Monday, June 05, 1995
About Coop Management and Real Estate Taxes
With all the stories of corrupt coop managements and inept boards (note recent Attorney General's investigation of kickbacks, and Coop City issues), it may be appropriate to clear the air, describe some caveats for coops, and discuss some current problems.
Having been a coop board member for many years, I can assess the environment.
There is no doubt that we become members of the board for selfish motives, namely the preservation of our quality of life and our investments. This coincides with the objectives of our fellow tenant-shareholders, and should make for a well-functioning coop. Tenant shareholders who get on the board for personal gains, such as doing business with the coop, will not be able to act in common interests. This conflict is best avoided by having a rule that no tenant-shareholder board member is to have a business involvement with the coop (sponsor-directors are an unavoidable exception). However, sometimes the board manages the building directly. This is an economizing measure, mostly seen in small buildings, which cannot afford professional management and where all tenant shareholders participate - provided that some members know what they are doing. If they are novices and cannot afford the time and involvement to learn, having professionals is a matter of survival.
Ordinarily, hiring professional management is essential, and hiring lawyers and accountants is unavoidable. Consider the range of special concerns: real estate taxes, the annual contest of assessments with the city, looking for tax abatements, timing and execution of refinancing of the underlying mortgage. Daily, in addition to the tasks of administering staff and payroll, there are the problems of determining the neeed for repairs and maintenance, making the repairs cost-effective (keep in mind that the Board members bear a fiduciary responsibility to the tenancy), passing on engineers' recommendations and contractors' detailed bids, overseeing the work and the overseers, and reviewing the results ("punch list"). Interviewing prospective buyers, a favorite complaint in the press, mostly involves making sure that the prospect has adequate gross income (often calculated as four to five times the carrying charges for all debts), a steady cash flow (this may be a problem with freelance writers, hence the horror stories), and a life style that does not interfere with the quiet enjoyment of life of their fellow tenants. Famous people are often less-than-desirable co-tenants for the latter reason.
There are important things within a good coop that need be provided for. A non-self-perpetuating structure of the coop board is important. Im my board, we provide that the eight tenant-shareholder members rotate off after six years. One third of the board is reelected every year, and after two elections a director's term is finished. They can run after a year, but this method provides a review period.
The board must actively recruit knowledgeable people for its succession. It is important that every board capitalizes on the expertise of members of the tenancy, and actively recruits real estate attorneys, accountants, finance experts, insurance people, builders and contractors. Given the proviso that none of the above can bring their own or buddies' firms to earn fees from the coop, they will exert their best efforts to have their property well administered. Special interest people who run for the board, to promote a concept or "get rid of the rascals," often drop out when confronted with a work load, with committee assignments and with time demands that they cannot or don't want to cope with. I can speak of a large non-exclusive activist board in a large building, the type that is best suited for effective management.
As to time demands, board members do "their thing" at some considerable sacrifice of time and effort. Boards meet once a month usually at 8 AM, and spend an hour, up to three hours, in settling issues. I have taken a half vacation day more than once because of a board problem. There is no expense account, travel is on us. When interviewing prospective tenant-shareholders, we have extra meetings at 7:30 or 8 AM, as required. It takes a lot of dedication, and those directors who do not perform hear from their fellow members.
Present day coop board (and for that matter, tenant-shareholder) concerns have much to do with real estate taxes. The 1994 agreement between the Mayor and the City Council to reduce the inequitable taxes for Class 2 buildings, that is coops, has been rescinded by the Mayor. Even though everyone agrees that coops are unfairly taxed, at a rate approximately three times that for single family dwellings, the Mayor's $3.5 billion deficit has caused him to eliminate the coop tax reduction portion of the preliminary budget. In fact, the assesments have gone up, not down, by something like 8 percent.
City Council Speaker Peter F. Vallone, much to his credit, has proposed that a substitute tax be imposed, increasing the tax on those one to three family rentals that are not serving as the owners' residences. Small income-producing residential properties have been riding free on the coat-tails of coop residents, who do not have the privilege of subletting their properties to earn incomes, except for limited-period emergency situations. You may want to write letters to the Mayor and the Speaker, but it's the economy, etc. And coop tenant shareholders are easy prey for the tax assessors - they are much removed from the realities, and therefore apt to ignore the tax injustices, since they do not have to write a tax check every year. In fact they cheer the tax refunds, and ignore the unfairly high tax rate.
Next, the Coop City situation. A coop board was sold down the river by its management, due to the cupidity (ignorance? stupidity?) of the board members. Coop City has many retired and blue-collar residents, and the nice old guys who are willing to dedicate the time to board activities probably do well on keeping the undesirables out, but are no match for the crooks among themselves and in management. They are not the only ones who have been fooled, many boards in the city composed of busy professionals have found that their lack of due diligence has opened the door for unscrupulous members of management firms to take kickbacks from contractors. That is why it is important that management contracts contain a standard clause to permit the board to dismiss management with minimum notice if members of the firm have been implicated in the irregularities. And that the management firm does not route all the requests for bids for repairs and maintenance to the Three Ususal Suspects all the time, that some new vendors are included.
I hope this proves that coop board membership is not a popularity contest, and that prospective directors' committment, professionality and absence of a direct personal profit motive should be the paramount criteria in electing them. Voters electing politicians to city, state and federal offices, please copy.
Wally Dobelis is the president of the board of directors of his coop.