Publication Date: Autumn 1999

COPING WITH CORRUPTION & INDICTMENTS
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.

Preventive Policies
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 are maintained.

Protections
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.

Communications
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 and Corruption.

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 and policies.

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 lease.

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 further improvements.

Implentation Procedure
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 info@cnyc.coop. 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.