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.
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.