Sponsors Can Leave Knotty Problems When They Give Up Control

Taking over a building from a developer and discovering problems is every new board’s and management company’s nightmare.That’s true. We had a 23-unit condo building with two commercial units that we took over in Brooklyn. For the annual meeting, we were going through the rent roll and discovered that the building’s ownership percentage did not add up to 100 percent.What exactly does that mean?In a condominium, the total ownership has to add up to 100 percent for the entire property. But when we examined Schedule A of the offering plan we saw some units were not included in the rent roll, and it added up to only 98 percent.How is this possible?We saw that they had listed some roof decks that were not included in the rent roll, so we reviewed the amendments and updates, but it still wasn’t adding up. Then we got hold of the amended condominium declaration and saw that the roof decks were never really meant to be sold. Instead, the developer had taken the percent ownership that was initially allocated to these roof decks and folded it into the commercial space.So who was actually paying for what?There were four residential unit-owners who, when they purchased their units, also purchased this roof space. But it was nothing more than a 4-by-4 foot area on the roof that wasn’t usable for anything. Because the rent roll separately allocated out the percentage that was assigned to these roof decks, they were paying, roughly, an additional $50 a month in common charges for something that was basically worthless. The commercial spaces, which should have been paying this amount, weren’t. How long had this been going on?Quite a few years, to the tune of nearly $5,000 for each of the four residential units. The commercial spaces had underpaid by about $25,000.Why didn’t the residential purchasers or their attorneys notice this?They were probably buying under the original documents, and then there was this amendment to the declaration that bundled the space into the commercial units.So what happened?Once we had all our facts straight, we advised the board that we really needed to bill the commercial spaces retroactively, and use that money to refund the residential unit-owners. The board was grateful that we were fixing this because its two previous management companies and accountant had never identified the problem. Did the board pay back the residential unit-owners before getting the money from the commercial owners?The board at first hesitated to do this, but we said that the residential unit-owners were innocent victims, and the board agreed to credit back their funds. One of the commercial units paid, and the other one hasn’t. We’re using the legal process to get the nonpayer to pay up.Condo boards don’t generally read their offering plans or amended documents, so what’s the takeaway? It’s critical that somebody understands what’s in all the governing documents. If the board doesn’t want to do this, then it needs to ask its property manager. If the manager can’t for some reason, find a professional who can.