New York City condominium unit owners and cooperative shareholders are facing massive capital calls regarding FISP (Façade Inspection Safety Program) and other projects in this uncertain period of inflation and supply chain disruptions. The reason for this is likely due to the aftermath of the Champlain Tower South collapse in Surfside, Florida and the resulting deaths of 98 people. Attorneys and design professionals are more aggressive in demanding that essential repairs be done.
The capital demands are being exacerbated by the current inflation cycle (including the increasing price of petroleum and petroleum-based products), the labor shortage and general supply chain issues.
It is ironic that after 10 years of relatively stable construction costs (when work could have been spaced out and financed at low interest rates), these projects are now being initiated and done in a high-interest rate environment, all at once, with many buildings competing for scarce resources. Additionally, the longer the owner waits to address many repairs, the more damage is being done and the more extensive and costly the required repairs become.
To make matters worse, condominium and cooperative buildings, by their respective unit owners and shareholders who already pay a disproportionate amount of the city’s property taxes, face penalties of up to $2 per foot unless these buildings make major reductions in energy usage. Buildings with “C” ratings or lower need to make major reductions in the use of power, gas, water, electricity, steam and other utilities. These changes will require electrical re-circuiting, plumbing upgrades, insulation and even removing gas stoves from kitchens. Windows must be replaced with energy-efficient models. This issue has been extant for approximately five years, but many buildings have not even given this a passing thought.
Why is this gross lack of planning happening?
First, managing agents are not motivated to plan for major capital work. That costs money, and the primary pressure on managing agents is to lower costs. Second, boards of managers and boards of directors, too, are not motivated to plan or execute capital work. Board members only want to be re-elected, and capital spending makes one unpopular. Therefore, all current incentives appear to favor concealing and avoiding problems as long as possible.
Changing the motivation of the managing agents and boards is crucial. One obvious way forward is to require boards and managing agents to make fuller disclosures to unit owners and shareholders. These disclosures should include mandatory annual distributions of: 1) the most recent FISP report; 2) the most recent benchmarking report with projected penalties per unit or share if the reductions in energy use are not made; 3) estimates of future costs if work is delayed and 4) estimates of savings from energy reduction measures. Boards and managing agents should be required to disclose how costs are accumulated.
In addition, managing agents and boards should be liable for damages to unit owners and shareholders for failing to perform basic maintenance such as roof replacement, valve replacements and related work when individual units are damaged. There should be no defense based on the business judgment rule (discussed last month) for omitting to perform necessary maintenance.
Individual board members and managing agents should be required to pay attorney fees to unit owners or shareholders who must retain counsel to gain access to building records, including benchmark and FISP reports. This information belongs to all of the unit owners or shareholders.
Finally, there may be buildings where the maintenance requirements are such that it is no longer practical to maintain the building — essentially, the building needs to be demolished and replaced. Unit owners and shareholders must accept this reality and consider all options. Meanwhile, if you own shares in a cooperative apartment building or unit(s) in a condominium, you need to prepare for five to seven years of heavy capital outlay. But the time to start dealing with these issues is now.
This column presents a general discussion. This column does not provide legal advice. Please consult your attorney for legal advice.
Carol A. Sigmond
Greenspoon Marder LLP
590 Madison Ave., Suite 1800
New York, NY 10022
carol.sigmond@gmlaw.com
( 212 )524-5074
