It’s happened twice recently. In the summer of 1994, 72 New York property managers were convicted of taking kickbacks from contractors and extorting payoffs. This resulted in a $4 million restitution fund. Then, just last summer, 21 corporations and 62 individuals, including managing agents, superintendents, vendors, contractors, architects, and even board members, were indicted for bid-rigging (coordinating false bids so that the "lowest bid" was inflated) and other fraudulent practices. Just what can boards do to protect their buildings in the face of such widespread fraudulent activity?
In a perfect city, every building would know it could trust its managing agent. Most managing agents are honest professionals, but recent years have shown that it is not possible for boards to blindly feel confident that their buildings are being run legally. It is in their interest to actively prevent fraud from happening in their buildings, and there are simple, inexpensive, and specific ways to help make sure it doesn’t.
Checks and Balances
According to the Council of New York Cooperatives and Condominiums (CNYC), managing agents should, at minimum, provide two financial reports by the 15th of every month. One report should supply the opening and closing balances and summarize the building’s disbursements and income. The other report should list all disbursements, with exact dollar amounts, copies of invoices, check numbers, an explanation of any unusual expenses, and a copy of authorization to incur such expenses. P. Leonard Jones, president of the New York Association of Realty Managers (NYARM), agrees that this information is extremely important and suggests, "It would be important to distribute a package including invoices to the board president, treasurer, and one other officer and then a summary of that information should be distributed to each board member once a month. Each board member should carefully review reports for the corporation quarterly and ask questions."
CNYC also suggests monitoring bids closely and comparing costs of services against costs for similar services from previous years or against other sources. CNYC provides a Comparative Study of Building Operating Costs, which should provide boards with ball park figures of reasonable prices. Jones agrees that comparing costs for services is important and suggests reviewing contracts yearly. When searching for a contractor, he "generally sends out invitations to propose to five to eight companies to ensure a minimum of three proposals."
Sam Irlander, president of Parker Madison Partners Incorporated, a full-service New York real estate firm, and associate professor at New York University, stresses the importance of a hands-on board. This is particularly important in the case of requesting bids from contractors for services. "Everything should be on a sealed-bid basis and should always go directly to the board. This way no one should know what the bids are until they open them up," he says. According to Irlander, one way to decrease the chances of fraud is to remember that choosing a contractor should always be a board decision and not a managing agent or management company decision.
A board will probably want to allow its managing agent to work independently when it comes to routine expenses such as electricity, but for unusual expenses, CNYC suggests having a separate checking account with checks requiring double-signatures, one from the managing agent and one from a board member. Boards can keep an account with enough money to comfortably cover routine budgeted expenses, but have a separate account for non-routine expenses. This separate account could require two signatures, the signature of the managing agent and the signature of a board member.
Irlander states that a board can require two signatures on all checks or they can choose to "set a maximum check amount that the agent can sign on [his or her] own and require two signatures on all checks exceeding that amount." Although signing each check may be difficult in practice, it would ensure that the manager’s practices are accounted for.
CNYC suggests periodically assigning specific members of the board to review a particular cost item in depth and report findings with possible suggestions for improvements. For example, one board member could focus on paint and investigate which companies and products have been used, how their costs compare to other companies offering similar services, how often the building incurs painting expenses, where supplies for these jobs have been purchased, and if there are any recommendations for improvement in this area. Rotating in-depth analysis of specific expenses will ensure, over time, that all elements of a building are run in the most efficient manner.
The easiest way to catch fraud early is to have your accounting firm review your accounts quarterly, or even monthly if you suspect something, instead of just semi-annually or annually. The sooner suspicious activity is detected, the sooner it can be investigated and acted upon.
Keep Up With New Laws
It is also important, when striving for building compliance, to know with what regulations the building must comply. For example, a law passed last summer prohibited the practice of torching roofs for replacement. Many buildings were not aware of the law until recently, and the practice remained widespread. Keep in mind that not complying with new laws not only puts residents in danger but can cause potential legal hazards for boards.
How can you find out about new laws? According Jones, the primary way to find out about changes in laws is to "have corporate counsel and require that counsel to keep boards abreast of changes in laws." He also stresses the importance of reading trade newspapers such as The Cooperator, NYARM News, and Real Estate Weekly which put out information to keep boards informed. Some other ways to make sure you are aware of new laws are networking with other board members and searching on the Internet. Know the industry.
In addition, Irlander suggests becoming a member of the Real Estate Board of New York (REBNY) which, he says, "can provide you with a fountain of information."
Teaching an Old Dog New Tricks?
What if your building has been running under a single system for a long time with the same managing agent or management company? Will you breed resentment by suddenly adopting stricter policies? What should you do to soften the transition to new policies?
Jones states, "Any managing agent or agency that wants to give good and proper service should not object to providing information." He continues, "Managing agents should enjoy that type of involvement by a board."
He does agree, however, that a procedures manual, a reference in which policies are clearly written out, is helpful. "It is prudent that changes in policy be adopted by the board and submitted in writing. It lends a kind of clarity. Reducing it to writing is extremely helpful," Jones explains.
Also, let your managing agents know that, while you are checking them, they are also responsible for keeping an eye on the board’s activities. If a board member should suggest something that sounds suspicious, the managing agent should know that he or she is responsible to notify other members of the board.
Ethics in Management
Board members are not the only ones making sure managing agents work in compliance with laws and run their buildings legally. Organizations such as The Institute of Real Estate Managers (IREM) has created a code of ethics in which specific responsibilities are discussed in detail.
Similarly, NYARM teaches seven courses on property management at the NYU School of Continuing and Professional Education. The courses range from financial management to the handling of clients, but the one required course is the Code of Ethics course written by and taught by the Manhattan law firm Schecter & Brucker.
Although we will never live in a perfect city where fraud is unheard of, a board that stays actively involved with its managing agent will feel more confident that its building is being run legally. Check financial statements closely. Implement a policy for writing checks, whether this includes requiring two signatures on all checks, having two checking accounts, or requiring two signatures on checks above a certain amount. Be involved in the bidding process when contracted services are required in your building. Always present changes in policy in writing so that your managing agent and management company know what is expected, and keep abreast of changes in laws. Taking these steps should help protect your co-op or condo against fraud. A knowledgeable board is many steps closer to maintaining a safe and prosperous building.
Ms. Hoodiman is a freelance writer living in Astoria, New York.