Adam Leitman Bailey's Blog, page 15

New Rules of Substantial Rehabilitation to Remove Units from Rent Regulation

Assuming the criterion that the building is substandard or deteriorated has been met, this means that it has conditions that are in violation of law. In New York City, this creates an automatic right by the landlord to have access to the apartment for purposes of curing these violations, that is, to perform the rehabilitation. NYC Administrative Code § 27-2008. While that provision does not specify where, how or at whose expense the tenant should be housed during the renovations, owners are better advised to provide alternate accommodations such as another apartment or hotel space.

The tenants do not have any real choice about allowing this access. Failure to do so is grounds for eviction.

Paths to Substantial Rehabilitation

Those landlords who decide to substantially rehabilitate a building have two avenues they can take, getting DHCR’s opinion on a particular construction project [RSC §2520.11(e)(8)], or conducting the work and hoping that DHCR and the courts agree.

As to the judicial determinations, the rules of collateral estoppel hold that with the landlord being the only party who would be involved both in DHCR and judicial proceedings, the landlord would be bound by an adverse finding in either path so as to estop an assertion of the regulation-free status in the other path.

However, neither the DHCR, a court, or another tenant would be bound by an affirmative finding of exemption made through a path in which that tenant did not participate, except that future tenants are bound by earlier DHCR decreed exemptions. [OB95-2(VI)].

OB 95-2(II) encourages owners “to apply for an advisory prior opinion at or about the time that they seek appropriate governmental approval for the rehabilitation work.” In 885 Park Ave. Brooklyn, LLC v. Goddard, 55 Misc.3d 74, 53 N.Y.S.3d 794, 795 (App. Term 1st Dept. 2017), the court reconfirmed that seeking an advisory opinion is at the discretion of the landlord, and the prior opinion is not needed to prove substantial rehabilitation.

No Immediate Effect

Substantial rehabilitation will often, but not always immediately, move the building completely out of regulation. Sometimes, a substantial rehabilitation in the building’s history can take years or even decades eventually to cause the deregulation. For example, as a building through the normal passage of time, exits the tax-benefit-for-construction-and-voluntary-rent-stabilization J51 and 421-a programs, questions often arise whether the building upon exit from the program is nonetheless subject to rent stabilization.

Generally speaking, if there was a substantial rehabilitation after 1974 but before entry into one of these programs, the building will be exempt and indeed, the very construction that historically brought the building within the program could be the one that eventually takes it out of stabilization.

The Unsuccessful Landlord

Where the landlord is relying on a post-OB95-2 substantial rehabilitation, elements for qualification are to be strictly construed, and solid records are imperative for success in a claim for exemption from rent stabilization. Cassorla v. Foster, 2 Misc.3d 65, 774 N.Y.S.2d 901, 903 (App. Term 1st Dept. 2004); Pape v. Doar, 160 A.D.2d 213, 553 N.Y.S.2d 344, 346 (1st Dept. 1990).

The OB95-2 mandated records must show that “all ceilings, flooring and plasterboard or wall surfaces in common areas must have been replaced; and ceiling, wall, and floor surfaces in apartments, if not replaced, must have been made new as determined by DHCR.” OB95-2(I)(A). In Cassorla v. Foster, 2 Misc.3d 65, 774 N.Y.S.2d 901, 903 (App. Term 1st Dept. 2004), the First Department held that the landlord did not meet the requirements for substantial rehabilitation where although the “landlord replaced kitchens, bathrooms and intercoms, the plumbing, heating and electrical systems were not materially changed; the roof, fire escapes, interior stairways and most of the floors were not replaced; and only portions of the apartment ceilings and plastered surfaces were replaced.”

Major Capital Improvements

Where, however, the project does not meet the criteria for substantial rehabilitation, it could still qualify as a major capital improvement which enables the owner to apply to the DHCR to have portions of the costs the work the owner incorporated into the tenants’ permanent rent. Copeland v. New York State Div. of Hous. and Community Renewal, 164 Misc.2d 42, 623 N.Y.S.2d 505, 509 (N.Y. Sup. Ct. 1994) (“Section 8626(d)(3)’s provision for rental increases based on ‘major capital improvements’ also appears to allow landlords to pass “substantial rehabilitation” costs on to tenants.”) “RSC section 2522.4(a)(2) permit(s) owners to apply for an increase in legal regulated rents, based upon the proven costs of building-wide major capital improvements.” OB95-2(V). A landlord “may file an application to increase the legal regulated rents of the building or building complex on forms prescribed by the DHCR.” [RSC §2522.4(a)(2)].

Conclusion

A pair of new decisions from the Appellate Term, First Department have toughened the standards under which a landlord may claim a substantial rehabilitation exemption from rent stabilization. However, since these toughened standards apply exclusively to construction work that took place prior to the promulgation of OB95-2, the landlord either has these records or does not.

Nothing can be done to bring them into existence at this point in history. The effect of these decisions may be to bring back into stabilization many buildings whose owners believed in good faith that their buildings were not regulated. This can have substantial ripple effects both through litigation and due diligence studies of supposedly exempt buildings up for sale.

This article was originally published on Mann Publications on 6/3/2019.

