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Building a Better System “Basically, you have to treat alteration and assumption agreements like corporate documents and make sure they’re retained for safekeeping,” says Ken Jacobs, a partner at the law firm Smith, Buss & Jacobs. “And when there is a sale, the board has to make sure that management checks the agreements for that unit, and for management to inform the transfer agent. The right hand has to know what the left hand is doing.”

Click here to read the full article in Habitat Magazine

CLICK HERE to view our PowerPoint presentation, “How to Handle Transfers – Current Issues Facing Co-op & Condo Boards.”

NY State and federal courts recently voided some of the more extreme measures taken by New York City and Albany during the COVID emergency.

“Eviction for Good Cause” Law Voided in City of Albany. In 2021 the city of Albany passed a law requiring landlords to offer renewal leases to tenants unless the tenants violated one of ten enumerated conditions (the “Eviction for Good Cause” law), ostensibly to address “the negative impacts of no-cause evictions on public health.” Those conditions included (for example) a failure to pay rent, but a rent increase greater than 5% created a presumption that the increase was “unconscionable” and hence void. A landlord group challenged the law and won in trial court. The City of Albany appealed.

The appeals court ruled that the City of Albany was barred from adding conditions for an eviction that contradicted those already contained in state law. For instance, state law allows landlords to evict tenants after their lease has expired or they have failed to pay rent. Albany could not further limit those rights by imposing stricter conditions, such as forcing landlords to prove that a 5% rent increase was not unconscionable; the local laws were “preempted” by the state.

However, the City was not barred from requiring registration of rental properties with the City as a condition of starting evictions. That condition merely “supplemented” existing law, without contradicting it. The difference is subtle.

Our state legislators have repeatedly introduced similar bills that limit how much landlords can increase rents, and requiring landlords to offer renewal leases to tenants unless the tenants have violated certain additional conditions. These “Eviction for Good Cause” bills have gained momentum over the past few years. They need to be carefully monitored or community associations may one day find themselves subject to state-imposed restrictions on increasing maintenance charges or requiring lease renewals in their buildings.

New York City Law Prohibiting Landlords from Enforcing Personal Guarantees of Certain Commercial Leases Invalidated. In the earliest days of the COVID emergency, New York State required “non-essential” businesses and restaurants to close. New York City passed a law prohibiting the enforcement of personal guarantees of those types of leases for rent accruing between March 2020 and June 2021 (the “Guaranty Law”). The federal court in the Southern District of New York has ruled that the Guaranty Law is unconstitutional, since it prohibits the enforcement of obligations that the guarantors of the affected commercial leases had contractually agreed to and bargained for.

This ruling may help numerous co-ops and condos in Soho and Tribeca who had lost a huge percentage of their income when their commercial tenants failed to pay rent. Most associations needed to make major accommodations at the time to deal with the shortfall. Even though this ruling comes two years later, it may still allow associations to be compensated for some of the foregone rent. However, we expect the ruling to be appealed, so we have not heard the last word.

COOPERATOR SEMINAR ON MAY 10th; “Problems with Transfers: Transfers to Trusts, Transfers by Estates, New Laws Affecting Purchase Applications and Rejections.”

Please come to our Seminar on May 10th at 2:30 at the New York Hilton (Midtown) as part of the Cooperator Expo! We will review ongoing Board problems with transfers: When to allow transfers to entities instead of individuals; how to deal with transfers by estates when no one shows up for the decedent; exercising and waiving rights of first refusal for problematic purchasers; latest updates on disclosure laws affecting rejections of purchasers and review of purchase applications, and threatening bills that are gaining momentum in the State legislature.

Matthew J. Smith joins Habitat Magazine to discuss the basics of access agreements.

The basics. When a neighbor requests access to your building, you need an access agreement. You want to make sure it describes exactly what work the neighbor plans on doing and where. We recommend that you ask for drawings and specifications if they’re available. You want to know how long the project is going to take and how long your neighbor will need access to your property.

Indemnification. You’re going to want to require that the neighbor and its contractors indemnify you against any damages or costs that their access creates. This is to protect you in case anyone gets injured or there is damage to your building.

Money matters. The neighbor has to reimburse you for any costs that you might incur. This includes engineering costs, architect costs and legal costs for the access agreement. There’s often a license fee for loss of use of a portion of your property. All of this is negotiated with your neighbor.

If things go wrong. Things can go wrong if the project takes too long, if scaffolding and other protections are left in place longer than they were expected to be, if you lose access to portions of your building’s balconies, courtyards and alleyways, things of that nature. That’s why the access agreement is critical. It should address all of those probabilities and have some sort of mechanism for the two neighbors to sort it out.

Ken Jacobs joins Habitat Magazine to discuss how to pass a controversial amendment to the proprietary lease.

