Journey into the Unknown

They bought into new. They bought into exciting. They bought into expensive. And they also bought into nasty construction defects. Now these condo owners are fighting back, traveling on a JOURNEY INTO THE UNKNOWN

They just don’t build ’em like they used to. They used to build ’em so that they didn’t fall down. At a freshly built condominium on West 53rd Street, residents say the undersides of the concrete balconies have started collapsing onto the floors below. At the Empire Condominium Tower, filling the west side of Third Avenue from East 77th to 78th Streets, buckling floors, leaks, and other problems in its $3 million apartments led to the state attorney general’s office (AG) requiring the developer to make $2.5 million in repairs.

At a recent condo conversion at 30 Crosby Street in Soho, the fireplaces and flues were so poorly renovated, a lawsuit alleges, that smoke and carbon monoxide poured into apartments. And at 515 Park Avenue on 60th Street – the elegant boulevard’s first new apartment house in 60 years, with condo prices starting in the $10 million-plus range – poor construction led to cracks in the foundation, mold infestation, and the forced evacuation “of eight of the building’s thirty-eight condominium units … as well as the quarantining of various common areas as potential health hazards,” according to an ongoing, much-publicized 2002 lawsuit against developer Zeckendorf Realty and others.

These are issues beyond the typical punch-list items that a new owner, on final walk-through, alerts the seller to before closing – issues far beyond whether the icemaker doesn’t work in the refrigerator or a scratch on the floor needs to be sanded and refinished. Attorney Jeffrey Reich, co-head of the real estate department at Wolf Haldenstein Adler Freeman & Herz, recalls a case where potential buyers did the walk-through, did the punch-list, and closed the next day. And then, a couple of days later, they took their shoes off and discovered the flooring was warped. “Ultimately, we discovered that the wood floor was put down on top of concrete where the developer didn’t leave enough time for the [concrete’s] moisture to leave.”

It’s not just in New York City, either: reports are rife from here to the heartland of a crisis in construction. “There have been massive amounts of shoddy construction over the last 10 years,” says Janet Ahmad, president of the Texas-based Home Owners for Better Building, attributing it to a confluence of unskilled labor, corner-cutting on materials, and lax government enforcement of building codes.

“There’s no question there’s been a decline in the quality of construction over time,” says the lawyer, engineer, and author Oliver A. Rosengart, who, until his recent retirement from the attorney general’s office to go into private law practice, had spent a quarter century as a state assistant attorney general. “Buildings constructed before the mid-1950s or maybe the 1960s are much better constructed than today, partly because the labor doing the work [today] is less skilled.”

As for corner-cutting – now referred to euphemistically as “value engineering” – Edward Braverman, a partner in Braverman & Associates, marvels that, in a recent Upper West Side condo conversion, “the exterior walls [weren’t] appropriately fire-rated. The architect told me, ‘Impossible. I spec’d it as a brick façade.’ But then [the developer] ‘value engineered’ it with aluminum panels instead.”

Rosengart also points to how quickly new buildings go up – partly through real advances in technology and materials, but also because, he says, “sponsors are anxious to get their money and to stop paying interest on construction loans,” which in earlier times had been as low as three percent. And rushed construction “results in a lot of problems. Wood needs to be aged properly before being installed, for example; otherwise there are problems with it expanding, buckling – things like that.”

It Can Happen Here

How can this happen in one of the most regulated and consumer-friendly cities in America? Partly because the attorney general’s office has dropped the ball, lacking both the will and the resources to rigorously enforce construction law. In addition, the Department of Buildings (DOB) hasn’t enough inspectors and allows architects and engineers hired by the builders themselves to certify that building plans meet zoning and code requirements. Just as troublesome, unfinished new construction can get a temporary Certificate of Occupancy – “temporary” except that, per state code, it can “be renewed an indefinite number of times.”

In 2002, New York City Assemblyman Scott Stringer released the report Total Collapse: How NYC Department of Buildings’ Failed Policies Contribute to Crumbling Buildings, detailing the DOB’s lack of enforcement, effective internal and interagency communication, and even a database to track development. Four years later, as Manhattan borough president, Stringer testified at a city hearing that “contractors who have flagrantly broken the law are allowed to continue to self-certify and are reissued permits with no questions asked. Contractors and building owners applying for permits are not tracked by address or name. Corporations often apply for permits under pseudonyms and through limited-liability companies, making it difficult for DOB, the public, and elected officials to track owners who repeatedly abuse the system.”

