Non-Resident Board Members How Do They Affect Operations?

For many reasons, common-interest communities such as co-ops, condominiums, and HOAs prefer that the people living in the community’s units be the actual owners of those units – rather than renters, or subtenants, or relatives of the owners. The conventional wisdom here is that owner-occupants have a more deeply vested interest in the overall health and smooth operation of their community than non-resident owners, because it’s their actual property – not some faceless landlord’s. Same goes for board members – it seems pretty obvious that someone serving on their building or association board will be more effective and engaged if they actually live in the building or association, and not several states away.

Ownership Possibilities

In the world of common-interest communities, the vast majority of owners are also occupants. They purchase their unit as a primary residence, and live there the majority of the time. But other possibilities do exist. In some communities, particularly in existing apartment buildings that have been converted to co-op or condominium ownership, any number of units may be owned by the original landlord or building owner – usually referred to in this instance as the sponsor. These units may be encumbered by holdover tenants who didn’t opt to purchase their unit when the building converted, and who in turn may be subject to various rent regulations, such as rent stabilization in New York City.

In newly-constructed buildings, there may be some number of units still owned or retained by the developer. These may also be rented to non-owners, but are not likely to be subject to older rent regulations designed to protect tenants who chose not to purchase their units, such as in the above-mentioned conversions.

Lastly, in either existing conversions or new construction, there is the possibility of investor units; apartments that have been purchased by a third party and operated as a source of investment income as one would any rental property. An investor could own one unit or many; the maximum number usually dictated by the community’s governing documents.

Board of Directors: Who May Serve?

According to Phyllis Weisberg, an attorney with Montgomery McCracken Walker & Rhoads, which has locations in New York, Pennsylvania, New Jersey and Delaware, at the state level in New York and elsewhere, “There is no residence requirement to serve on the board of a co-op or condo.” Rather, “One must look at the bylaws.” Weisberg also points out that for co-ops in New York, which are subject to the BCL—the Business Corporation Law—there is no residency requirement unless provided for in the community’s bylaws.

Section 701 of the BCL lays out the requirements as follows:

“Subject to any provision in the certificate of incorporation authorized by paragraph (b) of section 620 (Agreements as to voting; provision in certificate of incorporation as to control of directors) or by paragraph (b) of section 715 (Officers), the business of a corporation shall be managed under the direction of its board of directors, each of whom shall be at least eighteen years of age. The certificate of incorporation or the bylaws may prescribe other qualifications for directors.”

The co-op corporation or condominium association can prescribe other requirements if they so choose.

According to Stuart Halper, an attorney and president of Impact Real Estate Management, which has offices in Queens, Manhattan, Westchester and Long Island, anything is possible with respect to board participation. “Unequivocally the answer is yes, [non-residents can serve on their board], provided that it’s allowed by the bylaws of the co-op or condominium. When a sponsor is involved, it’s very common for there to be non-resident shareholder board members.”

Halper goes on to say that “Not only is it likely that there will be non-resident board members, but I’ve seen situations where the superintendent of a building was elected to the board, and another where a rent-stabilized tenant in a sponsor unit was elected. If it’s not specifically prohibited by the bylaws and the candidate is at least 18 years of age, they can get elected.”

Weisberg also points out that the logistical issues that might have made it difficult or impossible for a non-resident owner or shareholder to participate meaningfully in board activities and administration are no longer really much of a problem, thanks to video and telecommunications capabilities like Skype and FaceTime that allow board members to actively participate in meetings and other board functions from pretty much anywhere in the world. “People don’t need to be close enough to attend meetings,” she says. “They can participate by speakerphone,” or other technologies. “Some boards today meet entirely by conference call.”

Filling Seats and Navigating Agendas

A common problem in common-interest communities – whether they are co-ops, condominiums, or HOAs in urban, suburban or planned communities – is filling the seats on the board. Volunteers are hard to find. That difficulty may result in non-residents sitting on the board. “We recently had a situation where two board members were out getting proxies for their slate,” says Halper. “They didn’t have a third person, though, to run against another block of candidates. We looked at the bylaws. It turned out that only the president was required to be a resident shareholder. So we decided that if they have the proxies and the votes, the managing agent would be the third board member.”

Despite the legality and common practice of allowing non-residents to serve on boards, tension sometimes arises aroud the differing agendas held by resident owners versus non-resident owners. “Their interests are different,” says Halper. “An investor wants to keep maintenance low. They make money on the spread between maintenance paid to the co-op or common charges paid to the condominium, and the rental income they receive from their tenants. They bring a different gestalt to the equation.”

Weisberg concurs, but adds that the differing agendas of on-site owners versus off-site owners often involve more than just the dollars and cents of maintenance. “Investors and residents have different interests,” she says. Investors may be seeking to ultimately sell their units and have to be concerned with physical appearance more than long-term residents, many of whom are more concerned with the health of building systems. “Investors want the building to look nice, and may be more concerned with the lobby while residents have a greater interest in protecting the infrastructure and the functioning of building systems,” such as boilers, and roof and façade maintenance.

Another factor that may cause friction is the economic status of the residents. Older residents living on fixed incomes who bought into the building at low prices many years earlier may not want to spend money on projects or upgrades that younger, more affluent residents who purchased their units more recently may view as priorities. These older, more financially cautious residents may side with non-resident investor types in preferring to keep expenditures down.

Sponsors add a whole other dimension to the equation. Weisberg explains that a sponsor’s ability to control the board of a property it converted to co-op or condo ownership is governed by the regulations issued by the New York State Attorney General Real Estate Finance Bureau pursuant to the Martin Act—also known as New York’s blue sky laws—which govern real estate syndications. “Typically they allow sponsor representation on the board, but limit the period of sponsor control,” she says.

Both Weisberg and Halper maintain that sponsors have interests more akin to investors than to resident owners. They are typically more interested in short term appearance and value than to the long term health and stability of the property or building. That strategy is dictated by the fact that they are ultimately seeking to dispose of their assets in the co-op or condo association in a much shorter period to time than resident owners who have made a much longer term investment. “Sponsors,” says Weisberg, “may not want board members to look to closely at the building construction or financial issues, lest they decide to assert claims against the sponsor.” Long-term resident owners serving as board members may be more diligent about such issues.

What’s Best for the Community?

In the final analysis, the participation of non-resident owners or even non-owners on co-op, condo and HOA boards is a fact of life in most common-interest communities. Clearly, unless otherwise stipulated by the bylaws or other governing documents, one does not have to be ‘in-residence’ to serve. In some cases, one does not even need to be an owner to serve. With that said, what is the real effect on the health and operation of the community by having non-resident board members?

Halper says “It’s not particularly in the interest of the resident shareholders of the community to have non-residents on the board. They have different interests. It also makes management more complicated. It creates tensions on boards as the non-residents don’t have the vested stake in many issues that residents do.” In an imperfect version of a perfect world, though, Halper suggests, “Everyone brings different things to the table, and a healthy board has a good mixture of that.”

Perhaps then a little diversity can be a good thing.         

A J Sidransky is a published novelist and staff writer for The Cooperator.

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