why hire a low-life as property manager? 'cuz you didn't know

ignorance is expensive
There were reports in the press this past week about Richard Bassik, a Manhattan property manager accused of stealing from downtown clients that caught my eye because I know the guy … at least, I worked with him when I represented the sellers in a loft building that he managed. The NY Daily News article from January 24 (hat tip to Curbed, I think) has the salacious details about the guy’s recent bad acts and the even more salacious details about his (literally) criminal past (long past). The whole article is worth a read.

But for Manhattan Loft Guy purposes, the key fact is that this guy moved money or changed bank account authority so that he could get his hands on it. The article refers to four buildings (not identified, but hinted at) that claim they lost nearly $2mm. (Property management firms range from the very large, through medium, to small, down to mom-and-pop operations; the bad guy ran pretty much a pop shop called Downtown Properties.) The critical issues are (a) how did these buildings let themselves get in this position, and (b) how could they have prevented this. No doubt, many, many buildings are poring over their own books and asking these same questions about their "professional" management.

Before getting to these Big Questions, let me tell you a story.

one loft building unscathed, lucky?
I spoke this week to a friend, a coop board member whom I knew had retained the bad guy about 4 years ago, replacing another small management firm with whom they had grown disenchanted. His coop is a small loft building, fewer than 20 shareholders and (thankfully) with a fellow board member frankly described as "cheap". They got a call not too long ago from the coop board of another downtown building managed by the bad guy, asking if they had noticed anything "funny" about their accounts or records. This coop was about to sue the bad guy over some irregularities.

My friend thought there were no irregularities, but he and the other board member then spent about 36 stressful hours reviewing "everything", they contacted their bank and had his name removed from any signing authority, and let him know that they would replace him as property manager. Interestingly, the bad guy stayed on, managing the building, until they could transition to a new management company. From their perspective, the bad guy had done a good job managing their coop, and continued to do so until replaced.

They did have one bit of trouble with their accounts afterwards, but suffered no losses they could find. After the various lawsuits mentioned in the Daily News article, they found that one of their accounts had been frozen by court order, apparently because there was a possibility that the funds in that account may have come from one of the buildings that had suffered losses. Fortunately for this small loft coop, they were able to prove to the court that the funds in the account clearly flowed from the proceeds of a mortgage refinance, with a consistent balance (no increases) since before the bad guy had begun to represent the other unfortunate buildings. Had there not been this somewhat fortuitous paper trail and timing, they may have had to tussle with these other buildings over what they knew to be their own money.

Board members spent time in court, preparing for court, and working on their paper trail, which was certainly distracting and worrisome, but at the end of the day they discovered no dollar losses.

no need to outrun the bear
Remember that cheap board member? I asked my friend why he thought they had come through unscathed. He said that this colleague was a pain in the butt, that he closely reviewed all the coop’s financial statements and accounts, and asked many questions that revealed a (shall we say) anal personality. If there was a bank late fee in an account, he would want an explanation and to know whether the property manager had tried to get the fee reversed at the bank. When there was a $200 charge one winter month for "snow shoveling", he protested, saying that he thought that there had been no appreciable snow that month. When the coop reserve fund was tapped to pay for board-approved projects, they asked for details to show how the reserve funds had gone from $xxx to $yyy.

From what they can surmise, the bad guy may well have figured that this coop was paying more attention than others and maybe was not a prime candidate for hanky–panky. (Neither my friend nor I know anything about how these other buildings ran their operations, so this is not intended to blame them for these losses.) This surmise brings to mind the classic story about the two guys who come upon an angry bear in the woods.

"Uh-oh … do you think we can outrun that bear?"
"Gee, I don’t know. All I know is that I don’t have to outrun the bear … I only have to outrun you."

Maybe this coop board paid just a little bit more attention than other buildings, four of which have lost nearly $2mm. Maybe this coop board could have been scammed by the bad guy, but the bad guy had easier opportunities with other buildings.

remedies are limited
Of course the bad guy was bonded as a property manager, but my friend guesses that the coverage limits will be well short of the losses suffered (other buildings may yet discover that they got fleeced, but it is a $2mm problem so far). The Daily News implies that the bad guy has signed some confessions of judgment and the District Attorney is involved, but there was no suggestion that anyone is likely to track enough assets to make up much of these losses. And however much the bond is for has probably already been tendered (or will be shortly), without much fight.

looking back, looking forward
Obviously, the more closely a board reviews their accounts, the more protection they have against theft or incompetence. I believe it is standard practice (it is certainly good practice) to require a board co-signature on any checks or withdrawals in non-trivial amounts. Boards can require that their property managers have a criminal background check, though some boards may still decide to make an appropriately compassionate choice under the right circumstances to give someone a second chance (though if they do, they’d be wise to double their guard).

This bad guy is going to make it more difficult for the mom-and-pop shops to compete with larger property management firms that can economically carry larger bonds. Bad luck for them.

This bad guy should encourage all board members to be "cheap and proud", a pain in the butt even. Property managers will have to grow thicker skin for a while, as they are probably in for a season or two of micro-management. Too bad for them. Not too many coops can easily sustain un-reimbursed losses of tens of thousands of dollars per shareholder.
 

© Sandy Mattingly 2010