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CONVERSATIONS WITH CO-OP & CONDO MANAGEMENT EXECUTIVES

July 28, 2024
Season 2
Episode 2
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Why Your Board's Governing Documents Deserve a Fresh Look

Sitting on the back burner of all the issues your board must think about are its governing documents. Often written in legalize, sometimes difficult to change and probably outdated, they may be out of sync with the needs and best practices of today. But it’s unwise to leave them to age quietly, says Neil Davidowitz, President of Orsid New York, and in this episode, hosted by Habitat’s Paula Chin, the benefits to updating these documents and the risks in not doing so are revealed.

Paula Chin: Welcome to How to Run Your Building, a conversation with New York's leading property management executives. I'm Paula Chin with Habitat Magazine, and my guest today is Neil Davidowitz, president of ORSID, New York. Boards have a lot on their plates from local law compliance to lobby and hallway renovations, and of course finding the money to pay for rising costs.

There are so many things, in fact that updating and fine tuning their governing documents often gets pushed to the back burner, and boards do that at their peril since it can leads to headaches and even lawsuits down the line. Neil, can you start by explaining and defining those governing documents?

Neil Davidowitz: Sure. Good. Good afternoon, Paula. It's good to talk to you. The documents in question are for a co-op. They would be the proprietary lease. The bylaws, the house rules, and then there are policies and procedures that have been adopted by the board through the years. In a condominium, it's normally the condominium declaration, it's bylaws.

And then there's also policies and procedures that have been adopted by the Board of Managers over numerous years. 

Paula Chin: What is the problem if you haven't updated them? Let's just say in the last five years. 

Neil Davidowitz: So actually in the last five years that would not be the issue. My experience is it's much longer than that.

That, as you said in, your opening statement governing documents and governance sometimes goes to the back burner of co-ops and condominiums who are triaging the capital project or emergency of the moment. So my experience is that sometimes it's 30 or 40 years in which there have not been changes or that haven't adopted amendments relative to those documents that I just laid out.

Paula Chin: What sort of amendments need to be made? What are the things that have changed in, say, recent years or the last 30 years that should be in your documents? 

Neil Davidowitz: So in the last 30 years and, we're gonna deal with the documents universally, there's been real issues of forms of ownership in co-ops, 'cause condominiums, you've always had some broader discretion and rights, but historically ownership was by individuals. Now there's questions of trusts, of LLCs, of possibly corporate entities. That is now becoming an issue that co-ops are confronting. And prospective purchasers are sometimes seeking. There are changes relative to the occupancy rights.

Who has the right to occupy the apartment in addition to the shareholder of record, even when the shareholder of record might not be there. What are the building's policies relative to guests? Which goes to occupancy as well. Another thing that boards have sought greater clarity on relative to their governing documents is on repairs.

Who's responsible for what between the shareholder and the co-op, and conversely, between the condominium and the unit owner. Those are areas where we're seeing issues of change. Other issues and discussions, broad discussions about subletting rights, refinancing rights, cash down requirements in co-ops.

And the other broad area would be alteration policies, which are very important to both the buildings and obviously shareholders and prospective purchasers. 

Paula Chin: Neil, do you have any particular buildings you can talk about that were in trouble because they hadn't amended their documents? 

Neil Davidowitz: Trouble may be too strong, but really where issues arose that needed to be addressed.

One example is a building that was discussing value propositions about why a high-end upper East Side co-op was trading significantly less on a per square foot basis to new construction condominiums in the same neighborhood. And the discussion led to certain policies that the board had in place for many years, 30 or 40 years that these condominiums do not have in place. And some of the issues I just enumerated. It was a building with a 50% cash down requirement. 40 years ago, buildings who had 50% cash down requirements, there was a certain panache. There was an idea that there was a value added. You brought in a certain caliber of shareholder.

And there was a legitimacy to the argument. Today in 2024, the question is, does that eliminate young people who have significant income, would be good neighbors and have the economic wherewithal to do the transaction, but haven't socked away millions of dollars to put down on a 50% cash requirement or choose not to.

That was one issue. A building had not historically allowed pied-à-terres. We talked about the pied-à-terre market and people who were looking to buy in buildings where they could utilize the apartments of pied-à-terre. We talked about subletting policies. It was a building that historically did not allow sublets under any condition, and we talked about prospective purchasers who want certain rights relative to subletting if in fact they're transferred or they take a sabbatical. They need to care for an elderly parent and have to vacate the apartment for a year. Rather than have to continue to pay maintenance and mortgage, subletting provides economic assistance in that scenario. So it led to that discussion about policies and whether they made sense in 2024, how they would affect the fabric and culture of the building if they were modified, and would it have an effect relative to apartment value. 

Paula Chin: These boards that are maybe reluctant or have these issues with pied-à-terres, sublets, so forth, what is their thinking? Why are they reluctant, and how can you change? 

Neil Davidowitz: There's a rational basis for it. But you have to weigh the various factors and decide what to do.

The rationale for it is that co-ops historically wanted a community of people who were owners who resided in the building. The theory being a co-op is a community and apartments in the building is well taken care of by those co-operators who own apartments who are also residing there. And when you end up with people who are renting or people who are only using it on a limited basis, IE pied-à-terre it, it's a different animal.

Paula Chin: We hear a lot about buildings or boards that are also reluctant to allow trusts which I understand probably, again, it's time to rethink that. Is that right? 

Neil Davidowitz: Yeah I think there's legitimate discussions going on relative to trusts. For many people, their apartment is a key or important asset in their overall estate.

