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Council of New York Cooperatives & Condominiums
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Legislative Issues

Published: Summer 1995

New York Leaders Discuss Cooperative and Condominium Reform
July 1995 joint hearing explores urgent issues

A record crowd turned out when the Standing Committees on Housing of New York State's Senate and Assembly held a joint hearing in Queens on July 26, 1995 to investigate economic and policy changes which could improve the viability of cooperative and condominium housing. Co-hosted by Queens Borough President Claire Shulman, Senator Vincent Leibell, who chairs the Senate Committee on Housing and Community Development, and Assemblyman Vito J. Lopez, chairman of the Assembly Housing Committee, this important hearing invited testimony on eight key issues: reserves, management, refinancing, foreclosure, legal action against sponsors, board approval of purchasers, percentage of purchasers required for conversion, and transfer of board control from the sponsor.

More than 30 public officials, cooperative and condominium association leaders, co-op and condo board members and shareholders, and others from the real estate industry testified. New York State Attorney General Dennis Vacco made a statement, as did Stuart Saft, chairman of the Council of New York Cooperatives & Condominiums, Charles Rappaport, president of the Federation of New York Housing Cooperatives, and representatives of the Real Estate Board of New York, the Community Preservation Corporation, the Mortgage Bankers Association and the National Cooperative Bank.

Almost every speaker stressed the need for a private right of action so that cooperatives and condominiums could bring suit against sponsors who fail to comply with the law or to live up to promises made in their offering plans. This issue, along with resolving both sponsor and shareholder defaults, supervising management, raising the minimum percentage of shares needed for conversion, and increasing the availability of financing, were deemed to merit immediate attention.

Claire Shulman Works to Strengthen Co-ops and Condos

Borough President Shulman co-hosted an earlier hearing in October 1989, as problems were beginning to surface. Subsequently, her office addressed a myriad of financial problems afflicting as many as one out of every four of the approximately 80,000 units converted in Queens since 1980. She pointed out that many Queens complexes had been threatened by foreclosure after sponsor defaults. Resident-owners feared the loss of their homes and tenants feared reduced services. To learn more about these issues, Borough President Shulman held several hearings and forums. In 1990, she formed the Queens co-op/condo task force, comprised of government enforcement agencies, industry leaders and local experts.

Many of the problems required legislative solutions. Thanks to the bipartisan efforts of the state legislature, several co-op reform bills have been passed since 1990, but Mrs. Shulman seeks additional legislation that will go even further towards ensuring the stability of co-ops and condos in New York. "First and foremost," she insisted, "we need to increase the minimum percentage of shares to be sold before a non-eviction plan can be declared effective." Currently, a sponsor only needs subscriptions to purchase 15% of a building's units. This enables sponsors to market units almost exclusively to outsiders. Most financially troubled conversions occur in buildings where few "insiders", if any, purchase. These "counterfeit co-ops" are run, not by resident-shareholders, but by lenders, outside investors and bankrupt sponsors.

"I have long advocated legislation which would require that a minimum of 25% of bona fide tenants agree to purchase shares before a co-op can be converted. A law such as this would result in co-ops that are truly cooperative communities of homeowners," she insisted. "Some would say that this legislation is not needed because few conversions are occurring at this time, I say we need to act now to prevent a repetition of the terrible problems that we experienced over the past few years."

The Borough President is a strong supporter of a private right of action under the Martin Act to permit shareholders who are defrauded to pursue an action against the sponsor. "Currently, only the Attorney General can bring such an action against sponsors who fail to make material disclosures or who make false statements," she stated. "Unfortunately, the Attorney General's office does not have the capacity to handle the large number of cases brought to its attention. Granting this right to individuals who have been harmed will give shareholders redress and significantly relieve the Attorney General's burden." The Borough President is particularly intent on preventing foreclosures.

"Freddie Mac's foreclosure on a Brooklyn co-op in 1993 has brought to a head the issue of what happens to a co-op that `deconverts,'" she said. "When a lender forecloses on a co-op's underlying mortgage, the co-op reverts to a rental building. The Division of Housing and Community Renewal has been studying the issue of how rents should be set in deconverted buildings." Since her office devoted countless hours to long, complex negotiations with co-ops, sponsors, lending institutions and investors to prevent foreclosures.

