Almost a decade after a crackdown on building managers and agents who took kickbacks from unscrupulous vendors and service providers, the problem remains as intractable in New York real estate as cockroaches.
In 1994, more than 70 agents at several building management companies were indicted for taking kickbacks from building service providers. It was an ugly scandal, with a number of large real estate companies indicted by Manhattan District Attorney Robert Morgenthau. A second round of indictments stung the industry in 1999.
But those cases weren’t enough to scare shady managing agents straight. Many in the industry say that kickbacks haven’t ceased, but instead are widespread and difficult to prevent.
As the residential market slows and the economy weakens, more co-op and condo boards may be looking closely at their books to monitor expenses, and as a result, some corrupt practices may come to light. More boards, industry observers say, are rooting out suspicious relationships between managing agents and vendors for lucrative contracts that include waterproofing, wiring, oil deliveries, boiler maintenance, plumbing, electrical and engineering services.
In some cases, co-op and condo boards discover something off kilter when they find they can’t trace payments to suppliers, or they see a large number of small checks being made out to the same contractor — a red flag that something is amiss, said Douglas Heller, a lawyer at Herrick Feinstein.
“I know of at least three managing agents who stole over the past three years; they wrote themselves checks,” he said.
In one recent case, a contracting job gone bad may have revealed an allegedly cozy relationship with a supplier.
In an ongoing case, Prudential Douglas Elliman and its managing agents were sued by a building owner, Cherokee Owners Corp., in New York State Supreme Court for failing to properly supervise an asbestos abatement job, as well as other work on its four buildings on East 77th and 78th streets. The case, filed in March 2007, not only alleged mismanagement by the agent, but also “an inappropriately close relationship with the construction company,” and a lack of paper documentation for a $3.58 million contract, said someone familiar with the case who declined to be identified for this article.
Phone calls to Prudential Douglas Elliman were not returned.
The plaintiff’s attorney, Carol Sigmond of Dunnington, Bartholow and Miller, would not comment but confirmed the case is still ongoing.
Under the radar
But most situations rarely rise to the public’s attention, and even less frequently get the attention of the D.A.’s office. That means additional costs get passed down to owners, brokers said.
A spokesperson for the Manhattan District Attorney’s office would not comment, saying that even if they were once again investigating managing agents, they could not share that information with the public. And the Manhattan, Brooklyn, Queens, Staten Island and Bronx D.A.’s offices said none of the firms involved in the earlier scandals had been linked to any public indictments in the past year.
But Cherokee claims in its suit that Douglas Elliman and its predecessors, Kriesel Co., Insignia Residential Group and Insignia Douglas Elliman, breached their contract when they did not keep records for payments to contractors, did not maintain separate and accurate accounting of transactions, and, in addition, did not supply the bills when requested from 1999 to 2003 by the buildings’ owner, according to the lawsuit filed in 2006.
Also named in the suit is the contractor, DNA Contracting and Waterproofing LLC, whom Cherokee said did not complete the asbestos abatement of the building properly, said a source close to the project.
An ongoing problem
Some brokers suggest that the problems of the 1990s may continue to dog some of the larger firms that gobbled up smaller firms, because they took over other smaller managing agent companies, inheriting a few bad individual agents with the acquisitions.
And those companies are probably not alone. “Kickbacks have been rampant forever,” said Heller.
“Did it ever stop?” said a half-joking Mona Shyman, executive vice president of the Federation of New York Housing for Co-ops and Condominiums.
In a city as large as New York, it’s nearly impossible to assert that large or small management firms are worse when it comes to alleged kickbacks.
“I have seen it firsthand, and I don’t want to talk about it,” said one broker who did not want to be identified. “I think managing agents of all sizes are guilty of it, though the smaller ones less so,” they said, noting that non-payment-type paybacks are just as common as cash.
Kickbacks aren’t the only favors offered. Vendors “might end up doing work in another of the managing agent’s buildings for no charge,” said the source. That type of inappropriate business deal undid Darwood Management during the 1994 probe, he said. In some cases, this would mean that the managing agent gets work for free in one building, at the expense of another that is charged double or a percentage more to cover the free work.
Part of the problem has always been managing agents’ compensation: It can be difficult or perhaps irresistible to make more money on the side.
For a 100-unit building, agents might gross $50,000 to $60,000 a year. Most of the profit goes to the owner of the managing agency, said Heller. “I don’t think they make much on any [one] building.”
Many contractors and service providers that The Real Deal spoke to said that they had not heard of any kickbacks in the industry since the 1999 indictments. “I have been in the business since 1979, and I have been selling oil and natural gas, and there has been no hint or whisper of any managing agents coming to me for money at all,” said Lou Romano, an executive vice president at Stuyvesant Fuel Service Corp.
His company has contracts with several big managing agent companies and offers discounts to big accounts
simply because their size and contracts demand it. “A manager who is burning 4 million gallons of oil a year — he isn’t going to pay the same price as a one-family in Queens,” noted Romano.
Referring to Douglas Elliman agents, he said, “They won’t even go to lunch with us, or go play golf,” which he said can make getting to know his customers a little difficult.
How to fight kickbacks
Even if it is hard for a co-op or condo board to detect when a managing agent is accepting a rigged bid, stealing checks or abusing their power, the ultimate responsibility still lies with the board.
Shyman, the co-op and condo federation executive, said she makes herself the most reviled person on her co-op board for paying attention to every little expense to thwart would-be cheaters. She said boards that don’t pay attention to the workings of their management company are more likely to be victims of fraud by their agents.
And because many boards are made up of busy professionals, many disreputable or illegal acts can happen when someone is not paying attention.
Heller always advises his co-op clients to sign every check for every expenditure, but that few board members have time for that.
Steve Wagner, a partner at the law firm of Wagner, Davis and Gold, said he has advised many boards on how to make sure managing agents are on the up and up. “I recommended to two boards to go to a forensic accountant, someone who will investigate.”
Wagner said accountants can identify areas where expenses are questionable such as too much petty cash or too much postage, or where dealings with the same contractor occur over and over again.
But all too often, building owners would rather not be bothered. “A lot of these upscale buildings where they have a 33.3 percent financing rule, many of them are retired, so it is not even a question of time,” said Wagner. “It is an attitude that they do not need to dirty their hands.”
“Can you imagine what is going on with all the new buildings in Brooklyn and Queens, where the managing agents are not making anything on the buildings?” asked one lawyer. “There is no oversight.”