What are co-op or condo board members to do when substandard construction threatens their home, their investment, even their health? Plenty. It takes perseverance and good organization, but apartment owners can apply pressure on three different levels to prod a developer into fixing what’s wrong.

Dev Con One

The first step – call it “Dev(eloper) Con(struction) One” – starts with trying to work with the developer directly. If that fails, Dev Con Two involves filing a complaint with the state attorney general’s office. And if that fails, it’s Dev Con Three: launch a lawsuit.

But note that there are statutes of limitations involved: The Housing Merchant Implied Warranty Law (General Business Law Article 36-B), which applies to buildings five stories or less, has a six-year statute for structural items, such as load-bearing walls; two years for systems, such as electrical, plumbing, and heating; and just one year for everything else. For all buildings, however, contracts, including offering plans, have a six-year statute, and issues of fraud have six years or, alternately, two years from the date of discovery.

In any case, the first thing you have to do is organize. If you don’t already have a board, form one – if you can. “I have a very high-end new building where the sponsor can control the board for five years even though he owns no units in the building,” says Reich. At another condo, 44-story The Link at 310 West 52nd Street, the offering plan states that developer Elad Properties will control the board until either 90 percent of the building has been sold or two years elapse from the date of first closing. That was in January 2007 – and severe, documented problems have been plaguing the unfortunate residents ever since.

What do you do in such cases? Form a de facto homeowners association. In Reich’s client building, the unit-owners got together after finding shoddy construction and “as a group of individuals hired us and an engineer,” says Reich. Condo owners at The Link did likewise, starting last March.

Not being a board-in-fact creates obstacles: you won’t have any records nor will you have ability to collect common charges to fund your efforts. The Link Residents Group started with 15 unit-owners each agreeing to pony up $500 personally to split the cost of retaining an attorney; that figure went down to below $350 as more residents joined.

But whatever the obstacles, “organize, organize, organize – and organize early!” advises Brian McGrath, who spearheaded the formation of The Link Residents Group. “Owners have to get together and compare notes,” he says. “From the very first meeting we had, it was amazing the commonality and universality of the stories. The sooner you organize, the sooner you can deconstruct what’s going on in the building and if you’re getting the straight story or not [from the developer].” In addition, “once we organized, I got the ear of the managing agent [Cooper Square Realty]. We now have a weekly call. It was something they did not do prior to our organizing.”

’Net Results

McGrath’s group organized using the internet, creating a Yahoo! Groups message board at http://groups.yahoo.com/group/linkresidents/. Residents could read and post notices, keep abreast of organizing developments, and share experiences regarding the building. This tack was not only easier and less cumbersome than collecting addresses and sending e-mails but fostered a sense of community.

Ironically, so did Elad’s attempts at quashing its buyers’ complaints. “[T]here is a fine line between seeking to have punch-list items addressed in your apartment by the sponsor … and engaging in activities that could be construed as commercial defamation,” Elad outside counsel George Tzimopoulos of D’Agostino, Levine & Landesman warned in a March 27 letter to McGrath, sidestepping the fact that a trio of floods, lack of heat in the winter, “habitable” floors with ongoing construction, and much more went far beyond “punch-list items.” “They shot themselves in the foot every time they shot a missile at me,” says McGrath. “And every time they refused to respond, they further galvanized people to collectively act.”

The first step after organizing is to hire a forensic engineer. A group or a board can do this on its own or retain an attorney who will take that and other steps. Either way, this engineer reviews the engineering report in the offering plan, the architectural drawings supplied to the DOB, and a questionnaire filled out by unit-owners describing specific issues. The engineer then physically examines the building from roof to basement and writes a report.

“The engineer will look for things that are not code-compliant, not compliant with good construction practices or with the offering plan, and non-consonant with the drawings from the Department of Buildings,” says Braverman. “I usually don’t have them do probes, which are very expensive.”

