Reading the Tea Leaves: How the Minutes Reveal a Building's DNA
May 17, 2010
So It Begins
As those of you know who have been through the process, once an offer is accepted, the purchaser’s attorney begins the due diligence review, which includes a trip to the Managing Agent’s office to read the Board minutes of the co-op or condo in question. Although reading minutes can be as boring as watching paint dry, it is an extremely important aspect of an attorney’s review. Reading the minutes can reveal a great deal about the building’s finances, how the building is managed, and of subliminal importance, the personality of the co-op or condo.
What Exactly are “Minutes” Anyway?
Every co-op or condo, pursuant to its By-laws, holds periodic meetings of its respective governing panel, called a Board of Directors for a co-op and a Board of Managers for a condo. An officer of the entity, called the Secretary, is required by the By-Laws to record the action taken at the meetings. The recording of those Board actions are called “minutes.” The Secretary drafts the minutes, circulates the document to the Board members, and once the minutes are approved, a copy of the minutes, signed by the Secretary, finds its way into the “Minute Book”. The minute books are usually maintained at the Managing Agent’s office, which is why the attorney makes the pilgrimage once the contract goes out.
Depending upon the size of the building and how often a Board meets, the organization of the minutes can vary greatly. Larger buildings usually have extensive minutes that go back many years, while smaller buildings, particularly buildings that are self-managed, can meet less often than monthly and minutes can be missing or worse: the equivalent of interpreting a haiku.
As soon as the property manager presents the attorney with the minute book or books for review, the condition in which the minutes are maintained speaks volumes. Although it can be painful to review page after page of single-spaced history about boilers, doormen’s uniforms, the Christmas bonuses, bathroom leaks and other mind-numbing details about day-to-day life, a building that takes its Board meetings and the recording of minutes seriously, is of great assistance in understanding the issues that can impact a building’s physical and financial health. A building with an orderly presentation of minutes sends an immediate signal that the co-op or condo, at least at first blush, is well managed. I recently was presented with a minute book for a small co-op where the minutes going back a number of years barely filled a small loose leaf binder. Many months were missing and minutes prior to 2007 were nowhere to be found. In some cases, minutes for different months were typed on both sides of a page. Minutes in this condition paint a picture of how the meetings are conducted by the Board as well as the interest and attentiveness of the account executive at the managing agent’s office who is responsible for maintaining the corporate history of the building. Once an attorney sees a minute book in that condition, he or she is on notice that a full scale interrogation of the account executive will be necessary to understand the current status of the building’s health on all levels.
Reading the Tea Leaves
Sometimes well-run buildings, that meet monthly like clockwork, intentionally leave the minutes brief and vague as to facts. Co-op and condo Boards are always concerned about liability and about disclosing facts that could have a negative impact on value. What gets discussed in a Board meeting, particularly when there is an ongoing dispute between a unit owner and the Board, as reflected in the minutes, could be discoverable in litigation. For that reason, Boards can be touchy about details that might be of great interest to a potential purchaser. When problems arise without immediate solutions, the substance of a Board discussion can be omitted from the minutes (like a bedbug infiltration that’s getting worse not better). In high profile buildings, the monthly minutes might say only that the financial condition of the building was reviewed by the Treasurer, without going into any specifics. When a building’s minutes are forthcoming about its financial status, it is significantly easier to relate the co-op or condo’s physical and financial status to the purchaser. When it is obvious that a Board has “lawyered up” and is keeping the minutes intentionally empty of substantive information, the attorney has to keep digging to make sure the “known knowns” are disclosed.
Sellers Can Have Selective Memory
As “shocking” as it may sound, sellers often neglect to mention material facts about the apartment that might influence a purchaser’s decision to go forward with the transaction. Here are a few good memory lapses: a fire in the apartment; excessive noise from the toddlers upstairs; infiltration of cigarette smoke; the illegal atrium on the back terrace; a leak emanating from the façade that can’t be identified; or a dispute over roof rights or access. Even if the seller chooses not to disclose a material problem, a review of the minutes often reveals the issue and allows the purchaser the opportunity to evaluate whether it’s a deal killer or just annoying that the information was not discussed up front. In most cases, a purchaser will accept the circumstances and go forward with the transaction. Sometimes an adjustment to the purchase price might be appropriate if the condition revealed in the minutes might negatively affect the value of the apartment over time (like the inability to construct a deck on a roof, despite the representation to the contrary in the listing).
The Ultimate Question: How Far Do You Go Back?
Often when you show up to read minutes, you are handed the last two years worth of Board minutes. Well, that’s great, unless something material occurred three years ago. It always amazes me when the property manager is surprised by my request for minutes that go back a number of years. How else can you understand a building’s history without taking a look at the past three to five years of the building’s operating history? A statement in a particular month’s minutes might send you further back into a building’s past. How far back one should look varies from building to building, but only looking at the last two years certainly doesn’t reveal a complete picture. Then there’s the issue of whether the minutes should be reviewed by an attorney or by a paralegal. I bumped into a paralegal reading minutes recently who clearly knew what she was doing. That being said, I think review of the minutes is the attorney’s job and should not be delegated.
Is the Building Preppy, Stuffy or Crunchy?
In addition to all the financial and physical data about the building, the minutes often reveal the personality of the building, sometimes in comic detail. Minutes can go on and on about the doorman who dared to take his jacket off or didn’t open the door quickly enough. In one building, one of the Board members actually asked the other members to give “three cheers” to the landscape committee for a job well done. Wow… In other cases, the minutes can reveal a willingness to cooperate with potential purchasers, a lenient sublet policy or an active involvement in community affairs. These tidbits help inform the purchaser of what he or she is getting into.
Residential Reality: The Minutes as Roadmap
The minutes don’t reveal all there is to know, but review of the minutes starts the inquiry of what needs to be known about the operations of the co-op or condo before the contract is executed. Many times a purchaser asks the attorney, “were the minutes okay?” and the attorney says “yes” and that’s the end of the conversation. From my perspective, that’s a mistake. It behooves the purchaser to understand the mechanics of how the building is operated as it can greatly impact the purchaser’s bottom line and the quality of life in the apartment and in the building in any number of ways. As they say, trust, but verify…