Selling a Tenant’s Personal Property After Eviction

When an owner evicts a tenant from an apartment, by the end of the process the tenant typically owes the owner some substantial sum of money. While these evictions are usually in the context either of a nonpayment proceeding or a holdover proceeding prosecuted in the New York City Civil Court, such prosecutions do not necessarily result in an actual money judgment rendered in favor of the owner. Of course, often they do.

Most evictions involve apartments that are either empty or devoid of any objects of any significant value. Usually, what is left behind is essentially trash. While many years ago, it was common for evictions to entail carrying off the goods to some kind of warehouse, those evictions are increasingly rare. Nowadays, the norm has been to secure the premises for the owner, leaving the owner to determine what to do with the contents.

While there is a universal custom in New York to hold on to the goods for 30 days, there is no law on the books, no precedents for guidance, just this universal custom. Under this same custom, the owner can simply turn the new key in the new lock and allow the tenant to pick up the goods during the 30-day period or move the goods to storage, typically in the owner’s own basement, after which the owner can dispose of the goods as it wishes.

However, if the goods have value, the owner may well be better off having them sold off to satisfy some of the debt the tenant owed the landlord at the time of the eviction. Since there are fees involved in doing so—which can run into thousands of dollars, the property will have to be significantly valuable to make it pay to carry on this procedure.

The procedure for selling the tenant’s property is formal and precise. First, there must have been a money judgment. Lacking such, the owner must wait to sell the goods until 30 days have passed, with the tenant essentially having abandoned the goods.

If, however, there is a money judgment and both the judgment and the remaining goods are substantial enough to pay to employ the liquidation procedures, the next step is for the owner to prepare an “execution” to turn over to the marshal, typically the same marshal who performed the eviction.

With the execution in hand, the marshal has a notice of levy of the property and can prepare an inventory of the goods, retain an auctioneer, schedule an auction, and advertise it in a newspaper of general circulation.

None of this is cheap, particularly when you consider that the marshal also charges a fee. All of these costs come off the top of the proceeds realized on the sale and are the responsibility of the owner.

However, the net proceeds, limited only by the size of the money judgment (including interest, etc.), belong to the owner.

While the numbers of evictions that make such a procedure form a small percentage of the evictions that actually take place in the course of a year, for those cases where the numbers work, such a procedure is highly advised.

This article was originally published on  Apartment Law Insider .

How Long Can Rental Markets Survive Government Meddling?

Rent-regulated buildings in NYC aren’t built with seniors’ safety or comfort in mind, despite the fact that countless older adults rely on them for shelter.

According to a New York City Rent Regulation Memo, the average age of at least one tenant in a rent-regulated household is over 67 years old. For many, the agility and stamina necessary to walk up the long stairs of a typical rent-regulated building fades roughly at this age, necessitating a move to more age-friendly accommodations.

Previously, landlords had incentives to share with the current tenants, by way of buyouts, the profits they would realize from renting out apartments to new tenants. In many cases, tenants received large sums, enabling them to better their lives or move to more appropriate housing.

In just one year in my community of real estate lawyers, landlords paid over $75 million in buyouts with at least five tenants receiving over $15 million each and at least 50 tenants receiving over a million.

The tenants receiving smaller, but still highly significant, sums numbered in the thousands. Today, that safety net has disappeared for seniors.

The Housing Stability And Protection Act of 2019 (HSAPA) also strikes against the construction industry both by heavily restricting the turnover of apartments and by eliminating landlords’ profits from upgrading apartments.

The number of construction jobs thus abolished and the damage to NYC’s economy from the elimination of  a large component of construction supply purchases is uncertain.

But one thing if for sure — the damage includes stagnating housing redevelopment, excessively expensive free market housing, loss of thousands of jobs, and lost revenues to the city in tax collection as land values, incomes, and sales all fall.

Now that the state legislature has almost completely eliminated deregulation — previously effected by landlords hiring workers and spending money on improvements to apartments so as to raise their rents above the regulation thresholds — the landlord has neither reason nor incentive to offer any tenant any money needed to move to a more appropriate home.

For those seeking homes, the elderly remain incentivized to occupy multi-bedroom apartments, while those with larger families find less and less appropriate housing freeing up for their use.

While landlords facing foreclosure may not be the most natural objects of sympathy, with foreclosure comes both damage to the banking industry holding liens on devalued property and tenants who live in buildings deteriorating because they are under financial distress.

HSAPA even blunts landlords’ incentive to try to rein in illegal activity in their buildings, as they struggle to keep their buildings above bare subsistence.

HSAPA strangles a conventional landlord’s ability to convert a building to cooperative or condominium ownership by raising the conversion threshold of current tenants required to participate from 15 to 51 percent.

HSAPA also lengthens, complicates, and renders more expensive proceedings for recovering rents, burdening not only conventional landlords with these new procedures, but cooperatives as well.

Regardless of any fault by the tenant or cooperator, HSAPA renders the procedures for recovering attorneys’ fees lengthy and complicated and in many cases impossible, but preserves the ease with which cooperators and tenants may recover their attorneys’ fees against landlords and cooperative boards, thus placing these latter two groups at immense disadvantages.