With report in hand, you or your attorney can contact the sponsor or his attorney. “You don’t want to hit a sponsor up piecemeal, but with everything at once,” says Steven D. Sladkus, Reich’s real estate department co-head at Wolf Haldenstein. “If you hit him piecemeal, he’ll say, ‘You know what? You guys are never satisfied.’ You want to give a comprehensive look at all the problems up front.”

Sometimes, with such a nuts-and-bolts report in hand, everyone’s reasonable and formal arrangements will be made detailing how and when substandard conditions get fixed. Usually not, though. Sponsors, if they respond at all, might deny there are problems or blame the contractor, who might blame the subcontractor, who might blame the workers, and so on down the line.

Before it goes on too long, you need to make a choice: either complain to the attorney general’s office or skip that step and go straight to litigation. The Link residents’ attorney did the former. Whether it was that or simply the continuing exchange of attorney letters, the residents group was finally able to make formal contact with the sponsor – who, the residents say, had refused to even address them before this. (Elad declined to comment.)

Whatever the case, the sponsor, as of mid-July 2007, had finally taken specific action toward addressing the building-wide problems and was currently communicating with the residents. “I believe that we are now being informed because of all the pressure put on Elad from the homeowners,” says Donna Feig, one of the condo owners. “Thanks to Brian and his efforts, Elad is responding better to our concerns.”

That’s as it should be. Because, as Braverman says of the next step that you might have to take, “the problem with construction litigation is that it’s very time-consuming and costly. There’s a tremendous amount of discovery involved.”

General Contracting

So you hold off on litigation for the moment, and you or your lawyer contacts the state attorney general’s office. New York State’s Martin Act regulates the sale of co-op shares and condo units and is the law that requires an offering plan. But responsibility for enforcing the act falls exclusively upon the attorney general – which means that condo owners can’t bring their own lawsuits for violations of the act, “even if the violations are egregious,” ruled a judge in 2005. And that’s troublesome when the AG declines to act on the act.

“The attorney general’s office used to get involved,” says Reich, “but about three years ago they felt they were spending too much time dealing with those issues and stopped taking action. The AG or some other agency should be there to help the unit-owners. But there’s no real avenue.”

“The first step has to be the attorney general’s office, if for no other reason than to check it off the list,” says attorney James Samson, a partner in Samson, Fink & Dubow. “Call them up. But it’s a[n exercise in] futility.”

Rosengart concurs. “There’s presently no enforcement staff in the Real Estate Financing Bureau,” the longtime assistant attorney general says of the office that, by its own public definition, merely “seeks to prevent fraudulent real estate offerings by requiring [that] offering plans and related financial information be made available to the public.”

“The attorney general process is a joke,” adds Dan Pelson, the four-year-veteran board president at 30 Crosby Street. “They want to keep development going because it’s good for the city, and I get that; I agree. But you can’t turn your back on what’s happening. People are buying into buildings not built to spec, built with inferior materials, and not up to code.”

“They say they’re going to have an enforcement staff,” says Rosengart, “but it’s been seven months and [new Attorney General Andrew M.] Cuomo hasn’t employed anyone.” (The attorney general’s office did not respond to several e-mails and phone calls directed to both its New York City and Albany offices over several days.)

One highly public case where the attorney general did get involved is a cautionary tale for condo owners. About a decade ago, the brick warehouse at 195 Hudson Street in Tribeca was refurbished into 27 units that sold for prices ranging from $600,000 to over $3 million. And for that money, the owners got fireplaces that didn’t work, nonexistent (although promised) video intercoms, and other examples of what the residents told the attorney general’s office in mid-2000 were instances of building systems that did not match those described in the offering plan.

“The unit-owners’ first claim was for something like $2 million,” recalls Rosengart, who tried negotiating a settlement. “The sponsor offered $800,000. The president of the board, with board approval, said, ‘Get us $1.5 million and we’ll settle.’ The sponsor howled but finally agreed and said he needed my word that if he made that offer then I wouldn’t sue him.” Some additional back-and-forth made the settlement “$1.5 million in cash and some work valued at a little more than a half-million,” says Rosengart – but then the sponsor missed his payment deadlines.

