Three Sure Signs That Your Sponsor Is a Crook

Regardless of the promises spelled out in a co-op or condo offering plan, some sponsors overstay their welcome, refusing to sell apartments, clinging to control of the board, and effectively preventing the building from being occupied by people who own their apartments. It’s a lose, lose, lose deal – for everyone but the sponsor.

Here are three red flags that board members need to recognize:

Access to Documents
The sponsor should grant access to any building documents requested by a board member. "As a general rule, board members have the right to see whatever records they request in order to perform their duties as fiduciaries,” attorney Steve Wagner, a partner at Wagner Berkow, tells Brick Underground. “Refusal to grant access to the records is a big red flag."

Hiring of Professionals
Beware if your sponsor insists on hiring handpicked professionals, such as engineers, accountants, lawyers or contractors. "Any of these professionals, if working for a sponsor on other jobs or affiliated with the sponsor, could shade their opinions to favor the sponsor and not serve as honest brokers," says Wagner. If faced with pushback at the prospect of hiring independent professionals to work in the building, he advises, residents may have to retain an attorney and organize a takeover of the building's board.

Using the Reserve Fund as Piggy Bank
Make sure the sponsor keeps the building’s reserve fund separate from his or the managing agent’s other funds. This will prevent the sponsor from using the building’s money as his personal piggy bank by, for example, lending the building money rather than raising common charges to cover expenses. This will keep common charges low, which, Wagner says, an unscrupulous sponsor can use to increase apartment values and spur sales.

If your board uncovers evidence of fraud, theft, or misconduct involving the building's funds, Wagner recommends commissioning what's known as a "fraud audit" with an independent accountant, which could potentially be covered by the building's insurance.

Ignore these red flags at your peril.