Financial Disclosure Concerns at 425 East 86 Street:
Governance – Board Can Unilaterally Change Proprietary Lease
The Board has take the position in court that it can pass house rules that effectively override major elements of the proprietary lease, including an ability to target specific shareholders and require them to pay massive payments. In our case, this involved requiring us to spend hundreds of thousands of dollars to renovate outdoor space they argued we did not have any interest in. The court held this was legal and that we were now “contractually obligated as a Penthouse apartment lessee, to pay for the renovation of the roof space into a terrace space usable an an entertainment area.” The court previously recognized that, based on the Board’s arguments, exclusive use of the area was unsettled (see page 11). This is in opposition to the proprietary lease that prohibits levying costs not allocated on the basis of shares and certainly requires that expenses to maintain common areas is a common expense. Apparently, the Board’s rules take precedence based on the terms of our proprietary lease.
Regardless of the legality of such a decision, the prospect of suddenly being required to hundreds of thousands of dollars to renovate an area you might not even be able to use, certainly could put a damper on the value of the apartment. Who would want to buy in a building where they might suddenly be stuck with massive payments specifically prohibited under the proprietary lease? Logically, a lending institution who understood this, might be reluctant to accept using such a proprietary lease as collateral.
Between our purchase and interior renovation, we have invested over $2.5 million into our apartment at 425 East 86th Street. Based on the Board’s actions, we have significant doubts about our ability to sell it, at any price, to a buyer with a reasonable knowledge of the facts. We hope this situation changes.
Governance – 120 Day Statute of Limitation on Shareholders’ Rights
The Board has aggressively availed itself of the 120-day statute of limitation for anyone challenging a board decision (Article 78). They have used this even when it significantly impacts the value of a shareholder’s apartment. Unfortunately, courts have read the 120-day limit to run from the time the Board says it made the decision as opposed to when the shareholder received it. Moreover, courts have been reluctant to allow shareholders to challenge the start of the 120-day clock. This is true even, as in our case, where we can show strong evidence there was not even a Board meeting during the month the Board says it passed the rule! This makes rights under the proprietary lease quite precarious and, as mentioned above, opens the door to massive unexpected liability.
Governance – No Written Conflict of Interest Policy
We understand that the Board of 425 East 86th Street has declined to adopt a written conflict of interest policy. A conflict of interest policy is a fairly standard governance procedure most condo and co-op boards have implemented – even ones that don’t have a significant history of related party transactions as 425 East 86th Street does, such as:
- Refinancing the building’s mortgage and paying approximately 50% of the net proceeds (Approximately $1 million) to the waterproofing company owned by the then board president’s brother-in-law. Despite this expenditure, the building continues to have roofing and water infiltration issues.
- A board member who is also a licensed real estate broker, has been active selling apartments in the co-op for several years. As suggested in the Co-Operator, this represents a potential conflict of interest. We have seen no evidence the Board has taken any of the recommended steps to ameliorate this potential conflict. We will promptly update this information if we are given such information
Financial Disclosure – Transparency Concerns
The issue has gotten some press via Habitat Magazine‘s coverage of our effort to get access to the coop’s financial records and our related corporate governance concerns. As a result of extensive litigation, the court has ordered the 425 East 86th Apartment Corp. to meet certain legally required minimum obligations under New York law for shareholder access to corporate records. Additional details:
- Until 2011 Galicia Contracting and Restoration Corp was working on a multi-year roof/terrace/façade rehabilitation project at 425 East 86th Street
- In 2011 Mr. Frank Chaney joined the Board of 425 East 86th as president
- In 2012, 425 East 86 Apartments terminated Galicia Contracting and Restoration Corp and hired Standard Waterproofing Corp. to complete the project
- Standard Waterproofing’s owner, Andrew Wist was then Board President Frank Chaney’s brother-in-law
- Building financials from this period do not appear to disclose that relationship
- This appears to be a violation of ASC 850 which generally requires detailed disclosure of related party transactions
- The project appears to have gone nearly 90% over budget without a coherent explanation. The details are a bit ambiguous due to the poor disclosure, However, the initial cost estimate was $510,000 and the total cost seems to ballooned to nearly $1 million. The $3.3 million mortgage refinancing added approximately $2 million to the building’s mortgage balance of $1.3 million. Thus, approximately 50% of the refinancing proceeds went to the the project run by Frank Chaney’s brother-in-law.
- Only after a shareholder pieced together the relationship (via NYC Department of Building records and Internet searches) three years after the work began and asked the accountant to make the necessary corrections did the accountant belatedly add any disclosure to the 2014 financials
- An analysis of the 425 East 86th Street Co-Op’s Board meeting minutes at Douglas Elliman’s offices suggests inconsistencies and/or incompleteness between the explanation released in 2015 and the Board meeting minutes.
- Attached is a detailed follow-up letter to the building’s accountant Shavelson Neuman & Co. on August 18th 2015 outlining those concerns.
- Additional concerns are outlined in a follow-up document request these include
1) apparent lack of disclosure of asbestos liabilities required under FASB ASC 410-20; and 2) large discrepancies between sworn affidavits to the city about the cost of major projects and the amounts disclosed on the Co-op’s audited financials. The board president, David Munves’s disappointing response to my request.
- Until 2017, we do not believe the Co-op had ever delivered the annual financials within the required 90 day period.
- I sent this e-mail outlining additional concerns to the Co-op’s auditors Nussbaum Yates Berg Klein & Wolpow LLP (NYBKW) related to the 2016-2017 financials. I’ll post any response I receive.
- The Co-op’s 2017 financials, which the proprietary lease requires to have been distributed by April 1, 2018, have not been distributed. No explanation has been provided for the delay.
Litigation to Improve Financial Transparency
Our journey to understanding the Co-op’s financial issues and improving transparency is outlined in the two court actions we brought. Information related to these two actions are in the links below. The second court decision in this litigation helps pull Manhattan Co-op disclosure standards closer to those of other states and is consistent with the general trend towards heightened transparency expectations in corporate governance. It is out sincere hope this litigation results in further governance improvements in the future. We’d like the Co-op to strive to be an example of model transparency rather than working to avoid the legal minimum standards under New York law.
We believe all information on this website is both accurate and in the public domain/non-privileged. If there is reason to believe otherwise, contact us at: email@example.com and we will work to promptly evaluate the concern(s) and make any appropriate change(s). We have a large investment in the building and believe dealing with current challenges in a transparent manner is the best approach for maintaining long-term shareholder value.