What are some telltale signs that our building's sponsor might be stealing from the building, or is otherwise crooked?
Though it can often be difficult to turn up concrete evidence of a wayward sponsor, there are several strategies a savvy board can use to suss out potential problems, says Steven Wagner, a co-op and condo attorney with Wagner Berkow LLP and a longtime board member of his own 420-unit Manhattan co-op.
"The problem is that it is sometimes very difficult to figure out if the sponsor is cheating and, even if you just know the sponsor is cheating, the likelihood of catching the sponsor or proving the cheats in court is difficult," says Wagner. "Residents – specifically board members – should be diligent in monitoring the finances of the building. Any irregularities should be investigated to the satisfaction of the board member."
Access to any building records should be given freely if requested by the board or a board member, says Wagner. "As a general rule, board members have the right to see whatever records they request in order to perform their duties as fiduciaries. Refusal to grant access to the records is a big red flag."
Another warning sign: Your sponsor is wary of hiring independent professionals to work in the building, such as the attorney, accountant, and engineer or architect.
"Any of these professionals, if working for a sponsor on other jobs or affiliated with the sponsor, could shade their opinions to favor the sponsor and not serve as honest brokers," says Wagner. If faced with pushback at the prospect of hiring independent professionals to work in the building, says Wagner, residents may have to retain attorney and organize a takeover of the building's board. Below, a few more scenarios in which you may notice a sponsor engaging in bad behavior—and what you can do about it:
During (or right before) a condo conversion
Another problem area encompasses bad sponsor behavior directly before or after a condo conversion. Prior to (or directly following) a conversion, a less-than-legitimate sponsor might overstate the size of the apartments; include the exterior walls in the computation of the size of the building (a misleading metric); provide inaccurate drawings in the offering plan, such as omitting important details such as columns or beams that affect the unit; perform substandard work during renovations or constructions; or fail to include items "of the kind and quality promised in the offering plan."
During this stage, a bad sponsor might also fail to adequately fund the buliding's reserves, or, says Wagner, "charge unit owners (purchasers) the full amount of common charges, but only pay the additional amount needed to make up the difference between the amounts received from the owners who purchased and the amount needed to pay expenses." (Though on this last point, some offering plans will permit this practice.)
After the conversion is finished
After a conversion is completed, signs of malfeasance include:
- Failure or refusal to provide minutes of meetings or financial records
- Playing favorites with residents or improperly advising others about the building's rules
- Using space in the building without paying for it (or even renting it out at a profit)
- Failing to give up sponsor control (for instance, by electing unqualified members to the board, who happen to be favorable to the sponsor's interests).
- Taking kickbacks from vendors hired through the managing agent
- Failing to segregate the condo's reserve funds from the sponsor or managing agent's other funds, meaning that the sponsor is able to use building funds as "their personal piggy bank;" or loan the building money to cover expenses rather than raising common charges, a tactic Wagner says some sponsors use to keep charges artificially low, in hopes of increasing the building's apartment values and spurring sales.
What to do if you see signs of a problem
If your board uncovers evidence of fraud, theft, or misonduct involving the condominium's funds, then Wagner recommends commissioning what's known as a "fraud audit" with an accountant, which could potentially be covered by the building's insurance.
If the problems with your sponsor are related to poor construction work, says Wagner, "I recommend that the building hire an architect or engineer to review the conditions and see if they match up with was promised in the offering plan. If not, the conditions can be identified and confirmed, and the cose to repair determined." If this is the case, says Wagner, unit owners should consult an independent attorney to determine if the case can be successfully prosecuted.
New York City real estate attorney Steven Wagner is a founding partner of Wagner, Berkow, & Brandt, with more than 30 years of experience representing co-ops, condos, as well as individual owners and shareholders. To submit a question for this column, click here. To arrange a free 15-minute telephone consultation, send Steve an email or call 646-780-7272.