Publication Date: Autumn 1999
COPING WITH CORRUPTION &
In June of 1999, the Manhattan District Attorney indicted
dozens of property managers, architects, contractors and others
for corrupt actions including kickbacks and bid-rigging. Their
victims were housing cooperatives and condominiums, and the
indictments were a product of the ongoing investigation begun
early in the decade. In response, CNYC reprinted its white
paper entitled Monitoring Management in the summer issue of
this Newsletter and held a seminar on July 20, 1999, called
Detecting and Preventing Fraud and Kickbacks. There, CNYC
board chairman Stuart Saft, Esq., consultant Michael Cherkasky
who was formerly the Assistant District Attorney in charge
of this investigation, and Greg Carlson, president of the
Federation of New York Housing Cooperatives, offered participants
sound and practical advice for minimizing risk of their buildings
becoming victims of corruption.
The speakers stressed the importance of truly independent
bidders and careful, well-enforced purchasing and contracting
practices. The board must put in place systems that limit
the possibility of corruption and must insist on strict adherence
to these policies with no shortcuts allowed and no exceptions
made. When construction projects are undertaken, an in-dependent
architect or engineer is essential for analyzing the building's
needs and defining the scope of work required. This professional
should help find contractors to bid on the project, but the
board should seek bidders through other sources,as well.And
for very large projects, a peer review by a second engineer
or architect will help the board guarantee that the project
is well conceived and well supervised.
Because buildings depend so strongly upon their property
managers to meet the day-to-day needs, it is vital that management
be reliable. When seeking new management, Mr. Cherkasky advised,
visit every candidate company and look over the systems they
have in place. Ask if the firm has a code of conduct and,
if so, learn how these values are imparted to employees and
how standards are maintained. Examine their policies for qualifying
vendors. Get explanations of their tip policy.
Select the company whose philosophy and daily practices make
you the most comfortable, and then make sure that high standards
Every cooperative and condominium should protect itself with
adequate insurance, including directors and officers liability
policies, real estate agent's errors and omissions policy,
and employee fidelity bonds. If there is the slightest possibility
of problems, your insurance carrier should be alerted at once;
this is known as notice of potential claim. Board members
should also be maximally protected when they perform their
duties as board members acting in good faith. The building
by-laws should include broad indemnification provisions to
protect the board in the event of lawsuits. Additionally,
clauses can be added to construction contracts requiring that
the contractor guarantee that no payments or special agreements
have been made surrounding this contract.
Boards that learn of indictments of individuals or companies
that they have been dealing with were advised to keep shareholders
or unit owners apprised of events and of the actions that
the board is taking to protect their interests. The sad lesson
of this new round of indictments is that problems are ever
present and that boards must be ever vigilant. But careful
selection of professionals and reliance upon them, coupled
with well-enforced building policies can mitigate the danger
of corruption in your building.
At CNYC's 19th annual Housing Conference on Sunday, November
14th, Stuart Saft will join forensic accountant Mindy Eisenberg
Stark to present a workshop on Detecting and Preventing Fraud
CNYC's PROPRIETARY LEASE
FOR THE NEW MILLENNIUM
On September 15, 1999, CNYC's president, Marc Luxemburg. Esq.,
introduced CNYC's new form of proprietary lease which he has
designed to clarify and strengthen the powers of the board
in managing its cooperative, while at the same time carefully
protecting the shareholders. It is his hope that this new
form of lease will help reduce the use of the litigation process
to resolve problems in favor of the political process.
Stressing that there can't be a one-size-fits-all
proprietary lease, Mr. Luxemburg invited participants to use
the new CNYC proprietary lease as a guide when considering
revisions for their own documents, rather than to think in
terms of adopting it wholesale. Each building has its
own needs and its own way of doing things, he said,
encouraging boards to review and modify provisions with the
help of their own attorneys to suit their buildings' needs
The shelf life of a proprietary lease appears to be about
25 years, said Mr. Luxemburg, as he described the three generations
of leases that can still be found in different New York cooperatives;
the first dates from the 1920s; and the second from the World
War II era. The proprietary lease currently in widest use
dates from 1974. It is a good document, insisted Mr. Luxemburg,
but it isn't organized well. Furthermore, many of its provisions
no longer meet all the needs of housing cooperatives, nor
does it take into account changes in the law or technological
advances that have changed the way cooperatives operate.
Mr. Luxemburg has organized the new CNYC lease by topic,
and has added the innovative concept of distinguishing between
the ownership expenses and responsibilities of shareholders
and their operational obligations. Even if your building was
totally destroyed, he explained, the board would still have
to continue to meet certain ownership obligations-- mortgage
payments, property taxes, insurance coverage, etc.--and the
shareholders would continue to be responsible for the portion
of maintenance charges that relate to these owner obligations.
A Bit of History
The evolution of the CNYC proprietary lease is interesting.
As housing cooperatives that had been developed in the 1970s
and 1980s approached the term of their original proprietary
leases, lenders became reluctant to finance apartment loans
that stretched further in time than the proprietary lease.
The solution was simple: amend and extend the proprietary
But as Mr. Luxemburg reviewed leases for clients he discovered
that more and more provisions could benefit from revisions.
In July of 1998 he presented a seminar entitled Your Proprietary
Lease is a Dinosaur. He identified opportunities for revision
and offered some suggested changes. His audience was intrigued
but not satisfied. They pressured him to go further with this
project. And so he did.
The full blown CNYC prototype lease made its debut in Mr.
Luxemburg's seminar at the 1998 Housing Conference; since
then it has been reviewed and refined and is now ready for
general use. But this organic document will continue to evolve.
Expect changes regularly as suggestions are made, bringing
Mr. Luxemburg encouraged existing cooperatives to use the
CNYC lease as a guide for reviewing and revising their own
leases with the help of their attorneys, tailoring their own
documents to meet the physical, financial, psychological and
social needs of their buildings. Once the board has developed
its draft proposal, copies should be dis-tributed to all shareholders
and they should be given opportunities for comments and questions
prior to the ratification vote.
The complete text of the proposed new proprietary lease must
be included in the Notice of Meeting where the shareholder
vote will take place. Then, once the requisite supermajority
adopts the lease, each shareholder must give the corporation
a signed copy of the new lease and receive their own signed
copy for their records. Copies of the superannuated leases
must be retrieved from banks holding them as security, and
the new lease substituted.
CNYC members can request printed copies of the current version
of CNYC's proprietary lease by phone at (212) 496-7400 or
fax at (212) 580-7801 or e-mail to email@example.com. To receive
the lease on computer disk, send $10 to CNYC at 250 West 57th Street, NYC 10023-2142, being sure to include the address
to which to send your disk.
Marc Luxemburg will again present the Proprietary Lease for
the New Millennium in an afternoon seminar at CNYC's 19th
Annual Housing Conference on Sunday, November 14, 1999.