Legally and practically. The way to pass a controversial policy, such as a smoking ban, is to amend the proprietary lease. The proprietary lease is considered a contract under New York law, and therefore the parties to the contract, which are the shareholders, can amend it. Usually, the lease requires a supermajority of 67% or 75% of all shareholders to amend it. So in order to accomplish the amendment legally, the board has to create the proposed amendment, put it in a notice of meeting to the shareholders, call the meeting and have the shareholders vote. That’s the legal way of handling it — but not the practical way, because people are inevitably going to have concerns.

Laying the groundwork. So what I would suggest is that the board first determine whether there’s a chance of getting this kind of support from the shareholders — either through discussions with them or a straw poll. Then when the board proposes the amendment, I suggest calling a town hall or a Zoom meeting and having a lawyer there to answer questions. The first question is going to be: “Is it legal to ban smoking in apartments?” The answer is: “Smoking is recognized as a legal nuisance by a number of courts. And because the proprietary lease is a contract, the shareholders have the ability to set the terms of that contract, and that would include which activities are allowed inside your apartment.”

If at first you don’t succeed… You may not get that required supermajority at the initial meeting. The majority of the shareholders present can vote to adjourn the meeting for another 30 days, and the board can use that time to gather additional proxies from shareholders in order to get to that threshold. Two keys here are education and patience. Boards can’t just assume that everybody is going to go along with them. They have to give people a chance to express their concerns and respond to them between the date they send out the proposal and the date of the vote. It may not work the first time, but you could try it again in six months or a year.

Lithium-Ion batteries (“L-I Batteries”) are used in numerous consumer devices, ranging from cell phones, laptops and tablets to vapes, electric toothbrushes, tools and cameras, and wheelchairs, bicycles and scooters. These batteries have a history of overheating, particularly on E-Bikes and E-Scooters. After several E-bike battery fires this spring, the NYC Housing Authority banned E-bikes and E-scooters from apartment buildings that they manage. These restrictions were subsequently reversed, in part because the ban didn’t distinguish L-I Batteries in E-bikes from other L-I devices, and in part because so many residents depended on E-Bikes in their livelihoods as delivery workers. To date the NYCHA has rejected less restrictive proposals (such as requiring upgrades of L-I batteries to national standards or parking E-bikes outside) because upgrades are costly and many NYCHA buildings do not have outside storage and charging facilities.

Unlike NYCHA renters, though, most Co-op and Condo owners do not need E-Bikes for their jobs. Therefore many Boards are considering flat bans on allowing E-Bikes to be stored within their buildings. Boards unquestionably have the authority to prohibit residents from storing E-Bikes or scooters using L-I batteries inside the premises. But will these bans solve the problem?

The National Fire Protection Association states, “[If lithium-ion batteries] are not used correctly, or if damaged, those batteries can catch on fire or explode.” Obviously Boards cannot simply issue a blanket prohibition on all L-I devices, but they can mitigate risk.

The NFPA recommends (among other things) that (a) users only purchase and use devices, batteries and charging equipment that are listed by a nationally recognized testing lab and labeled accordingly; and (b) users should store E-bikes, E-scooters and L-I batteries away from exit doors and anything that can get hot or catch fire.

As to (a), the NFPA proposes that all L-I batteries include a certification of compliance with Underwriters Laboratories (UL) test 1642 or UL 2054. (Amazon, for example, requires that all products containing L-I batteries comply with UL 1642 or UL 2054.) But compliance with UL standards by sellers of L-I products remains voluntary. The NFPA also urges that all users remove L-I batteries from their chargers when fully charged, but that too depends on user compliance. OSHA adds other recommendations for the workplace, including making sure that replacement batteries are specifically designed and approved for the device, are purchased from the manufacturer of the device, and that L-I batteries are stored in a cool, dry place.

As to (b), it appears that statistically the majority of L-I battery fires are caused by E-Bikes, E-Scooters and cell phones. Therefore Associations could substantially reduce the risk of fire damage from overheated L-I Batteries by requiring L-I powered vehicles to be stored outside of the building. However, many buildings simply lack external bicycle parking capacity, and outdoor storage still leaves users with the problem of charging their devices. In other words, requiring exterior parking may have the same practical effect as a ban.

Notwithstanding, it may well be reasonable for Boards to limit potential fire risks to other owners by barring E-bikes from being stored indoors. To deal with other L-I devices, though, Boards should consider circulating other recommendations to owners as well, such as:

• Only use UL – certified batteries.
• Store devices using L-I batteries at room temperature.
• Check batteries for bulges, smells, heat or other signs of damage.
• Do not dispose of L-I batteries in the garbage or trash chute. Recycle them. (Call2recycle.org will help you dispose of them safely.)
• Keep a fire extinguisher handy. (A standard model is sufficient.)

