Will NYC Co-ops Have to Disclose “Why?”

I’m thinking probably NOT.  Janny Scott of The New York Times reveals that the City Council is co-sponsoring a measure to Push Co-ops to Explain Why You can’t Buy.  This legislation has been discussed for years and in front of the Council members for almost 16 months with no vote yet.

Under the bill, a co-op board would have to describe its reasons in detail and reveal the source of any negative information it had used. It would also have to say how many applications it received and rejected in the previous three years. If it failed to turn over the information, or do it on time, it could be fined thousands of dollars.

It’s no secret that I have had some issues in the past with some co-op boards and their antics and just recently had the misfortune of a buyer being granted approval only to have it then rescinded.  I want to state that on the whole I think that most Co-op Boards do a fine job of managing the affairs that arise in the course of running a building.  Having said that, I and many of my colleagues have been increasingly puzzled by recent Board rejections and having a reason for the rejection would not only serve to prove that no illegal discrimination occurred but it would also help a buyer in determining how to improve their chances of Board approval in the future.

Currently, co-ops — apartment houses whose residents purchase shares in the cooperative corporations that own the buildings — are free to decide who can move into their buildings and are not required to give reasons. Co-op groups say most rejections are based on applicants’ finances. Like any homeowner or landlord, boards cannot legally discriminate on the basis of race, religion, family status and 11 other protected categories; people who suspect that they have been discriminated against can complain to the city’s Commission on Human Rights

Although two thirds of the City Council is said to be supporting this legislation, others who appreciate the need for some sort of accountability by Co-op Boards aren’t convinced that this bill is the answer.

The bill’s opponents, who include Council Speaker Christine C. Quinn, say federal, state and city laws already prohibit discrimination and offer redress. They say the bill, the Fair and Prompt Co-op Disclosure Law, would let loose a flood of lawsuits, delay co-op sales, discourage residents from serving on co-op boards for fear of liability and impose an administrative burden, especially on smaller co-ops.

“The only one who is going to come out feeling good is the lawyers,” said Marc Luxemburg, president of the co-op and condominium council, which, with the real estate board, recently issued a guide on how to do co-op admissions fairly in response to the threat of legislation. “Anytime you try to give a reason, you’re going to get sued. You say the guy was obnoxious at the meeting, he comes in and says ‘I’m going to sue you.’ Every time you turn somebody down, you’ve got a lawsuit on your hands.”

No doubt that we live in an incredibly litigious society but can someone actually sue if a Board thinks a buyer was "obnoxious" in an interview?  I’m not an attorney but that seems a bit frivolous, no?

I don’t have an answer on how to solve the issue of accountability for Co-op Boards, but I do believe that some form of transparency in the process would be helpful.  For starters, if a co-op board could provide buyers with a specific and LEGAL list of requirements that would have to be met for approval, greater efficiency would benefit all involved.  The current system is terribly flawed and often costs buyers and sellers wasted time and thousands of dollars only to be left out in the cold with no explanation of why perhaps their biggest financial asset is being held hostage by a Co-op Board. 

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11 Responses to Will NYC Co-ops Have to Disclose “Why?”

  1. avatar newbie says:

    Rather than have laws to provide transparency in reviewing applicants – which may be redundent because coops can already be sued – there should be enforceable standards for better coop board governance.
    I think the biggest issue with coops is the shenanigans that go on i.e. a board that rejects a rennovation because the shareholder didn’t use the services of an architect who’s – surprise! – on the board. Or boards that don’t provide adequate (if any) meeting minutes.
    You can move into your dreamhouse in a well-run building only to have a changing of the guard – and business practices – a few years later.
    any thoughts?

  2. avatar Anonymous says:

    Passing such a law would be catastrophic: every co-op board and its members would be exposed to lawsuits, whether they are justified or not, or the threat of lawsuits, which is practically the same thing.
    Each co-op board would therefore have to insure itself (as corporation boards do) against such liability, or would face significant lawyers’ fees at the first opportunity (and believe me, people will test the system so that their lawyers friends can collect). That would mean an immediate significant jump in all maintenance fees for all co-op boards in NYC. Lawyers would be happy but would be the only winners in this.
    I would even go so far as to say that it would make co-op less attractive as a legal entity, which may act as a long-term incentive to switch to condo. Since co-ops prevalence are one of the factors why the Manhattan market is less speculative and less susceptible to crash than other housing markets, having less co-ops would weaken the NYC market.
    This measure could single-handedly crash the Manhattan real-estate market.

