New Wall Street pay leaves co-op boards befuddled

As Wall Street pay grows more complex, brokers are facing an even tougher sell to co-op boards these days. Stock options — sometimes deferred — can be a particular sticking point.

“[Boards] do not look on [deferred stocks] as real money,” said Alicia Gany, a real estate partner at Wollmuth Maher & Deutsch. “Anything that has a value that can’t be immediately realized, they’re going to look at as barely nothing.”

Spurred by the financial crisis, Wall Street has moved from basing bonuses on short-term, risky performance to basing them on long-term performance by way of stock options, which, according to New York Comptroller Thomas DiNapoli’s office, accounted for the top executive bonuses at most of the largest financial firms. Though those forms of deferred compensation were left off a recent study of 2009 Wall Street bonuses, DiNapoli found that bonuses were up 17 percent, to $20.3 billion.

It’s not just stock options that are frustrating boards. Complex compensation on Wall Street is making some co-op boards generally skeptical of buyers from the finance industry. This means brokers must do everything in their power to make applications from Wall Street buyers easy for boards to understand.

“You have people [on boards] with no experience whatsoever,” said Stefani Pace, an agent at Prudential Douglas Elliman. Knowing that, she is meticulous about her packages. “I use little colored tabs; I go back to when I was in college, and I do an outline, and I write all over them. I feel that if they miss one little thing, [my client] could be passed over, so I explain everything to the board like they’re five-year-olds.”

The confusion is forcing brokers to become experts in non-cash salary structures, particularly on deferred stock options. Though they differ in their terms, the value of any deferred stock option mostly depends on what the company is worth when the employee is allowed to cash it out on a set date in the future.

And, given the economy, there just aren’t any guarantees.

“So the broker has to try to give the board a historical basis: ‘The stock was worth this.…’” said Gany. “It turns the real estate broker into someone who has to be an expert in deferred compensation. And that is not something that you’d walk around knowing. It’s a big job for a broker.”

Rick Wohlfarth, a CPA by trade and founder of the brokerage Wohlfarth and Associates, said his firm has had a lot of questions from buyers about deferred compensation. “But you can’t use it,” he said. “It’s back to basics. [A board] cannot calculate what [a buyer] can afford, or what [a bank is] going to lend you, based on something you get five years from now.”

Gany recalled one of her clients who had AOL stock options, which he presented as proof of his buying power; the board turned him down. “He wasn’t qualified because those options couldn’t be immediately quantified,” Gany said. “The board wouldn’t even look at that stock as any factor at all. He looked like an underpaid person.”

Wohlfarth recounted a similar experience: “We had an accepted offer for $12 million; I received information that I thought was accurate, and lo and behold, when I went through the financial stuff, half was deferred compensation. It didn’t go.”

Despite a likely uphill battle, some brokers are willing to try to get board approval on deferred compensation.

“Some boards are accepting the deferred options more than others,” said Barak Dunayer, president of Barak Realty. “We have to work extra-hard to write a detailed projection letter on how the applicant will fare over the long term.”

For him, the key hurdle is the board’s attitude.

“The biggest challenge with the board is that some of them really don’t want to listen,” he said. “They’re old-fashioned; they’re stuck in their ways; they’re suspicious of brokers. The ones that we’re able to get across to are the ones that are open. They recognize that things are changing, and that times are changing.”

Like Dunayer, many brokers are using explanatory letters for their applicant’s finances to head off concerns before they arise.

Elliman’s Pace remembered one recent finance client whose compensation was doled out in a complex fashion — essentially he was paid for work over a period of time, rather than in a regular paycheck, called “smoothing.” This means that though he could have earned $100,000, for example, the money might not be present in his bank account yet, despite the fact that it’s guaranteed. “I’m a broker, I’m not in finance, but I had to understand it well enough to explain it to someone else,” said Pace.

Her buyer did get approval after Pace prepared a thorough board package, which included a letter explaining every detail of how he was paid. The co-op was on 51st Street and Second Avenue.

“You want to answer their questions before they ask them,” noted Marc Windheuser of Elliman’s Windheuser Group. “When a board member reviews an application and gets confused, it puts a tinge on it, even if everything’s fine.”

In today’s climate, it’s not just deferred compensation sending up red flags for boards. Even straightforward bonuses are being newly scrutinized.

“A lot of the boards these days would no longer consider a bonus as valid income,” said Dunayer. “This changes the purchasing power of these people a lot.”

He explained that if a typical Wall Street base salary is $150,000, and that person gets a $1 million bonus, rather than counting the applicant’s salary as $1.15 million, which a board might have done in the past, the salary remains at $150,000. This practice basically originated from the Wall Street crisis as boards got nervous about counting bonuses tied to performance at shaky financial firms.

And at the extreme end, there are boards that won’t consider Wall Street types at all.

“Some of the boards are just not comfortable with the fact that they’re in finance, period,” said Pace. “They might turn someone down just for that.”

New York City law prohibits discrimination based on occupation, but the board does not have to give a reason for its decision to reject a potential buyer.

Pace had a customer who was in finance and trying to get into a co-op in the 70s on the East Side. However, when she found out that the board had already rejected an all-cash buyer who worked in finance, she and her customer backed off. “He didn’t want to go through with it,” she said. “And he didn’t; it’s too stressful.”