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Council of New York Cooperatives & Condominiums
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Sponsor & Conversion Issues

Publication Date: Summer 1998

COMPLETING THE CONVERSION

A number of CNYC's member cooperatives and condominiums suffer from a low number of apartments sold to resident owners. The result is hybrid buildings where resident owners often have little voice in how their buildings are run and little opportunity to sell their units. To help members overcome this debilitating problem, CNYC held a workshop on May 20, 1998.

SPONSOR CONTROL
CNYC Board Chairman Stuart Saft, Esq. discussed two ways to consider sponsor control: in legal terms and in actual terms. Legally, sponsors are required to relinquish control of the board within five years after the date the plan is declared effective. Yet the courts have interpreted this merely to mean that after five years, the sponsor will not elect a majority of directors who are his employees or relatives. This means the sponsor can appoint two members of a five-member board, and then cast his or her vote for the remaining non-sponsor shareholders on the ballot, electing individuals who will support sponsor goals. "That's still tantamount to control of the board," said Mr. Saft.

Litigation options. Conversions are governed by the General Business Law and the Attorney General's regulations under the Martin Act. CNYC President Marc Luxemburg, Esq. noted that these documents are not particularly articulate on the subject of sponsor control. But he views this as an opportunity for co-ops and condos to make inroads through the courts.

"In the offering plan, there's a list of apartments that the sponsor has for sale, and it can be assumed that the sale offering is continuing," he said. "The plan, including clauses that define the reserve fund, is based on the assumption that the building is going to sell out. Thus, the Martin Act requirement that the sponsor ‘will not abandon the plan after the effectiveness amendment is filed' implies that the sponsor will continue to sell apartments."

The plan also says that the sponsor "will not omit any material fact," added Mr. Luxemburg. "If the sponsor had plans to stop selling after X-number of apartments were sold, then that should have been disclosed in the offering plan -- which it is not."

Legislative options. But court action can be both costly and time-consuming. Cooperatives and condominiums are also looking to the legislature to help cut away at the wall that the sponsor has built, said Mr. Saft. Senator Frank Padavan and Assemblymember Ivan Lafayette have proposed legislation requiring that sponsors must either disclose in the offering plan that they will rent apartments rather than sell them, or must obtain approval of a majority of the shareholder representatives on the board each time they wish to rent a unit (see On the Money, Summer 1998). The legislature had not passed this bill when it recessed in June; CNYC urged members to make this a front-burner issue in the coming elections (see The Value of Your Vote, Summer 1998).

Another legislative goal is to raise the minimum number of purchasers required for a non-eviction conversion. The present law, passed in 1982, requires that purchasers subscribe for 15% of the units in a non-eviction conversion. For an eviction plan -- where non-purchasers must leave the building within three years of conversion -- 51% of the units must be subscribed by "inside purchasers".

According to Mr. Saft, this system actually works against purchasers. "Before 1982, 35% of insiders had to purchase before the plan was declared effective, but then the sponsor could evict everybody else in the building," he noted. "In a strange way, that was very beneficial -- not because we wanted to throw people out on the street, but because it gave residents an incentive to band together and negotiate better prices and larger reserve funds. Very few of those early conversions resulted in default situations because of the extensive negotiations that produced something that was fair."

After 1982, few if any sponsors sought the 51% required for the eviction plan, compromising instead with the 15% non-eviction plan. Tenants, meanwhile, became complacent, knowing that they could not be evicted, so plans tended to go through without much negotiation.

To ensure that future conversions produce strong and stable cooperatives and condominiums, CNYC advocates higher presale requirements and resident control of the board from the time of conversion (see On the Money, Summer 1998).

Because of the substantial turnout for this important seminar and the depth of interest among CNYC members, CNYC is establishing a Task Force on Completing the Conversion. This body will meet on Thursday evening, October 15, 1998.

 
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