When Trust, but Verify Paid Off

When the cops finally came for Michael Richter, the board members of one Queens co-op knew they had done the right thing. Richter, owner of Charter Management, had acted as managing agent for Forest Hills South Owners, a 605-unit co-op spread across seven buildings. They fired him.

On July 13, 2010, police arrested Richter and charged him with five counts of second-degree grand larceny and five counts of first-degree falsification of business records. Richter was also charged with embezzling almost $1 million in tenant maintenance fees throughout a six-year period from five co-op buildings in Jamaica, Forest Hills, Rego Park, and Elmhurst.

In what the Queens district attorney compared to a “Ponzi scheme,” Richter’s alleged crimes included providing falsified business records to disguise the thefts. He initially denied wrongdoing before pleading guilty to third-degree grand larceny, a Class D felony, on January 25, 2011. Richter was sentenced to up to three years in prison on April 19, 2011 and signed five confessions concerning the money he stole.

What did this mean for Forest Hills South? With its significant financial resources, the Queens co-op could have been prime pickings for a thief like Richter. Another co-op caught up in Richter’s scam had to sue to reclaim the $350,000 he plundered. Other buildings in similar traps had to take legal action to find more than $1 million in missing funds. For Forest Hills South, however, it was a different story: the board’s diligence prevented the co-op from falling victim to white-collar crime.

“We double-check everything and take nothing for granted,” explains George McGrath, the board president of the posh co-op, which includes manicured gardens, elegant fountains, and beautiful Georgian architecture. “There was a sense that we were missing some marks with Richter and needed to move to the next level. If you step back and see that you’re doing all the work and you have to keep your hand in everything 24/7 to make sure everything is in check, then something is not right. We took precautions that enabled us to dodge a bullet.”

Use a “Trust but Verify” Policy

McGrath says his board has maintained a “trust but verify” policy for many years. That legacy includes a simple but effective list of processes when dealing with building finances and management companies:

• Insist any operating account is held separately to avoid commingling of funds with accounts from other buildings (illegal, but practiced by Richter).

• Maintain control of your reserve fund.

• Only make transfers between reserve funds and operating accounts when bills are to be paid.

• Make regular reconciliations between your accounts – look at all the bank statements and bills every month.

• Don’t become complacent.

“When you see something out of whack, you have to press management, press people who were involved, and ask what really happened,” says McGrath. “Make sure you are comfortable with the explanation.”

Forest Hills South dumped Charter as the police swooped. The co-op could have been at the center of a crime story. Instead, it has become more of a love story. With Richter’s departure, Forest Hills South signed up the Lovett Group, a management company that supervises roughly 12,000 apartment units in 70 New York City buildings. That relationship has become a textbook case of exactly how to run your cooperative or condominium. The board is full of praise for Lovett and vice versa.

When Lovett arrived, the co-op faced major capital investments. Roofs and aging elevators needed to be replaced in all seven buildings. In addition, the board recognized that evolving dynamics in New York’s real estate market meant general improvements were required to keep the curb appeal of its buildings, so the co-op added an indoor gym for residents. All these challenges could have been big problems, but because of the savvy, hands-on board, it turned out to be business as usual.

“The board has its eye on the mark. It makes it easy for us,” says Bob Amato, account executive with Lovett. Company owner Ken Lovett adds that, in his experience, some boards get tripped up by focussing on the minor things. “I had one board president tell me once that his board ‘majored in minors.’” Forest Hills South is different, he notes, observing that the board concentrates on the big picture and gets involved: “We had to sit and listen and feel around the property and then work out a game plan. They had their list and we had ours. We went back and forth. The lists cost money to fix. They were in fairly good financial shape but they are now in better financial shape.”

The Financial State Is Good

Shareholder-generated revenue – primarily maintenance fees – accounts for close to 90 percent of operating costs. Add to that figure fees from 300 garage spaces and laundry rooms and another 10 percent from commercial property that lines Queens Boulevard. The long-term capital investment plan was funded by a 2012 $5 million refinance deal on the co-op’s mortgage that took advantage of low interest rates available at the time.

Every June, the co-op triggers a capital assessment that runs parallel to returns from real estate tax abatements. The theory is that shareholders don’t pay money out of pocket – McGrath adds most shareholders still get money back on their abatements. The end result is that almost $1 million per year is invested in capital improvements and the co-op reserve fund sits at around $4.5 million – and is topped up every year. “We don’t want to surprise shareholders,” says McGrath. “We understand people have enough financial stress in their lives.”

A Diverse Board and a Plan to Help

The co-op’s seven-member board is diverse in its experience. Current members include a business communications professional (McGrath), some information technology experts, a lawyer, and a representative from the sponsor, Pickman Realty Corporation. Board member experience also runs the gamut – a first-year rookie and a long-time resident who has served for 20 years. Meetings are open to shareholders and residents.

“You get a perspective when you’re on the board that you don’t get as a resident,” observes McGrath, who has been president for seven of the twelve years he has been on the board. “We probably generate nine tons of garbage every week and it magically goes away. You don’t worry about that until you have a problem. The key to avoid those problems is having a plan and looking ahead.”

McGrath adds that it’s important for board members to recognize they are amateurs, co-opted from other professions. They should never be afraid to admit they don’t know everything, but they shouldn’t be afraid to ask questions, either. “One thing you learn about being on a co-op board is how much you don’t know about what it takes to run this day to day,” he says.

Patience Is Key in Getting Things Done

“I have learned a lot in 12 years on the board but there is a lot I will never know because I’m not working in the business full time. As a board, you have to bring some humility to what you do. The other side of it is that when management comes and proposes an idea, we do a lot of due diligence on it. We have people coming to us saying we have a great idea for the building. Sometimes that works out and sometimes it doesn’t. You have to be patient and build consensus on the board and then it has to be accepted by the community.”

And while an exceptional relationship between a board and management company can be inspiring, it means nothing if the community doesn’t share the enthusiasm for how business is conducted and the buildings are managed.

“The key is to have a vision for the property that is developed from [the] inside out,” advises McGrath. “Build that vision in concert with the residents and shareholders and then set out a plan. Make sure you take care of the day-to-day as best you can. The stuff that seems mundane, that’s how people will judge you.”

Forest Hills South celebrates its 75th year in 2015. It turned co-op 30 years ago. The seven buildings opened in 1940, developed by Morris Pickman and Sons. The Pickman family has a long history in residential and commercial property in Queens and operates today as Pickman Realty Corporation. Pickman’s vision for Forest Hills South was captured by the promotional slogan “the suburb on the subway” that adorns a framed poster that hangs in the co-op boardroom. The company still has ties to the co-op. Although 92 percent owner-occupied, some residents still rent from Pickman.

As Forest Hills South heads toward its 76th year, the board and management are looking forward to marrying the original Pickman vision for the buildings with the 21st century. Next on the agenda is adapting digital technology to building management.

“We have a 75-year-old gem here so a big question for us is how to maintain the traditional feeling and lifestyle here, but still deliver the best service in the 21st century,” says McGrath. “The Pickmans had a vision when they developed this property. We are always trying to realize that and take it to the next level.”