  3. newbie,
    Great point about the “dynamics” of co-op Boards. Clients almost always ask “how’s the Board?” To which I always respond, “the current Board is…but that is no indication of how future Boards will behave.”
    How do you suggest “enforceable standards for better co-op governance?” It sounds like you may be on to something. Please elucidate.
    I know of a building on the Upper East Side who has changed its pet policy 5 times in the past 10 years from no dogs to dogs allowed. Currently they don’t allow dogs, but there are plenty of our 4 legged friends in the building.

  4. Anonymous,
    Although I absolutely appreciate your perspective and can see how transparency could open up more Boards to lawsuits, I maintain that full disclosure (of course there would be some growing pains) may actually improve the co-op experience in the long run. Co-op Board members should have D&O (directors and officers) insurance anyway. The system now is greatly flawed as Boards are almost completely untouchable and unacountable for their decisions…is that right?

  5. avatar newbie says:

    Doug, my thoughts are having a set of ‘standards’ for coop boards and establishing a group (either self-governing or through the city) to ‘audit’ boards and ensure they are meeting these standards. Much in the same way that public companies now have to have their auditors sign off on internal controls.
    Such standards could include maintaining sufficient meeting minutes, whether all shareholders are required to have homeowner’s insurance (some boards actually don’t require this!), etc.
    The ‘auditors’ wouldn’t necessarly opine about the coop’s management abilities but instead disclose whether coops are meeting these standards.
    Kind of like a public health inspector…does’t matter what the food is like or how much they charge, but make sure the place is clean.
    Of course there would be the cost of maintaining this process but it might be less than legal fees incurred as a result of the proposed law. And if done effectively you’d see the price gap btw condos & coops narrow.

  6. What a great concept newbie!!! Likening to health inspectors is kind of funny given how ineffective that industry is in being watch dog. That said, I like the idea and don’t believe I’ve heard this type of solution suggested. The “auditors” would have to be from an outside independent company but it may force some accountability. Very interesting and intelligent.

  7. avatar newbie says:

    Thanks, Doug. The idea is to have an objective party doing the evaluation.
    The comparison with health inspectors is theoretical, but having worked for a financial regulator and as an auditor (and having witnessed the Enron & Worldcom scandals), I think there is a lot of value an ‘inspector/auditor/
    whomever’ could add to the process. After all, you’re talking abt the largest financial investment many people have.
    Because coops are companies that are accountable to their shareholders they should be treated as such. And this process would (hopefully!) encourage better management of coop boards and greater transparency within the building and the RE market as a whole.
    I wonder if anyone else in the RE industry has considered this idea??

  8. Generally speaking newbie, most in my industry have blinders on and are incredibly resistant to change, However, there are many forward thinking people in the industry who are trying to effect change. That said, I have never heard of anyone coming up with this type of proposal. I like it a lot and would love to hear what other True Gotham readers think of it.
    Thanks for the intelligent dialogue!

  9. avatar New Producer says:

    I’m a producer for a local network news affiliate. We are working on a story about NYC co-ops and we are trying to find someone or people who were rejected by a NYC co-op board. We’d like to interview them for a television piece we are doing…can anyone on this board recommend someone? If so please email me at the following address:
    producer.news@gmail.com

  10. avatar mishon says:

    I am in a uncoopertive coop to say te least. Rejection is only half of the issues. How about taking application fee not once but twice for one applicant and never interviewing him,,,How about one family on the board allowing six to seven family member in apaetments.Unaccounted money,slow to repair,absolutely no accountablity…

  11. avatar Mike says:

    Of course it would be a good idea to make boards accountable. What should they be afraid of? In fact the city council should look at completely revamping and stripping down the powers of co-op boards. These are not corporations in the same sense as say, General Electric, and there is no reason why they should have the far-reaching powers they have. For instance: sub-let fees and “Flip” tax. The latter is simply taking money from someone who spent years, maybe decades, paying off an apartment, and giving that person nothing in return. And the word “Flip” used to refer to a speculator -buying and instantly selling, not a long term resident building up equity. General Electric couldn’t even do that to sellers of shares. Sub-let fees are also theft. The owner who sublets gets the same benefit from his/her apartment as an occupant – only in the form of cash. The occupant benefits in the form of occupancy. What’s the measure of the value of occupancy? Answer: rent. They are equal. If one is taxed, the other should be too. There is no moral reason why it’s OK for shareholders to take money from a neighbor because he rents out his apartment or sells it. It is theft. The power to steal should be permanently removed from co-op boards. It is unnecessary for the fulfilment of their duties.

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