Feb. 9, 2007 - coop boards behaving badly / can you imagine?
how absolute power can corrupt
Maybe it is the cold weather that has me thinking about nasty people doing nasty things….
worse than alligators / I will count the ways
It seems that everyone in Manhattan has heard horror stories about buyers being screwed by coop boards. The stories have as much ubiquity as the alligators-in-the-plumbing stories, but more truth. We recently had one such horror story in our office, which got me to thinking about ways that coop boards can abuse their nearly absolute power.
There are three ways that coop boards are most likely to abuse their power to approve or reject applications to purchase. (1) Arbitrary application of financial and special standards. (2) Your garden-variety (illegal) discrimination, against people of a different race, religion, sexual identification, etc. (3) When conflicted by self-interest.
‘tough’ boards get a reputation
The first abuse is one that is probably the easiest to anticipate for agents and sellers, as these buildings develop a reputation. These buildings include the very tony addresses with financial requirements include post-closing liquidity of two or three times the purchase price (i.e., to qualify to buy an apartment for $1.5mm the purchasers should have $3-4.5mm in cash and securities after the purchase) and buildings that have boards that never agree within themselves what their standards are, so each application is a bit of a crap shoot.
the grandfather problem for tony buildings – not lofts
In those tony buildings, it often appears that if your grandfather did not go to boarding school with my grandfather, my application will not be approved, no matter what. This problem is not a problem in any loft building I am aware of!
shooting craps to buy a loft
Some lofts do seem to have a crap shoot approach, however, sometimes because of generational conflict on the board: long-time shareholders can have a more laissez faire attitude (“if the bank lends them the money, that’s good enough for me”) while more recent purchasers on the board are more sensitive to the risks that high prices and exotic mortgages can bring.
This problem is not so much an abuse-of-power issue as it is a moving target issue, where sellers, buyers and agents may have trouble predicting what the board’s standards for admissions are.
gardening discrimination
Your basic illegal discrimination is the dirty little secret of the Manhattan coop market. It is also impossible to get good data on because coops don’t report reasons and because lawsuits are hard to prove and expensive to bring. (Few people want the continuing distraction of fighting to get into a building that [they believe] discriminated against them, or to possibly be known as a litigious applicant (which can tend to reduce admissions chances in any coop).
But it happens. Enough agents and real estate lawyers have seen enough “unusual” rejection decisions by boards to know that some boards sometimes make decisions for illegal reasons. We had one in my office last year that was an all-but-certain case involving a gay couple with impeccable financials. The financials were deemed “impeccable” by the listing agent who had done a lot of business in the building. The couple had histories of stable and remunerative employment, significant assets, and had been together a long time. They were turned down without an interview, and without the normal back-and-forth of questions from the managing agent after the application is submitted.
Other people have had experience with applications that hinted at the purchaser’s race (because of college or organization memberships) that were turned down, despite seemingly fitting into the pattern of previously acceptable qualifications.
This problem is very difficult to anticipate or do anything about. There is just not enough history that becomes well-known to give agents or sellers reason to anticipate the problem.
To engage in gross generalization for a moment, this behavior is more stereotypical of “uptown” coops, rather than downtown loft buildings, which ion may ways have a live-and-let-live attitude. But you never know….
conflicted boards that want you to sell to me, not them
Then there are boards that have rejected applicants to purchase a certain apartment then later approve an application by a board member to buy that same apartment.
We just had what looks like one of these in my office. A cash purchaser was turned down on the paperwork, without any back-and-forth about financial qualifications, for an apartment that a board member had tired to buy at a lower price some months earlier. No smoking gun here, but the reasonable suspicion is that the board rejected a qualified buyer so that one of its won could buy instead.
As with all things within the Cloak of Coop Invisibility it is hard to get more than anecdotes and urban legend “information” about these occurrences. Agents (especially) and shareholders who end up selling and moving into another coop tend not to have a reason to make too big a stink.
One example that escaped from the Cloak of Coop Invisibility was discussed in the New York Times about two years ago. A Board Turndown, and Then a Buyer With Board Ties In this instance, the seller was sufficiently pissed off about what happened and – having moved to assisted living with family outside Manhattan – unafraid to be quoted.
The facts in that instance were typically suspicious of this kind of scenario. A board member had expressed interest in buying that apartment at (what the owner thought was ) a below market price; a purchaser with historically-acceptable qualifications was turned down without much back-and-forth; an individual related to the board member then purchased.
what can be done?
For a purchaser, the agent should inquire if there has been any interest in purchasing from a board member and perhaps even get a contract representation that there have been no such inquiries. If there have been, it gets very dicey, as the buyer (and the seller) should be loathe to upset the board before approval.
But they can consider a polite conversation with that board member to underline that “of course” the new application will be considered on its merits, and maybe a call from the seller’s counsel to the managing agent. The seller can also talk informally to as many people on the board as he or she has good relations with.
In other words, not much can be done by the seller or the buyer.
Shareholders always have the power (when it comes around once a year) to throw the bums out. But that assumes that shareholders (a) find out (b) care and (c) are willing to serve instead of the bums.
Having said all this – and as a ten year coop board president – I should reiterate that all of these types of abuses of power are exceptions to the general rule that boards act responsibly. The exceptions are always painful to those caught in them, and deserve to be pointed out – even though it is in almost no one’s interest to do so at the time.
bad apples + a bunch
It is stories of abuses like these that periodically fan the flames of a legislative solution in Albany. Whether coops should be forced to give reasons for purchase decision is a complicated issue, but if it happens it will be because some boards misbehave. Blame them.
© Sandy Mattingly 2007
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