Mrs. Shulman expressed great concern about suggestions that building rents be set at market levels upon deconversion: "This action would be a great incentive to mortgagees to foreclose on defaulting loans rather than sit through a difficult, often protracted workout process," she stated, adding that, "today, co-op mortgages are not only held by institutional lenders, but by sponsors and investors or so-called `white knights.' Some of these individuals may be less concerned about the effect of a foreclosure on building residents and the community than an institutional lender would be.

"It has been the mission of my office to do everything possible to protect innocent purchasers of co-ops and condos from having their investments - often lifetime savings - wiped out. That is why I believe that a compromise solution to this problem which protects co-op residents and is fair to the concerns of lenders needs to be developed," she insisted. "I have urged members of the co-op and banking communities to come together to develop such a solution."

ATTORNEY GENERAL VACCO MAKES FIRST PUBLIC STATEMENT ON CO-OP AND CONDO ISSUES

In his first public statement about co-ops and condos, New York State Attorney General Dennis Vacco affirmed that these housing issues were important, and that he, too, want to find ways to resolve them.

The Attorney General submitted two bills to the state legislature concerning this subject. The first requires that the sponsor cure building violations before an offering plan could be accepted for filing, and the second would permit co-ops, condos, and Homeowner Associations to collect rent directly from the tenant of a defaulting unit owner, to help affected co-ops and condos meet their financial obligations and reduce the amount that non-delinquent unit owners would have to pay to make up the shortfall caused by the default.

Mr. Vacco noted that the Attorney General's office plays a significant role in the enforcement of the co-op and condominium laws of New York State, a fact which benefits both consumers and owners of property. He affirmed that, "as Attorney General, it is my intention to strengthen this tradition and make certain that a level playing field exists so that both landlords and tenants can feel that they are treated fairly. My office stands ready to work with all of you today towards that goal."

The Attorney General acknowledged that property managers play a vital role in ensuring the quality of the housing they manage. "My overriding goal is to ensure that property managers are honest in their dealings and have a solvent business," he said. "As the recent indictment by the Manhattan District Attorney for kickbacks in the management of cooperatives indicates, there has been corruption in cooperative and condominium management that drives up the cost of housing. We want to prevent the unscrupulous and the dishonest from entering the building management field. We must do more than simply issue a license after a class to ensure protection for both owners and tenants against those few who might think otherwise."

Mr. Vacco concluded on a positive note. "Part of the solution for the future entails investigating sponsor abuses, I support the proposals that enhance my power to do so," he stated, adding: "I realize the importance of these issues and the need for careful scrutiny to have the best solutions. I am in the process of forming a task force to review our current regulation of co-ops and condos, proposed legislative solutions and ways my office can better perform." He invited Borough President Shulman to join this task force.

CNYC CHAIRMAN PROVIDES DETAILED REVIEW OF CRUCIAL ISSUES

Stuart M. Saft, Esq., chairman, Council of New York Cooperatives & Condominiums, presented detailed testimony reviewing many important issues. The following is an excerpt:

I would like to speak of some of the more pressing immediate issues and to suggest legislative solutions to some of them.

A. Private Right of Action. To insure that sponsors disseminate accurate offering plans, both the purchasers and the cooperative corporation or condominium association should have the right to assert violations of the Martin Act in litigation against sponsors who fail to provide accurate or complete disclosure. This change in the Martin Act would substantially reduce the burden placed on the Department of Law and would enable market forces to solve many of the problems with which we have had to deal over the last six years. The sponsors, knowing that the purchasers can raise Martin Act claims, will provide more thorough and complete disclosure, which will reduce the need for purchasers to bring such lawsuits.

B. Collection of Rent from the Tenants of Defaulting Shareholders'. Since 1988, an unprecedented number of shareholders in cooperative housing corporations and unit owners in condominium associations have defaulted on their maintenance, assessments and common charges. These defaults have placed a huge financial burden on the non-defaulting shareholders and unit owners and have destabilized the operation of these commonly owned buildings. Because of delays endemic in the law, the cooperative housing corporation and condominium associations cannot expeditiously terminate the interest of the defaulting owners in their buildings.

Often, during the period of time that a unit owner or shareholder is in default on maintenance payments, that same apartment owner may nevertheless sublet his or her apartment and collect rent from the subtenant. Thus, the legal system allows a defaulting owner to profit while delaying the ability of the cooperative housing corporation or condominium association to terminate the interests of the defaulting owner.

