Understanding Apathy Among Co-op and Condo Residents

What is lacking at so many co-ops and condos? The exercise of shareholders’ and unit-owners’ authority. Board members will often serve successive terms, not necessarily because they’re in love with the job, but because no successor can be found. Or, boards will present important amendments to the propriety lease or other governing document for member approval and no quorum can be obtained.

There is a popular argument among co-op / condo detractors that this is because members feel that the board will not listen to them. But at the meetings we have attended where there is an active contingent of members wishing to address issues before the board, they get the board’s attention.  The board members we know are very interested in what their constituents have to say — but the constituents have to say it.

Good Boards Listen

What I fear is the real reason owners don’t participate has nothing to do with frustration with their board of directors. Certainly, their co-op shares or the condo unit they own is probably one of their biggest investments. But sales occur frequently and many owners view their piece of the co-op / condo as a short-term, transferable interest that they will soon pass on to someone else.

The sale of a co-op or condominium apartment is not like the sale of a single-family home. When an owner sells a single-family home, the property is inspected in various ways so that the prospective buyer has at least a reasonable understanding of its condition, and a reasonable understanding of the financial issues that will have to be dealt with to insure proper repairs in the future.  But most significantly, deferred maintenance is dealt with in that transaction. The effect of the condition of the home on asking price is direct and immediate.

"Reserve" Judgment

The issue of deferred maintenance (or inadequate reserves) is not usually a factor in the sale of a co-op or a condo. The level of understanding required to demand adjustments to the purchase price is simply not achievable in the sale of a such a unit. Regardless of how sophisticated a prospective buyer may be, or how knowledgeable the real estate agent might be, or how complete are the statutory disclosures, it is impossible for anyone to properly evaluate the physical condition of all of the buildings in a condominium complex or the adequacy of its funding to meet present and future maintenance and repair obligations. 

Why? Because even most boards of directors and managers don’t know the true condition of the project. Community associations in California are required to conduct a “reserve study” every three years, and New York has Local Law 11 requiring façade inspection / repair every five years. Yet neither of these are in-depth inspections – they cover only visible and accessible areas— and many boards find themselves with major unexpected expenses at some point.

Even when the true condition is ultimately determined, the accounting practices recommended by some management companies and CPA firms allow for deferral of reserve deposits in order to meet operation expenses — leaving reserves seriously underfunded. The actual condition of the project will not be known until later in its life — usually when a scheduled project exposes other serious internal damage, or years of underfunding the association’s reserves means even routine projects cannot be funded without special assessments or bank loans.

The Undiscovered Country

This means that in the early years of a co-op or condo building, an individual unit-owner can transfer his or her individual interest unaffected by deferred or undiscovered maintenance. This easy transferability often translates for many owners into apathy — they have little interest in the present activities of the board. If you can sell it easily, you don’t really care what happens later.

By not insisting on in-depth investigations or full funding of reserves, we’ve enhanced transferability at the expense of owner interest in the policies of the community. But worse, we have disguised the value of those interests to the detriment of future owners.

Tyler Berding, a partner at Berding|Weil, received a Ph.D. in Government from Claremont Graduate School and his law degree from the University of California, Davis. His firm has represented community associations for over 30 years. This is adapted from his blog post “Why Members Don’t Care.”

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