Spending Hours on the Co-op Board Minutes
The standard advice to apartment buyers is to make sure someone reviews the board minutes. But why? What’s in the minutes that is so important? It turns out to be quite a bit.
A co-op board’s minutes provide lawyers with the best window into the inner workings of a building: disputes between shareholders, pending lawsuits, bills coming down the line for major capital repairs, and votes on issues like whether an owner can rent out his or her apartment. They provide a sense of what a board is like and what issues may affect the buyer, said Luigi Rosabianca, the principal and founder of the law firm Rosabianca & Associates.
“You can find out about the guy smoking too much in Apartment 4A or the barking dog in another apartment or that the roof needs repair,” Mr. Rosabianca said. “It can contain social nuances and issues as substantial as a financial crisis.”
The board of directors of a co-op usually meets monthly to discuss building business, with a break over the summer. The board is required to keep a record of what happens in the meeting.
The minutes, usually just a summary of the meeting, are sometimes sanitized to mask certain controversial issues, said Steven R. Wagner, a lawyer specializing in real estate at Porzio, Bromberg & Newman.
Lawyers for buyers generally want to see 18 months’ to three years’ worth of minutes during the buying process, as a way of ensuring that the buyer knows as much as possible about the state of the building and the apartment before money is put in escrow. They generally review the minutes once an offer is accepted and before a contract is signed.
Usually a real estate lawyer or a paralegal will look over the minutes on site in the building, and prospective buyers can go along; alternatively, if the co-op allows it, the interested buyers can read them on their own. But a prospective buyer unfamiliar with the nuances of deciphering minutes might miss important clues about impending expenses or other issues that a lawyer might pick up on; and the buyer lacks the connections to get additional information from management firms if necessary. Also, not just any lawyer will do, said Daniela Kunen, a broker with Douglas Elliman Real Estate. “The attorney should be a real estate expert familiar with co-ops,” she said.
Lawyers also look at a building’s financial statements, though minutes serve a different purpose. Financial statements look back over what has happened in the last year, Mr. Wagner noted, while minutes can help a lawyer better understand what changes are likely to occur. Board members might discuss a possible lawsuit against the building that has yet to be filed, or impending work on the facade or the heating system. These issues can lead to special assessments or increases in maintenance, or to a flip tax, if the building doesn’t have enough cash reserves to address them.
Buyers can also learn about the temperament of the board, from the way it addresses problems and implements rules, said Eva Talel, a partner of Stroock & Stroock & Lavan who is in charge of the co-op/condominium board representation group. In a building that allows shareholders to rent out their apartments, for example, a look at the minutes might reveal to a lawyer that the board allows such rentals only after an owner has been in the building for three or five years, Ms. Talel said. The board may also demand that owners adhere strictly to rules governing what is and is not allowed on their terraces. “You may have a vision of a garden,” she said, “only to find that you are restricted to two potted plants.”
Dogs may be allowed, but the board may prefer breeds under a certain size. Or it may be strict about complex guidelines on renovations — for example, the placement of bathrooms. “You can find out how strict or flexible a board is from reading the minutes,” said Roberta Axelrod, who sits on 10 co-op boards and directs co-op and condo sales, marketing and conversions for Time Equities.
Lawyers can also learn quite a bit about the specific apartments their clients want to buy. The minutes should reflect whether, for example, there was a fire above, below or next to the apartment, or any history of water leaks, or even of bed bugs. If a neighbor has chronic complaints about noise or smoking, that will also be reflected in the minutes and may make buyers pause before they take the plunge, Mr. Wagner said.
The minutes do not, however, contain everything. A certain amount of summary is appreciated and expected of well-run buildings, Mr. Wagner added. If minutes were a jumble of verbatim discussions, it might be a sign of a poorly run building. Minutes can also give insight into board dynamics — whether the board seems to be efficient and professional, or a bastion of infighting.
“You can tell how crazy a board is by the form of the minutes,” Mr. Wagner said. “If there are 12 pages of ‘he said, she said’ back-and-forth, they are probably not taking care of the business of the co-op.”
If a lawyer is puzzled by something in the minutes, he or she often asks more questions of the management company to get some insight. But in some buildings, lawyers actually have little to go on. Some smaller, self-managed buildings — like three- and four-unit co-ops in brownstones — might just keep handwritten notes, or in some cases nothing at all. In that event, a lawyer might just telephone a board member and have a conversation about what is happening in the building and whether there are any large repairs or lawsuits looming, said Peter Graubard, a Manhattan real estate lawyer.
Although minutes can bring up issues of concern, it is rare that something comes up to scuttle a deal. Sometimes a revelation can force a concession from a seller — if, for example, an assessment is expected. The seller might pitch in some money to cover a portion of the bill. “In my experience,” Ms. Axelrod said, “the vast majority of the deals go forward.”
The review of minutes typically comes at a very vulnerable time in the purchasing process, especially in a market in which buyers are falling over one another to land homes. Once an offer has been accepted, buyers may be itchy to get the contract signed, as they could be outbid in the interim, but they shouldn’t forgo the minutes, said Ms. Kunen of Douglas Elliman.
Sellers generally expect a brief delay while the minutes are examined, and Ms. Kunen counsels her buyers to hire a lawyer who can look at the minutes within a day or two. In the past, she said, lawyers could wait a week, but not these days. “If they wait a week or 10 days, that is how you lose a deal,” Ms. Kunen said. “I would not counsel anyone to skip this due diligence — just hurry up and get it done.”