New Construction + Condos

What’s the smoothest way for an independent board to take over from the developer of a condominium?

Getting independent control of the board is an important step in a condo building’s structural and financial health.

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2019
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If you’ve bought into one of the many glittering new condo buildings in New York City, you may be loving your new apartment but feel slightly less excited about the sponsor’s involvement on the board.

For a period of time after construction, the developer of a new condo building will control the board and although a few owners will be allowed to serve, their minority involvement means they won’t have access to the records of the building. Steve Wagner, a real estate attorney at Wagner Berkow & Brandt (FYI, a Brick sponsor) says it’s often hard to get rid of the developers.

Wresting control of the board away from the sponsor to an independent association is an important step in a building’s structural and financial health.

“It’s the Gordian knot, it’s what unties everything,” says Bruce Cholst, a real estate attorney who specializes in co-op and condo law at Anderson Kill. While a sponsor controls the board he or she can also hide abuses of power, says Cholst, “I’m not saying all sponsors are abusive but the potential for abuse is there and it does happen." He says that can include controlling funds he shouldn't, use of building staff to service his apartments, or faulty construction. 

Transitioning to an independent board becomes even more important if there are signs of building defects because the statute of limitations for negligent design is three years, meaning you need to get independent engineers in to assess the condition of the building within that time frame if you are going to get the sponsor to repair them. This is especially important if construction defects are not immediately visible or “latent,” says Cholst. He recommends following these steps to secure the board's independence.

Create a residents committee

Unit owners should start considering the transition as soon as possible.

"Procrastination is a resident's worst enemy," says Cholst, who recommends you start talking to each other straight away and form a committee to oversee the changes. Cholst says speed is important here because you want the sponsor out "before the three-year window and you need time to investigate and amass the facts." The clock starts ticking from the date of the first closing in the building. 

Hire a real estate attorney

An attorney can help facilitate getting control of the building by reading the offering plan and interpreting the condo bylaws, much of which is "concealed behind very thick legalese," says Cholst. These details will determine when owners are entitled to get control of the board. It comes down to how many units have been sold but Cholst says a sponsor might not volunteer that information.

"The attorney will be able to ask the questions and read the plan and know when it is feasible to get control. If the sponsor refuses to hand over the reign of powers, it’s the attorney who can threaten suit in order to make it happen or go to the AG and ask him to get involved," he says.

Get other independent professionals in place

Once you get control of the board, you are then in a position to throw out the sponsor’s professionals and get your own in. You'll need to consider employing an accountant, and a managing agent as well as an architect and engineer. When you have access to all the building records, that will be the clue as to what’s going on and whether there has been any misconduct including construction defects. With your team in place, they can analyze them and then you can start to prioritize. 

Cholst says an important next step is getting an engineer to take a careful look at the building and give his honest assessment. "The sponsor in his engineer's report is going to describe [the building] as the Taj Mahal and the tenants are going to assume it is a tenement. The truth lies in between," he says. Engineers are generally conservative (for liability purposes) so Cholst warns you will likely get "a gloomy picture, no matter what."

Pull together a capital plan

The next step is to prepare a capital plan. This is an assessment of the building's structural, mechanical, and financial health. Cholst says you'll be asking the engineers and architects to tell you what needs immediate fixing, like the boiler and what can wait a few years because there will inevitably be limited funds. If there are construction issues you will then have to take on the sponsor, he says. 

If necessary, make demands of the sponsor

If you've identified construction defects, and you're within the window of liability, you can now make demands of the sponsor. Cholst says some of his clients find out about construction defects too late and there's very little that can be done. "The sponsor isn’t going to be Santa Claus and voluntarily fix it 99 times out of 100," he says.

Because of these short timeframes to address liabilities, Cholst says, "It is in the sponsor’s interests to remain in control and deny the residents access to all the building records and all the knowledge about building operations as long as possible because once they’ve ridden out the statutes of limitation, then they are immune to liability on that."

Cholst recommends letting the sponsor know that you are aware of the statue of limitations. If the sponsor is serious about wanting to fix any defects you can then enter into what's called a tolling agreement, where the statute of limitations stops running and you don't have to sue right away. Cholst emphasizes the importance of trying to avoid a law suit. "If you are going to sue, the sponsor can throw roadblocks in your way. Litigation is the last resort but it may be the only way."