“He ran out of money and said he would pay but that it would take time. Six or eight months later, the unit-owners said they wanted $5 million,” which the condo board president told The New York Times in 2004 came from newly found problems and cost escalation over the preceding three years.

The board belatedly filed a lawsuit after having poured time and money into a state-brokered settlement attempt – only to see the developer not pay what he had promised.

Sue You Blues

The board at 30 Crosby Street went straight to the lawsuit route. While only the AG can use the Martin Act, common law allows anyone to file breach-of-contract, negligence, or fraud suits – that last example having the formidable burden of your needing to prove intent to defraud.

Built circa 1890, the commercial building at 30 Crosby Street was gutted and completely renovated between 1999 and 2001, and two duplex penthouses were constructed to create a total of 13 loft apartments, selling for prices ranging from $1.55 million to $10 million. Unfortunately, as the 2007 lawsuit 30 Crosby Street Condominium vs. 30 Crosby Partner LLC et al. alleges, conditions there were, in the wonderfully understated tone of legal discourse, “materially different from those represented … in the Condominium Offering Plan.”

How different? “Pipes were not properly insulated, so they would sweat from the water system and mold formed in the building,” reports Sladkus. “The roof was constantly leaking. Each of the loft units had fireplaces that couldn’t be used because they filled the apartments with smoke when you tried to use them. The flues were poorly constructed and missing sections – pieces weren’t even sealed.” That’s carbon monoxide poisoning waiting to happen. And, in at least one unit, the lawsuit states, a piece of plywood was lodged across the flue inside the wall, further adding ventilation problems – and a fire hazard.

There was much more, the lawsuit said, including clogged toilets; poor heat, hot water, A/C, and kitchen ventilation; improperly installed sidewalks that allowed water infiltration; and the fact that, four years after closing, the building still didn’t have a final Certificate of Occupancy. “We’ve spent three to four million dollars fixing those things,” says Pelson. “There’ve been five or six assessments of various amounts over the past six years.” As of mid-July, the lawsuit was continuing.

“Unit-owners, if they can afford to hire a lawyer and start their own lawsuit, have to wait years before it’s resolved,” says Rosengart. “And then they’ll have a problem collecting [any judgment] since in most cases the [sponsor] entity has no assets; it’s been disbanded, and to pierce the corporate veil to show intent is difficult.”

“You can chase the limited partners’ distributions and profits,” says Samson, “but it’s a lot easier to stop them at the threshold when a sponsor still owns units. I’ll stop their sales,” he says, “and take those apartments from them. You’ve got to have a lot of guts to do it. The sponsors have very deep pockets, and you’d better be right.”

Red Flags?

How is it that the savvy and successful people who can afford to buy such luxury apartments can get taken so badly?

“People buy into buildings before they’re built,” Pelson says. “You have to buy in at the earliest possible stage to secure [a new condo], and [so] you have a situation where the sponsor is saying, ‘You’re welcome to negotiate the offering plan, but there are 50 people behind you who want the apartment who won’t.’ You trust the reputation of the builders,” Pelson says. “There’s a leap of faith that they’re not going to cut corners. But the system is set up to enable builders with questionable integrity or skills – and it doesn’t matter which – to create these situations without recourse.”

Are there red flags that the average new unit-buyer can see? Not really. “It’s pretty much a blind item on the walk-through when you’re talking about new construction,” says Braverman. “Sure, you can turn on the knob and [ask], ‘Does the A/C blow hot or cold air?’ But you can’t really tell on a walk-through if pipes in the walls are the size and material that they should be, or whether the window frames will expand or contract with changes in temperature and the panes actually break,” among other unknowables. “Probably the best thing to look for is who you’re buying from: who the real principals are, what they’ve built in the past, and how is the product they’ve turned out in the past. And even then I don’t think there’s any assurance.”

“Getting into litigation or even an attorney general complaint can be very, very costly and time-consuming,” says Robert Braverman, a partner in Braverman & Associates and the attorney for The Link residents. “Trying to have an open dialogue with the developer and hashing things out without the need for litigation or attorney general intervention is by far preferable.

“And there are success stories in sponsors making tremendous strides getting work done,” he says. “When there are two open minds and a sponsor willing to deliver what was promised under the plan, the building gets where it has to be.”

If not, at least you know now what your options are.