Hopefully technology will advance sufficiently in the coming years that users will no longer need to be concerned with defective L-I Batteries for everyday consumer use.

PART I – FINDING EVIDENCE OF “DEFERRED MAINTENANCE”

When you take out a personal mortgage or a co-op loan, your bank usually packages it with other mortgages and sells them in bulk to the Federal National Mortgage Association (“FNMA” or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or simply “Freddie”). (In this newsletter, we are calling both condo and co-op loans “mortgages.”) FNMA and Freddie Mac insure the payment of these packaged loans for the benefit of the institutions that buy them.

In response to the Surfside Condominium collapse in Florida, Fannie Mae and Freddie Mac issued Bulletins that required banks counting on FNMA and Freddie Mac insurance to look for “Deferred Maintenance” in the buildings in which the mortgaged unit is located. The results are affecting not just individual borrowers but also underlying loans to co-op and condo associations.

“Deferred Maintenance” is defined as “[conditions] severe enough to affect the safety, soundness, structural integrity, or habitability of the improvements;” or “[that] impedes the safe and sound functioning of one or more of the building’s major structural or mechanical elements, including but not limited to the foundation, roof, load bearing structures, electrical system, HVAC, or plumbing.” FNMA and Freddie Mac will not insure a loan in a building with significant Deferred Maintenance.

A. How FNMA/Freddie Mac Determine “Deferred Maintenance.” Lenders are instructed to obtain and review the following documents and information:

(i) “Addendum” to the Standard FNMA Questionnaire. FNMA and Freddie Mac customarily require banks to fill out a questionnaire with information about the community association in which the unit is located. They have added a “temporary” addendum to the questionnaire focusing on potential “Deferred Maintenance” in the building and the steps that a condo or co-op has taken to address it. A copy of the Addendum can be viewed here. The full questionnaire, including the Addendum, can be viewed HERE.

Lenders pass on this Questionnaire to managing agents, who charge to fill it out. Some managing agents, though, demand indemnification from the Association for their answers, since they are required to “certify” the answers.

(ii) Building Condition Reports: Up to five years of reports required to be filed by localities or the state. In New York, that could mean NYC Local Law 11 façade or gas pipe inspections, state-mandated garage inspection reports, engineering inspections that were performed by lenders before approving mortgage refinancings, or reserve fund studies. Freddie Mac states that the absence of a report will not protect an Association against a negative inference.

(iii) Minutes of Board Meetings. The last six months of Board meeting minutes.

(iv) Violation Searches. Building Department or Environmental Control Board records of outstanding violations.

(v) Special Assessments. The purpose of, percentage collected, and remaining installments of current and planned special assessments, and whether the assessments will have any impact on the financial stability, viability, condition, and marketability of the project.

(Freddie Mac adds that if the special assessment is related to safety, soundness, structural integrity, or habitability, all related repairs must be fully completed or the Project is not eligible.)

Initially, the appraiser hired by the bank is instructed to perform these reviews (which would double the prices of appraisals). But FNMA also states that “Lenders cannot rely solely on appraisals” to make their determination.

B. How Associations Can Address Lender Demands. If Associations refuse to provide information or to fill out the Addendum, they run the risk that FNMA and Freddie Mac will simply decline to insure loans in their buildings. FYI, these agencies keep a master list that lenders and mortgage brokers can refer to in order to review why loans may have been declined in the past.

Some banks make “portfolio” loans (hold them rather than packaging and reselling them). FNMA and Freddie also don’t insure “jumbo” or “non-conforming” loans, which currently includes loans exceeding $970,400 in NYC and some surrounding areas. But many lenders are now requiring borrowers to provide the same information, including filling out the Addendum (or the bank’s proprietary equivalent), as a condition of making any mortgage loan. Moreover, New York State is considering legislation that would expand the required reporting of building conditions to conform to what most other states already have. (More on that in Part II, “New FNMA and Freddie Mac Reserve Requirements; Preparing for Future Capital Repairs.”)

How can your Association prepare itself for this increased disclosure? We submit these suggestions on how to prepare your Association to respond to these new lender demands, particularly in conjunction with the reserve and capital planning issues to be discussed in Part II:

1. Sanitize and Conform Your Minutes. Appraisers will be reviewing your minutes for evidence of deferred maintenance and incipient physical condition issues. Boards should express their concerns in the minutes in a proactive or positive light. In other words, rather than stating, “Director Smith demanded that the Association fix the severe ongoing roof leaks since the warranty expired,” the minutes might state, “The Board discussed the advisability of planning for installation of a new roof as part of its overall repair and maintenance plans, and authorized management to engage an engineer to review roof conditions and to solicit proposals.”