HSAPA also allows the courts to saddle landlords with their undesirable and delinquent tenants for a full year and for all tenancies, prohibits landlords from collecting more than a month’s security deposit, thus working against tenants with questionable credit histories who seek to obtain housing by placing higher deposits or prepaid rent with the landlord.

There are no innocents regarding the worst rent regulatory law enacted since World War II — the HSAPA. And the resulting situation isn’t unique to NYC, as we see legislation on various topics being similarly rushed through in cities nationwide.

The problems with laws like HSAPA stem from the legislative process itself where 74 pages of legislation flew through the legislature without it receiving input from the tens of thousands of people affected by it.

The party-selected legislators enacting HSAPA mostly ran unopposed after a primary. Worse, almost no one bothered to vote. The State Board of Elections reports that only 11.8 percent of registered Democrats voted in the 2018 election. With re-election under these machine politics assured, these legislators enacted a law that greatly harms almost everyone — landlord and tenants alike, along with a host of other victims even outside these two categories whom the law also harms.

Vetted laws are better laws. There are provisions in HSAPA that should have been enacted and will prove helpful. But the unfortunate truth is that the package as a whole will wreak vast devastation on the very persons the legislators no doubt genuinely sought to assist.

I bear no ill-will against the legislators who passed this law; my critique is against the process that produced it.

We are now at a point when the hearings that never took place to pass HSAPA need to happen to enable the legislature to craft a workable set of repairs to it.

Because so much that is so damaging is happening so quickly, the legislature must act swiftly and efficiently to set things right — for seniors, and for everyone else impacted by these poorly-thought-out policies.

This article was originally published on  Real Estate Weekly on 12/2019.

Will Sports Help Women Win the Business World?

Here’s the truth — female workers will be more successful than their predecessors if they participate in competitive sports.

I could build my case with the clichés of sports teaching toughness, determination, discipline and the best character builder a young person can have as well as the lessons discussed below to prepare for most of the trials of business life. But those are not as persuasive as demonstrating that many of the most successful Chief Executive Officers (CEO) at the world’s largest companies played sports at very high levels.

The examples are endless — Hewlett-Packard CEO Meg Whitman played four sports during high school and named a captain for the swim team and played lacrosse and squash at Princeton. Whole Foods CEO Walter Robb stared at soccer in high school and at Stanford. Sunoco CEO Lynn Laverty Elsenhans played high school basketball and college basketball at Rice University; Bank of America’s CEO Brian Moynihan played football and rugby at Brown. Melendez International’s CEO Irene Rosenfeld played basketball, while General Motors CEO Daniel Akerson boxed at the Naval Academy. PepsiCo CEO Indra Nooyi played cricket in college in India.

It is no coincidence that female success in business has followed the rise in women’s competitive sports programs. In 1972, only 15.5% of college athletes were female. In 2017-2018, the number of females by State playing competitive high school sport averaged 42 percent. The evidence stacks up on the business side, too — a 2015 study of 400 female C-suite executives conducted by ESPNW and EY found that more than half played sport at the university level compared with only 39% of women at other management levels.

As an owner of a law firm with fifty-plus employees in which half are female, all hiring decisions are based on benefiting our clients and producing the best results. We survive in business based on the quality and production of our human labor. When we hire, we hire those who have a competitive edge, an obsession with success, and a willingness to push themselves to their limits to finish the task at hand. Usually, society doesn’t compel women to be aggressive, intense, or competitive — but in sports, players of all genders are required to hone those skills. We only hire the best, and the best is usually an athlete.

Sports programs serve as a training ground for many of the traits that executives will experience later on in life. If we can encourage today’s children — and girls in particular — to play sports early, we can increase their drive to become the female corporate leaders of tomorrow.

Participating in Youth Sports Builds Intrinsic Motivation

In business, there are winners and losers. In sports, winning is paramount. As Vince Lombardi famously stated, there is only one place, first place. Only the best businesses remain in business.

There is no better teacher of the necessity of personal motivation than sports. I started competing in schoolyards and camps since I was five years old, and I joined the track team at 13. During one of my first eighth-grade track practices, I took a fake fall as I was so exhausted from running. A few seconds later, while I was lying on the ground, my assistant track coach bent down to scream in my ear that we do not ever make excuses and we always finish practice. That was the last time I did not complete a race—injury or no injury–in my high school career.

As a lawyer and sole firm partner, I have to compete in the courtroom, when negotiating deals, when trying to have clients hire my firm, and competition in dozens of time each day because my clients are looking for the very best real estate lawyer or litigator. I did not learn my yearning to win and zest for success in the courtroom or office or board room or college or law school. I learned it in sports competing against my peers, always giving one-hundred percent to win.

Athletes Learn How to Strive for Greatness and Survive a Failure

Failure stings. If you never get used to it and in high school and beyond, a social stigma enters the arena and prevents you from trying. For non-athletes, this could mean choosing not to apply for a reach college, or not pursuing a dream job. That fear of failure has real long-term consequences.

It’s a lesson that my niece learned recently. She has been playing competitive soccer since she was five years old, and ever since I can remember, her dream was to make the high school varsity team. By the age of 10, she played in two leagues including a travel team coached by experienced professional coaches.