And people are focused on estate planning more so I think than ever. And the ability to create grant or trusts or other mechanisms to do estate planning is important. And boards who maybe didn't allow it historically are revisiting it with the advice of counsel and with a variety of limitations and documentation that would protect the co-op, but also create the availability of the shareholder to do the estate planning they may want to do. 

Paula Chin: Can we dial back to proprietary lease amendments? Tell me, like you said, a lot of these buildings in. It could be the proprietary lease from the time the building went co-op.

What are the main things there that you see that probably should be updated? 

Neil Davidowitz: I think I touched on it a little bit. It's the occupancy language. Many old proprietary leases say apartment can only be occupied by the shareholder and lists family members . Even those family members, it talks about simultaneous occupancy.

So there are buildings that are concerned about that and there are some buildings that wanna broaden those policies and some people that are happy with that language and wanna limit that policy. The rights of shareholders relative to the death of the lessee, death of the shareholder. Most proprietary leases require transfer upon a shareholder's death to anybody other than the shareholder's spouse, requires consent of the board. There's sometimes different tests. There may be a reasonableness test as opposed to complete discretion, but there are shareholders that say, you know what? My children lived here for 30 years.

When I die, I want my children to live here without board review. There's a lot of discussion about that paragraph. And there's discussion about repairs. Who should be responsible? Give an example of that. Historically, in most co-ops and condominiums, the windows were treated as a common element.

They were the responsibility of the co-op corporation or the condominium. There are buildings that are revisiting those window policies and thinking building may be better served by transferring that responsibility where the shareholder or unit owner is responsible for the windows as opposed to the building.

Paula Chin: Okay. And what is the worst case scenario that you see? Maybe doesn't happen often, but when documents aren't updated? Litigation, in what cases can it lead to that? 

Neil Davidowitz: It can lead to litigation because if there's a lack of clarity of who's responsible for what in a building. That's very important.

There are fires, there are leaks, there are issues in apartments, and if there's not clarity of who's responsible for what and who has to be insured for what, that could lead to litigation and does. Occupancy rights lead to litigation. One of the most important things I didn't touch on is proprietary leases, by definition, have an expiration date.

It's very important that you amend that paragraph and extend the proprietary lease. Because if the lease has an expiration that's less than 30 years out, banks who are giving mortgages to individual shareholders, 30 year mortgages, will have a problem with that. So that is crucial that buildings address that and amend that clause.

Paula Chin: Now let's go to the next step, which is actually amending buildings' governing documents. How is that done? 

Neil Davidowitz: So that's interesting. Different documents require different means of amending them. So let's start with a proprietary lease. Almost all proprietary leases require a super majority of the shareholders to modify the lease.

It's usually two thirds, 75%. I've seen it up to 80. And that's not people who show up at a meeting and vote. If there's 10,000 outstanding shares and you are 75% super majority building, you need 7,500 shares to vote affirmatively to make the change. So the board really has to do an excellent job on any amendments to the lease, communicating with the shareholder body the rationale for the changes, whether they do it in writing or conduct a meeting, they need to really effectively communicate to get it passed. 

Paula Chin: And what kind of changes can you do without shareholder or unit owner approval? 

Neil Davidowitz: So let's talk to that. So in a condominium, the declaration also needs a majority. You have to look at your own. Each governing documents are different. Bylaws, both for cooperatives and condominiums and co-ops, there are provisions and bylaws that can be changed by the board directly. There are others that may require shareholder change. Bylaws with condominium similarly. House rules are rules that can be changed, modified, added to, deleted by the board, and policies and procedures can also be changed and modified by the board without going to the shareholders.

Paula Chin: You mentioned how communication is really important. Let's say a board has five amendments they wanna make and let's say all of them require a majority or super majority, how do you handle that? 

Neil Davidowitz: So first of all, it's not if they will. 'cause whatever the super majority requirement in the proprietary lease is, whatever the majority requirement in a condominium declaration, that is the requirement for all five. It's never written that this paragraph only requires 60% and this requirement requires 80%. To amend it requires a certain super majority. To your point, you basically have to make the case and you have to make the case well to the shareholders or the unit owners as to the rationale of what you're doing.

You would ask a specific question, and that's really a, let's call that a strategic or political decision. If you're amending five provisions of your lease, you have two options. You can restate a new lease incorporating all five and you either vote yes or a no.

The benefit of that is if you get it, yes, and you meet your super majority, all five pass. But the negative of that is if somebody just doesn't like one of the five, they're gonna be forced to vote down the whole thing and it becomes more difficult to pass. The alternative is to create a ballot in which you vote on each of those five amendments separately.

The board may not achieve all five, but you have a better chance of achieving some, if not the majority of them, by having individual votes per amendment. 

Paula Chin: And before a board conducts this vote, is there something they can do beforehand to take the temperature of the building and get a sense of how good their chances are?

Neil Davidowitz: A hundred percent. You can do questionnaires, surveys. You can have a pre informational meeting. You can create your amendments and documents and distribute them in draft form and have a discussion. Lots of things you can do pre vote and pre official notice of meeting with the material to get the temperature.

And not only do you get the temperature, you may not have thought of something that a shareholder thought about or a unit owner. It allows you to iron out that detail and possibly modify that language. 

Paula Chin: Neil, in closing, what takeaway is there for our listeners? What most important bit of advice would you give boards?

Neil Davidowitz: The most important advice, let's end where we started, Paula. You've gotta move governance and governing documents and the review of those documents from the back burner to the front burner. For many many buildings they have antiquated documents that don't conform to the current situation and don't really conform to what their unit owners or shareholders need today. So the recommendation is with counsel and their managing agent to look at those documents and see what, if anything, needs to be updated. 

Paula Chin: Neil, I think that's really great advice. Thank you so much for joining us today. 

Neil Davidowitz: Thank you, Paula.

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