Also, make sure your minutes are consistent with existing reports. It doesn’t look good if your Board appears simply to ignore a report that recommends replacement of a building component within a particular period.

2. Anticipate and Address the Results of Mandated Inspections. New York
City has tightened up its requirements for making prompt repairs after receiving “SWARMP” comments in Local Law 11 reports, but these may still unsettle potential lenders. Show that you’re dealing with them in some written record. Likewise, you do not want to see a garage inspection that states, “The mortar in the ceiling shows evidence of water penetration and has fallen in several places,” unless you plan to address it.

3. Review Current Violations. Many Lenders are asking for explanations of violations issued for failures to conduct regular elevator or boiler inspections (a common failing of service) companies, or to remove old “Stop Work” orders. Consider how your outstanding violations look from an institutional standpoint.

4. Explain Your Special Assessments (Possibly in the Minutes). Provide a basis for a special assessment that looks consistent with prudent capital planning as opposed to a desperate remedy to emergency conditions. (This will be explained in greater depth in Part II.)

The FNMA/Freddie Mac demands have received considerable pushback from community associations across the nation, including requests for a one-year deferral of enforcement. That has not happened. Meanwhile, banks are pushing ahead with their own inquiries and will make independent judgments. We still have to see how this plays out.

NEXT INSTALLMENT – “The Other Shoe Drops – Enhanced FNMA and Freddie Mac Reserve Requirements.” FNMA and Freddie did not stop with requiring banks to obtain more information about building conditions; they are also demanding that Associations establish “adequate” reserves and demonstrate that they have the financial capacity to deal with potentially hazardous conditions before another Surfside disaster. We will discuss the new guidelines in our next E-Blast and offer additional suggestions on how to cope with them.

On June 10th, we notified you that a bill exempting Co-ops from some of the more objectionable provisions of the 2019 Tenant Protection and Housing Stability Act passed the legislature. See our E-Blast HERE. Due in part to the change in the executive branch, the Governor did not sign the bill until last week.

To remind Co-op Boards, the bill:

(a) Allows Co-ops to require escrow deposits from owner-occupant purchasers (or shareholders) for more than one month’s maintenance as a condition of approval of purchase applications;

(b) Allows Co-ops to collect late fees up to 8% of maintenance if authorized under the Proprietary Lease;

(c) Allows Co-ops to charge fees (and to authorize managing agents to charge fees) in connection with processing applications to become “tenants”;

(d) Allows Co-ops to charge the actual cost of conducting background checks on applicants;

(e) Allows Co-ops to collect additional rent and fees in summary proceedings against defaulting tenants, rather than having to commence a separate proceeding; and

(f) Allows Co-ops to send notices of non-payment to shareholders other than by certified mail, if another method is authorized under their Proprietary Lease.

The foregoing does not apply to cooperatives organized under the Private Housing Finance Law, such as Mitchell-Lamas, mutual redevelopment housing, etc. Also, remember that the provisions relating to collection of late fees and other charges, as well as serving notices, must be authorized under the Proprietary Lease in order to apply.

Restrictions on Landlord Legal Fees. The Governor also signed a separate bill [S2014] that severely restricted the right of landlords to collect legal fees without a court order. (So, for example, a landlord could not pass on legal fees for sending a Notice of Default.) A post-passage amendment to the bill would exempt Co-ops from that restriction. The change does not yet appear in the bill text, but the Governor’s Signing Statement makes clear that the bill will be amended to exempt cooperatives. We will keep you advised when that change makes it into law.

Other News; 2022 Updates to Follow:

Reverse Co-op Loans Allowed. After a long fight, the legislature is allowing lenders to make “reverse” loans secured by co-op shares. While this theoretically puts co-op shareholders on a par with single-family and condo unit owners, the procedure is complex and potentially expensive. Applicants should carefully review the costs and procedure, and make sure their Co-op Boards will approve such a loan.

FNMA and Freddie Mac Imposing Reserve Fund Disclosure Requirements on Existing Cooperatives and Condominiums. In response to the Surfside Condominium collapse in Florida, the agencies that bundle and resell mortgages and co-op loans on the secondary market are imposing new disclosure requirements on lenders and borrowers regarding the physical condition of the building and the steps the Association is taking to fund potential structural repairs. Eventually we expect this to filter down into a formal requirement for a Reserve Fund Study that most NY State community associations currently decline to perform. This merits a separate e-blast, which will follow.

Vaccine Mandates. Vaccine mandates for NYC employees went into effect on December 27th. The latest questions received from buildings deal with how to discipline an unvaccinated employee. The directive from the Commissioner of Health states that the building can “exclude” the employee from the workplace, but says nothing about whether the Association has to pay the employee until they comply. We expect this to get to the grievance stage in union buildings very quickly.

HAVE A WONDERFUL NEW YEAR!