In her sophomore year, she went out for the varsity team — and did not make it.

But she didn’t give up — in fact, she dug in and worked harder. She played on the junior varsity team as well as her travel team. She decided to change travel teams, so she could be challenged more. She attended clinics and took every chance she could to play and be coached to improve her skills. But she knew that if she did not make the varsity team in her junior year, she would be cut from the team and never achieve her dream of making the varsity team.

My niece and I are very close. I had been to many of her games since her first game to some of the most important ones. When I received the call that she was cut from the team and the ugly politics behind the decision, I cried with her. Later, I told her that there is more to life than soccer, and she will have time to see what goes on in the rest of the world.

It was a hard lesson — but one that made her stronger, more determined, and willing to push herself to succeed. Everyone in business fails—and I know that this loss will empower my niece to be more focused, retrospective, and able to grow.

Children of All Genders Need Sports to Thrive in Business

I understand that not all young people have been made for physical sports or, more frequently, they have not found a pursuit they have a passion for. But there is competition for everyone whether it be ballet or chess or ice skating or dance. The key is to make competition, winning, and losing a daily part of your life. The trials and tribulations to prevail and reach the goals provide incredible training for future executives.

We will be a stronger and more productive country if more females play high school sports. Hiring practices need to become more merit-based, as well — the talent in our country need to be hired and promoted based on their skill and competence rather than whether they are male and female.

If you encourage your child to take part in team sports, you will be setting them up for professional success — and that’s a fact.

This article was originally published on Thrive Global on 11/14/19.

Reading Biographies Will Make You a Better Leader

I never had an adult mentor. At the same time, I have been able to learn from a few of the world’s greatest leaders. I have been able to witness those who were put on this earth to handle the world’s most significant problems and view a play by play of how they worked, failed, and succeeded. Ever since I was a young man, books have served as my teachers — and I admit that after college, it was a rare exception for me to pick up a fiction book in my free time when the biographies of the greats were waiting for me on the shelves.

Year after year, long before electric gadgets, I would carry enormous tomes onto the beach or to the park and get lost in history. Part of my reason for choosing biographies was that I always needed to feel as though I was doing something meaningful in life. And, of course, I also really enjoyed learning about the lives of these men and women. I always knew that what I was reading what teaching me how to become a better leader, boss, and attorney.

Criteria for Choosing the Book

As a workaholic with very limited time who made the most of his free time and vacations reading, I had strict criteria for choosing my books.

First, the book usually had to be referred by someone I respected and had a proven record in history. Second, most of these books averaged 600 to over a thousand pages. Finding out if the text you choose is the best on the subject before you put in the time is extremely important. The leading biography for each successful person never was hard to find when the book store, the internet, bestseller lists, and colleagues offer up suggestions. Third, I would only choose leaders that had been hugely successful, and it was a bonus if they had overcome great odds. Fourth, I needed to be interested in their story.

Ironically, I tend to be more interested in leaders from a few hundred years ago than those born in the same century—although Malcolm Gladwell (@Gladwell) helped me break this trend in Outliers: The Story of Success. He used lawyers in a book only 40 years older than I am to produce a fascinating study both on how the year a person is born affects their chances of success and how certain traits can cause some to become more successful than others.

For me, recollections of a recently deceased person do not have the sources, perspectives, or information necessary to be as helpful as texts on a long-studied historical figure. Moreover, very few modern leaders pass my test for determining if they are worthy of study. Of course, given more free time, I would be eager to study some of these people. I have broken this trend to read books on famous people who I have represented or litigated against to learn for the case and out of interest for the subject that had fascinated me—Vicky Ward (@VickyPJWard) did a terrific job studying Harry Macklowe and some of the other real estate players in Liar’s Ball.

The biographies I read transcend subjects. As I look for greatness and how a given person reached such a plateau, I do not confine myself to one period (although I have my favorites) or discipline (although I am partial towards business persons, world leaders, and revolutionaries). I learned so much from reading both Albert Einstein and Vince Lombardi; the lessons I learned in their books remain with me today. But I would humbly submit that the largest number of biographies I have consumed include my combined favorites: Winston Churchill, Alexander Hamilton, and Abraham Lincoln. All have made me a better leader and person — and I think about what they would do whenever I approach a challenging situation.

Some Tips on Becoming A Better Leader By Reading Biographies

Learn from the Leaders In Action

During each book, I would challenge myself to see how I would handle the same situation. I would keep a hotel’s small pad of paper and pen or, if I was at home, a few of my own writing materials in my bag. As I read, I would take notes and later use some of the ideas that the greats implemented in my life. By writing down the idea, I would remember it later. Sometimes I would not want the book to end, as some of them were so motivational that each time I picked up the book I had a new vigor for life and work—I had been inspired by my heroes, and was thus assisted in working harder and coming up with new ideas.

Find Comfort and Learn that You Can Overcome Anything

During times that my life was not going so well, I would open one of these books for the reassurance that the greats had it worse than I did—Winston Churchill had won a war for his country and then lost a subsequent local election to office. He did not have the resources to take on Germany during World War II and was obligated to either convince Roosevelt and the Americans to join the war or surrender  — all the while keeping the morale of the country strong.