Included as Exhibit B to my testimony is a proposed Modification of General Business Law §352-e 2-d(a), which enables the board of directors of a cooperative corporation or the board of managers of a condominium association to collect rent from occupants of units in the cooperative or condominium buildings when the owner of the shares appurtenant to the apartment or of the unit does not occupy the apartment or unit and is not paying maintenance, assessments or common charges. We believe that the enactment of this modification of GBL §352-e 2-d(a) is essential to reduce the number of defaults and allow the buildings to operate.

C. Acceleration of Condominium Foreclosures. Pursuant to existing law, each condominium unit owner can obtain a mortgage on his or her unit securing an unlimited amount of indebtedness. As a result of the language contained in Real Property Law (RPL) §339-z, if a unit owner defaults, the condominium association cannot obtain its unpaid common charges and assessments until the mortgagee has been paid its entire principal balance and accrued interest. During the pendency of the condominium's or the mortgagee's foreclosure action - which could take up to four years under the Real Property Actions and Proceedings Law (the RPAPL) - the condominium does not have the ability to collect common charges or assessments from the defaulting unit owner. Non-defaulting unit owners must often pay additional assessments to cover the cost of operation of the building while the defaulting unit owners live in the building for free. Furthermore, in the event the proceeds from the sale of the defaulting unit owner's unit are less than the outstanding principal balance and accrued interest on the mortgage, then the condominium association will never receive any of its common charges or assessments for the period in which the unit owner was in default. Far too often it is this scenario that prevails.

Included as Exhibit B to my testimony is a proposed modification of the Condominium Act (Real Property Law Article 9- B) which provides condominium associations with the ability to expedite the payment of common charges and assessments by enabling the board of managers to foreclose a common charge lien through foreclosure by publication similar to the method used by cooperative housing corporations to collect unpaid maintenance from defaulting shareholders. It even contains provisions to assist a mortgagee in foreclosing its mortgage. This legislation does not change the priority between the mortgagee and the condominium, it simply accelerates the process so that it can be completed in three months rather than four years. This bill has been introduced in the Assembly by John Ravitz, but does not yet have a sponsor in the Senate.

D. Assuring Principled Management. In 1994, the Manhattan District Attorney brought indictments against dozens of managing agents, shedding light on a most unfortunate aspect of this industry. Cooperative and condominiums that had already spent years dealing with continuing financial crises learned to their dismay that many of the managing agents to whom they had entrusted the day-to-day care of their homes were corrupt.

To ameliorate this situation, the Assembly and Senate can do a number of things, which we suggested to Senator Roy Goodman's Committee on Investigations last year, namely: 1. Investigating and licensing managers; 2. Requiring management firms to keep separate client accounts without commingling funds; 3. Requiring annual audits of management companies; 4. Affirming management companies' responsibility for acts of their employees; 5. Obliging management companies to turn over books and records upon termination; and 6. Providing that court costs can be awarded to cooperatives and condominiums whose agent has committed a fraud.

Mr. Saft went on to further propose:

  • Reducing excessive interest on late real estate tax payments;
  • Establishing that maintenance charges (i.e., true cost of operating the building) should become the rent due from former shareholders following a foreclosure;
  • Granting resident-shareholder control of the board upon conversion;
  • Acknowledging the homeowner status of cooperative shareholders and condominium unit owners; and
  • Establishing a separate part in Housing Court for cooperative and condominium issues.

FEDERATION SUPPLEMENTS HEARING AGENDA

Charles Rappaport, president of the Federation of New York Housing Cooperatives, digressed from the proposed agenda to call attention to problems raised by Real Property Law 235(g), the "roommate law", which states that one adult non-family member and that person's minor children can occupy an apartment with the tenant. The courts have ruled that 235(f) applies to cooperatives.

"Here," insisted Rappaport, "is a law which penalizes all cooperators and unit owners. They are paying for the increased use of water and the related water and sewer taxes; increased use of utilities where included in the cooperative's maintenance charges; increased use of elevators and garbage disposal and increased exposure to injury claims. Security is jeopardized because a board has less control over who is now occupying the apartment.

Lastly, the apartment may be too small for the number of occupants. Experience has shown that non-owner tenants are less careful about the building and its amenities." Mr. Rappaport demanded legislation to make it clear that 235(f) does not apply to cooperatives.

Mr. Rappaport concluded by voicing his organization's support for a co-op and condo section of the Housing Court. "Most Housing Court judges seem not to understand the difference between a rental building and a cooperative," he said.

 
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