Published: Summer 1996
THE IMPACT OF RENTAL ISSUES
ON COOPERATIVES & CONDOMINIUMS
The ideal housing cooperative is a self-run community, with each unit
owned by a resident homeowner who takes part in the tasks of managing
the building. Unfortunately, this profile doesn't fit every New York cooperative
It often takes many years before a building completes its conversion
from rental status to a full cooperative. During this period, a significant
percentage of units may be occupied by renters, and these renters themselves
have diverse statuses.
CNYC presented a seminar at its 15th annual Cooperative Housing Conference
on the Impact of Rental Issues on New York Cooperatives and Condominiums.
Richard Nardi of the Mortgage Bankers' Association joined former DHCR
Commissioner Donald Halperin, journalist Lois Weiss and CNYC Board Chairman
Stuart M. Saft for a far-ranging discussion identifying and commenting
upon a variety of renter's issues that affect cooperatives and condominiums.
NON-EVICTION CONVERSIONS CREATE MIXED BUILDINGS
Since most conversions are "non-eviction" conversions, many
rent controlled or rent stabilized tenants frequently live on in the building
as tenants of the sponsor or of investors. The law protects the rights
of these renters and assures that they will receive many services from
the owner of their units. See Our Members Write
detailing the similar experiences of a Queens cooperative.
In addition to the rent-regulated units, apartments may also be rented
at market rates. This occurs for a variety of reasons. In recent years,
with the market down and lenders reluctant to make loans for the purchase
of units in certain buildings, subletting has become more and more prevalent
as owners ready to move elsewhere find that they can't easily sell their
units. Similarly, sponsors securing vacancies as their rent-regulated
tenants left chose to rent their units rather than sell them at low prices.
Finally, a very small number of
cooperatives have failed. Their mortgages have been foreclosed,
and they have been "deconverted", turned back into
rental units. The courts have determined that the former shareholders
of these buildings are entitled to rent stabilized rents,
and that these rents are to be established by the New York
State Division of Housing and Community Renewal (DHCR). Although
only a minuscule portion of the population is directly affected,
the repercussions of this situation are said to be far-reaching.
The formula that DHCR establishes as the basis for post-deconversion
rent could limit the willingness of banks to make mortgage loans, because
they are required by regulators to reserve sufficient funds to protect
each loan from the worst-case risk. If rents were set too low for a building
to be operated profitably upon deconversion, lenders claim that this would
force them to make smaller loans at higher rates.
"When the DHCR sets rents, those rent levels will be used in all
future appraisals of cooperatives. This will have a very big impact on
the amount of financing available to co-ops," said Mr. Nardi. "This
affects Park Avenue co-ops as much as any other co-op out there."
Mr. Nardi has been trying to convince DHCR of the need for a fair system
of post-foreclosure rents. "We want to have it set at fair market
rents, but the real point we have tried to get across is for the DHCR
to go slowly, to listen to as many people as they can, because this potentially
can hurt all co-ops."
CNYC acknowledges the need for a reasonable rent that reflects the cost
of operating the unit. CNYC has therefore recommended that the post-deconversion
rent be set at maintenance (with appropriate adjustments for situations
where buildings artificially reduced maintenance prior to deconversion).
Maintenance is the unit's proportional share of the cost of operating
the building at break-even. If, as lenders ask, the deconversion rents
are set at market rates, CNYC contends that this could become an incentive
for lenders -- particularly private lenders -- to foreclose, and for sponsors
to strategize schemes of vacancy decontrol.
Some have suggested that DHCR opt for a complex formula that takes the
stabilized or controlled rent of the unit at the time that it was purchased
and increases that rent by the percentages permitted in the intervening
years. Since rent stabilized rents bear no relationship to the cost of
operating an apartment, but are rather a reflection of how long a person
has lived in the unit and how many times the unit turned over prior to
that tenant's occupancy, the resulting rents will be diverse.
We continue to await the determination of the DHCR on these issues, and,
as we wait, we note with some relief that foreclosures are very few, and
that lenders tend to cooperate as much as they possibly can in working
out impossible situations and enabling the cooperatives to recover and
then to thrive. When foreclosures do occur, the DHCR is advising that
reasonable rents be fairly negotiated to enable former shareholders to
remain in place.
A far more common impact of rental
issues on cooperatives and condominiums, the panel agreed,
was that of a subletting situation. In recent years, many
cooperatives have had to cope with problems associated with
having too many sublets. Many lenders refuse to finance units
or refinance the underlying mortgages in cooperatives whose
sublets exceed a predetermined percentage of the units. Subletting
is also seen as "the antithesis of the whole idea of
a cooperative, which is to create a small community where
you have a say," said Mr. Nardi. As a result, many cooperatives
enact stringent sublet policies to dissuade shareholders from,
in effect, turning their buildings back into rentals.
Yet Mr. Saft admonished that taking an unyielding stance on sublets is
sometimes the wrong thing to do. "In a typical cooperative, each
shareholder has a right under the bylaws and the proprietary lease to
sublet his apartment," he said. "In a building where people
cannot sell and cannot remain in an apartment that they have outgrown,
too rigid a sublet policy will invite a revolution against the board."
He mentioned a West Side cooperative that enacted a stringent sublet policy
because 50 percent of the building was already rented. The non-resident
shareholders organized a proxy fight to unseat the board, eventually forcing
the board to back down.
The solution for most boards is
to remain flexible. "If you have a static sublet policy,
you need to re-evaluate it based on the building's needs,"
said Mr. Nardi. Added Mr. Saft: "You're better off implementing
restrictions on time -- only allowing sublets for two of every
five years of ownership -- rather than putting a cap on the
percentage of sublets you're going to allow in the building.
The cap cuts some people out, and that's just another way
to create trouble."
"HOLDERS OF UNSOLD
Holders of unsold shares also
present several points of confusion for many cooperatives.
"If the sponsor sells the apartment to a non-occupant
and confers upon them the status of holder of unsold shares,
then the shares on the apartment continue to be unsold shares,"
said Mr. Saft. "In that case, the sponsor is still responsible
for any default made by the new owner. If the shares are not
sold as unsold shares -- to an owner-occupant -- then the
new owner has responsibility in case of a default."
REDUCTION IN SERVICES
Another important question is
whether cooperatives can reduce services -- for example, no
longer provide 24-hour doorman service -- when there are rent-regulated
tenants in the building. "It's not black and white,"
said Mr. Saft. "The board has the right to reduce services
unless it says otherwise in the operating plan. If you reduce
services, rent-regulated tenants have to go ahead and apply
[to the DHCR] for rent reductions, which means that the sponsor
has to deal with the decreased income. Thus, in buildings
where the sponsor maintains control of the board, reducing
services may be difficult. But if you control the board, you
can do what you want. The sponsor is still your shareholder,
and, like all other shareholders, he must continue to pay
you his monthly maintenance." See Our
Once homeowners own and occupy,
say, 60% to 65% of the units in a cooperative or condominium,
it is no longer seriously hampered by the presence of rental
tenants. Several factors now combine to bring promise of improvement
in this area. The recent upturn in the market are providing
an incentive for sponsors and sublessors to sell their units.
The new property tax abatement which is available only to
homeowners in cooperatives and condominiums who own no more
than three units (see Tax Reform
Law Passed) may also help tip the balance from renting
to selling when an apartment becomes available.
For its part, the Council of New York Cooperatives & Condominiums
is committed to seeking legislation or state regulations that will require
that sponsors continue to sell units at least until the cooperative or
condominium has a sufficient percentage of homeowners to be viable and
loan worthy. The Newsletter and this Web site will continue to report
on any progress.