The examples are countless.

At the beginning of the American Revolution, after the English established themselves on Staten Island, George Washington’s ill-prepared soldiers lost every battle they fought and faced certain defeat. The American revolution almost came to an early end before heading into New Jersey.

The ambitious Alexander Hamilton had been discovered paying a prostitute’s husband to have relations with her husband’s wife.

Lincoln suffered from severe depression and personal hardships including the loss of his three-year-old son, the loss of his mother at a young age, an abusive father, the death of his soon-to-be fiancé. He then lost a significant number of elections and, after becoming President of the United States, caused the commencement of the Civil War. But the most fascinating and educating read is how he dealt with the blows and challenges he received as a war-time president.

Learn from the Heroes

Despite their difference in years, all of these leaders had much in common and offered much to learn from.

Albert Einstein had many suits, but they were all the same color and design because he wanted one less decision to make each day.

Vince Lombardi taught me to strive to win and the recipe for doing so.

John D. Rockefeller knew how to run a business and kept morale up by engraining his top staff members’ names onto the ceiling of his headquarters. When he had a major public relations problem, he tried solving it by giving out money to everyone he greeted on the streets.

Theodore Roosevelt understood how to connect with people without giving up his convictions—but he knew where the cameras were and called in the press to maximize a political opportunity, wearing just the right outfit for the occasion. Mohandas Gandhi gave up his suit, his country of origin and became a true Master of Mass protests and leadership by giving up all for the freedom of a people with fasting being his weapon of choice to wield power.

Robert Moses was never elected to public office — but is, besides Alexander Hamilton, the most historically significant New Yorker. Anyone involved in New York real estate, politics, or the study of power will learn an enormous amount from Robert Caro’s Power Broker.

Jack Welch taught me how to lead and motivate a larger group of people through empowerment. Early in my career, Michael Milken taught me how to earn an employee’s loyalty; he would cater lunch for his staff, work almost every waking hour. The most incredible story of the loyalty he inspired is that his secretary would risk jail than testify against her boss.

All of the leaders I have read had many of the same traits in common. All of these greats had an incredible work ethic. All remained calm and had good judgment during a crisis. Every leader needed to overcome great obstacles several times during their lives — and yet, they found a way not only to overcome them but to turn them into a force to assist them either later in life or later in battle or business. Almost all of the leaders came from humbling or troubling childhoods. None of these leaders ever fully blamed another for a bad decision or loss, no matter how worthy the criticism. Instead, each leader turned to what to do next to overcome the crisis. These people also had the foresight to see many steps ahead — they were big-picture people.

Most of all, they all strove for greatness.

This article was originally published on Thrive Global on 10/31/19.

Want Low Turnover and High Profitability? Focus on Merit-Based Compensation.

My company, Adam Leitman Bailey, P.C., turns 20 years old on January 3rd.

During the past 20 years, we have maintained an average retention rate of over 95% per year. We’ve been able to attract the best candidates, clients enjoy having the stability of working with the same attorneys, and the firm enjoys a healthy level of profitability as a result.

Why do we enjoy such a high retention rate? Is it the benefits package we offer, the company culture, the high morale in the office?

In part, it is all of these things. But in my opinion, money is the number one reason we are able to retain our attorneys at the rate that we do. We employ a unique merit-based compensation system that differs from most other revenue sharing programs.

In the usual revenue sharing system, Harry has the ability to make as much money as Sally, despite Sally working much harder and doing superior work. Our method focuses on the individual and essentially makes every individual their own company; how much they profit depends on how hard and smart they work as well as how effective they are at making sure the clients are happy.

The Merit-Based Compensation Program—Revenue Sharing

The program, at its essence, is individualized revenue sharing. Adam Leitman Bailey, P.C., is the only law firm in New York that provides this kind of payment structure.

Every attorney at the firm receives one-third of the billed time for a given client. The other two thirds go to expenses (one-third) and profits (one-third). Attorneys receive additional compensation for bringing in business, receiving up to fifty-three percent of their billable time if they brought in the client and worked on the case. That means that the attorney would receive 33 percent of the monies for working on the case and an additional 10 or 20 percent of any monies earned for bringing in a client.

When an attorney at any level brings in business, he or she receives a percentage of what he or she brings in on top of the compensation program. This can be up to twenty percent for top performers. However, our revenue sharing program is not based on bringing in business. Attorneys are not required to bring in business, and we do not have a minimum billable hourly requirement. Attorneys have the luxury of striving to make as much money as they can or have a more relaxed career by billing fewer hours.

The process is simple. A case is brought into the firm. A partner and associate are assigned to the case and may choose other members from the firm to assist the client. The attorneys record the time spent working on the case, which then gets computed into our database.

Here are a few examples:

A senior attorney with a $625 billing rate x 2,500 billed hours per year equals $1,562,500. With a collection rate of 92% (the rate for 2015-2018), the firm would collect $1,437,500 for the year. The attorney would earn one-third of this amount, total compensation of $479,167.
Assuming the same $625 billing rate x 2,000 billed hours per year equals a total gross compensation of $1,250,000. With a collection rate of 92%, the firm would collect $1,150,000 for the year. The attorney would earn one-third of this amount, total compensation of $383,333.
At a $450 billing rate for some junior attorneys x 2,000 billed hours per year equals $900,000. With a collection rate of 92%, the firm would collect $828,000 for the year. The attorney would earn one-third of this amount, total compensation of $276,000.

For any company that can measure its employees based on a mathematical formula or another metric, our model keeps employees self-motivated and self-managed with lots of support. I can see some variation of this system working in about three-quarters of the companies I come into contact with.

Let’s take a restaurant, for example. Each server is assigned a number of tables. With the amount of information we have today, we can measure how long parties sit for a meal, as well as the biggest moneymaker — how much alcohol they order. Each server should know at the end of every shift how many tables they served, the amount of profit — net and gross — made, and the average time a party sat during a meal. If the server were to receive an additional piece of the profits when they hit specific goals or numbers, the food would come out faster, the tables cleaned more quickly, and the wines sold more often.

Of course, this can backfire rapidly with an overeager server — as it can in any business — but as long as the restaurant (or business) has checks in place to ensure the service is good, there wouldn’t be an issue.

Individualized Revenue Sharing Is Not for Everyone

Some unique variables must be considered when using this formula. First, the company must have enough work to quench its employees’ appetites.

At Adam Leitman Bailey P.C., no attorney has ever gone more than a week or two without having assignments as long as the other attorneys thought their work product was at the firm’s high standards. When an attorney has not been producing quality work, they have trouble finding assignments to work on as attorneys do not seek them out as collaborators. In this way, poor performers are naturally weeded out.

There is also a hierarchy of attorneys. Some attorneys are more sought out for work than others. Eventually, these stars stop accepting assignments from other attorneys and control their own caseloads — because if our firm’s attorneys notice their talents, so do the clients.

This merit-based system also only works at companies with employees that are ambitious and willing to work hard knowing that they must put in the time and effort at the highest level of excellence to earn a certain salary.

Lastly, the employees must have trust in the system. We have an outside accountant do quarterly reports on the numbers four times a year after each calendar quarter ends. Our attorneys are able to review their reports and numbers and have full access to the accountant for any questions.

The number one issue that arises — mostly for younger attorneys — is when it’s determined that the time spent on the matter exceeds the normal amount of time for the typical assignment. I always bring the attorney in to discuss the issue before cutting time, but I have the final say because not only do we need to provide a quality service, but we need to do it cost-effectively.

Raises, Bonuses, and Collections

The good news for employers considering this model is that no one ever asks me for a raise.

An employee’s raise is the amount of money they made above their salary in their yearly report. However, a constant discussion is whether to increase an employee’s hourly rate. Sometimes we need to tell the attorney to raise their rates, while other attorneys want to raise their hourly rates faster than the market can handle. When an attorney bills more than one-third of their salary and the money has been collected, the excess monies become the attorney’s bonus — payable either quarterly, or more typically, at the end of the year.

This revenue sharing system makes every attorney technically a partner. As such, they have an incentive to make sure the hours they billed are paid for by the clients. They are given monthly reports to see which clients have not paid their bills, and we expect the attorneys to work on the collections process. This participation could include making calls themselves or working with the accounting department to remain apprised on their progress. As a rule, we do not keep clients who do not pay their bills and are quick to withdraw from a matter or case if a bill is unpaid.

Because we set up a system where an attorney’s salary and income center on billing and collections, we have a duty to work with them to make sure the bills are paid and stop working on cases where the bills are not being satisfied. In addition, we sue clients who have not paid their bills for several months. This allows us to show the attorneys their hard work will not go to waste. All of the above has allowed us to have an enviable collection rate.

We Work for Our Employees

This is my personal creed. My employees work crazy hours, as if today were the most important day of their life—every day. I have never seen any social media site on an employee’s computer. We have been through hell and back together, and I’ve learned how loyal they are. I’ve hired some of the greatest people alive.

Flaws exist, and some of them drive me crazy. But when morale is high in an office, usually employees maintain their positivity. I do everything I can to give back to my employees and try to make them happy without getting in the way of productivity.

To that end, our benefits are extremely competitive. Everyone has their own office, and paralegal stations are as large as many other company’s employee’s offices. We provide food any time, all of the time, and it is always healthy. We pay for 80 percent of gym memberships to any gym preferred. We have Spa Fridays with manicures and massages every other Friday. Employees who arrive by nine and leave after eight receive dinner and a car home. We call our health insurance plan the Rolls Royce of plans; we self-insure dental insurance and eye-care insurance. We have holiday parties and happy hours, and employees control when they want to go out as a group on the company’s dime. Our office views are inspiring as well, and the office decor is immaculate and professional.

In confession, being cost-conscious when it comes to helping employees has never been our forte. We probably need to do a better job of monitoring our expenses for some of these activities. But I believe it is impossible to weigh the benefits of a happy employee against what you pay as an employer. These benefits really end up benefiting the company.

The biggest benefit of all, though, is compensating an employee through the individualized revenue sharing model. Do I expect most businesses to copy the above? No. But I do believe that by providing my firm’s operational plan, it can assist your business in making your own version. It may give you a few good ideas — and hopefully, lower turnover and maximum profitability in the future.

This article was originally published on SCORE NYC on 10/26/19.

Recent Changes to Co-op & Condo Laws

This past June, the New York State Legislature and Governor enacted into law a sweeping overhaul of landlord-tenant relations throughout the State; just a few days later, these same powers enacted amendments to those amendments. While relatively few of the 74 pages of densely-written text directly affect cooperatives and condominiums, boards and managers should be aware of the items that do affect – or appear to affect – their communities.

Many of the enacted provisions will be enforced through the State’s Division of Housing and Community Renewal. In the world of cooperatives and condominiums however, enforcement is nearly entirely through the courts, depending on litigants citing these laws, either in prosecuting their suits or defending them. The one exception to that general rule are the new rules on conversion to cooperative and condominium communities from conventional landlord-tenant housing; any such issues would fall under the auspices of the Attorney General’s office.

Processing Fees, Security Deposits, and Background Checks

Processing fees for those applying to purchase a cooperative apartment can be quite high; however they now seem to be restricted by the new law. Newly-enacted RPL 238-a restricts the fees to “reimburse costs associated with conducting a background check and credit check, provided the cumulative fee or fees for such checks is no more than the actual cost of the background check and credit check or twenty dollars, whichever is less.” Of course, in the real world, these expenses normally run into hundreds of dollars.

Changes to the law regarding security deposits (See GOL 7-108(1-a)) limit cooperative boards to charging no more than one month of prepaid maintenance and another month’s maintenance as a security deposit. Some commentators (with whom this author disagrees) are even interpreting the new laws to mean that the second of these charges may only be collected as the prospective shareholder is actually taking possession.

Prior to this change, in the case of an applicant whose financials were shaky – but for whom the board was willing to accept some limited risk based on an otherwise strong application package – a board could opt to hold multiple months of maintenance for the life of that applicant’s residency, or for a long enough period of time that the board was satisfied that the accepted applicant could uphold their financial obligation to the cooperative.

In lieu of the now-banned practice of requiring multiple months of maintenance to guarantee that an applicant can, in fact, pull their weight, we can recommend some possible workarounds.

Possible Solution 1: The Guarantor

Instead of requiring additional maintenance, boards can ask for a financially qualified guarantor to sign the proper documents after the board has conducted proper due diligence in investigating that proposed guarantor. We note, however, that no matter how financially stable they may be, it may prove difficult to collect from any guarantor who is not New York-based.

Possible Solution 2: Attorney Escrow

Another way to hold the extra maintenance in a secure place without violating the new laws is by arranging for the purchaser’s attorneys to hold substantial additional maintenance in their escrow accounts. The funds held thusly would not be released to the shareholder or the board except upon certain specified conditions.

Possible Solution 3: The Bylaws

The bylaws of most co-ops needed to be updated and tightened up even before the new laws went into effect – but these recent changes have made the situation even more urgent. Co-op boards should review and rewrite their bylaws immediately, giving the board the authority to issue fines – but not as rent, or additional rent. The board will simply have to use alternative means to enforce their entitlement to these additional funds, some of them very long-term. No one thinks that it is easy to amend bylaws and proprietary leases, but under these new laws, the very survivability of some cooperatives and condominiums may depend on those amendments.

Since the new laws limit the charges to incoming shareholders, the board must impose these fees on outgoing shareholders – so new bylaws also need to include either a flip tax or transfer fee. Because sellers and purchasers can reallocate these fees amongst themselves by contract, none of these charges would violate the new law. With properly written corporate documents, such a transfer fee or flip tax can legally take the place of the extra maintenance, legal fees and processing fees that boards have previously collected upon application or upon closing – and they would provide the funds needed to cover the expenses that have been part of running a cooperative ever since the first NYC co-op opened its doors.

Background Checks and Shareholder Histories

The Department of State has recently opined that the $20 cap on background checks does not apply to cooperative and condominiums — but as we learned in Roberts v. Tishman Speyer Props., L.P., 13 NY3d 270 (2009), New York’s highest court, the Court of Appeals, has proclaimed that agency decisions can be overruled, no matter how many people have relied on the agency’s determination. So, while the Department of State’s opinion that the $20 cap does not apply to co-ops and condominiums is encouraging, it is not necessarily the last word on how to interpret the June 14 laws.

Scariest of all is that boards can no longer refuse applicants based on the applicant being previously sued in housing court. (See RPL 227-f). This of course exposes boards and their constituent communities to the risk of allowing chronic deadbeat rent- and maintenance-dodgers – and the financial risk that comes with them – into their buildings.

Possible Solution: The Real Estate Broker

Although the new law bans landlords, cooperatives, and those acting on their behalf from charging above $20 for the cost of background checks, nothing in the law explicitly bans real estate brokers from doing so. Commentators are in disagreement as to whether these bans on higher fees apply to brokers, although most agree that the bans apply to managing agents as strongly as to the boards themselves. So, although it is neither certain that the $20 dollar limit is applicable nor that brokers would also be subject to the limitation, boards may find it worthwhile to have the brokers be the ones to collect the higher than $20 fees.

Maintenance Increases, Late Fees, Collections & Receipts

According to the new laws, shareholders must be given between 30 and 90 days notice if their board intends to raise maintenance by more than five percent,, based on a resident’s length of occupancy. (See RPL 226-c). Since a large percentage of co-ops have at least one long-term resident, and no resident is going to cheerfully accept getting less notice than anyone else about a fee increase, in most cases this change will mean giving everyone in the co-op 90 days notice. The new law does not directly address special assessments, but a conservative reading would imply that they would also require the same 90-day notices.

The new laws also tighten the requirements for monies paid by wire or any other form besides personal check, now requiring immediate issuance of receipts, and that records of cash payments be kept by or on behalf of the board at their offices for three years. Indirect payments, such as by lockbox, now require a receipt to be issued to the payee within 15 days. (See RPL 227-e)

In addition to all that, late payments can only be charged five percent of monthly maintenance, or $50 – whichever is less. The new laws have also added a provision requiring that prior to serving a rent demand, notice that rent was at least five days late must be sent by certified mail.

Collections and Non-Monetary Holdover Evictions

Under the new laws, the courts now have the discretion and ability to grant a non-paying resident up to a year of continued residence in the apartment before the marshal is permitted to come to the door to perform the eviction. With the Legislature slowing down judicial proceedings, collecting past-due maintenance from shareholders in arrears will likely be an even greater nightmare as unpaid fees pile up and boards struggle to find ways to make up for the loss of incoming maintenance.

The new laws also expand the group of shareholders who previously had 10 days to cure their non-monetary defaults after judgment from just residents of New York City proper to include shareholders throughout New York State, and gives them 30 days to cure. (RPAPL 753). ‘Non-monetary defaults’ include nuisance behaviors like renting out units as hotel rooms, or using them as venues for all-night rock concerts. Having to put up with obnoxious, disruptive behavior for 10 days is bad enough – having to endure it for a solid month makes a bad situation significantly worse. Worse still, while boards could previously collect attorneys’ fees from these offenders as part of the summary proceedings, now such collections must be by other means – such as in separate lawsuits, or as charges at the closing table when the offending shareholder finally sells the apartment. (RPAPL 702)

Possible Solution: Invoke the Pullman Case

More than ever, co-op boards need to carefully craft their governing documents to allow the board or shareholders to evict a bad actor for conduct not conducive to cooperative living. These so-called ‘Pullman cases’ (named for a notoriously uncooperative cooperator in the late 1990s) require cooperatives to follow specific protocol: the board must confront the shareholder with their history of misconduct and give them the opportunity to amend the behavior. If the shareholder fails to make such amendments, the board may bring suit to evict them. Thus framed, these suits take away any further cure periods, and the courts do not second-guess the boards, so long as they follow their own rules correctly. However, the courts may still allow the shareholder an additional year of residence prior to eviction, even if subject to some kind of stipulations.

Condo Conversions and the New Law’s Applicability

First, it should be emphasized that none of these new laws apply to condominiums in their direct relationships with unit owners; they only come into play in condos when individual unit owners rent out their units to subtenants. Just because the effects are indirect doesn’t make them less real, however. For example, the lengthened cure period on non-monetary defaults mentioned above can have a dramatic impact on other unit owners, and leaves boards powerless to do anything about it. After all, no court will sustain a fine against a unit owner who has done everything the law allows to curb the misbehavior of his or her tenant.

Second, as a result of the new law, building conversions from rental to condo now require 51 percent of the tenants in a converting rental building to buy their units. While effectively preventing the warehousing of empty units, this law makes it economically unfeasible for nearly any building to convert – except situations in which the other restrictions of the new law make private ownership of a building so untenable that the owner and the tenants negotiate a fire sale type conversion to co-op or condo ownership.

Possible Solution: Rehabilitation, Demolition & New Construction

The new laws do not touch the old doctrines of demolition, substantial rehabilitation, and new construction. Theoretically, any building can be subject to demolition – but the procedure required to effect that through the state agencies remains arduous. In the few months since the law’s passage, substantial rehabilitation (which on the practical level means the gut renovation of distressed buildings) has created a heated market in empty or nearly-empty distressed buildings. Where the developer can show a brand-new gut renovation, the building is exempt from any rent regulation at all. Brand-new construction enjoys the same kind of exemption.

In Closing…

Clearly, this article leaves open some questions on whether and how these new laws may (or may not) apply to co-op and condo communities. Various state agencies have promised to release their interpretations, but as the only state agency directly regulating cooperatives and condominiums, the Attorney General will have the most persuasive advice to offer. However, some of these laws were actually designed for rent regulated housing and any advice the state’s Division of Housing and Community Renewal may eventually offer could prove persuasive in co-ops and condos as well. Ultimately, the only truly reliable interpretations are going to come from the courts as these laws are applied, tested, and potentially challenged.

Adam Leitman Bailey is a New York City-based attorney specializing in co-op and condo law.

This article was originally published on  The Cooperator on 10/25/19.