Council of New York Cooperatives & Condominiums
CNYC Newsletter
Legal Issues

Published: Winter 2003

The Court of Appeals of the State of New York has ruled that sponsors have an obligation to create a "viable" cooperative or condominium when they convert a building to cooperative or condominium ownership. The Court did not define the term "viable".

The Council of New York Cooperatives & Condominiums fully supports the proposition that the goal of a conversion to cooperative or condominium status of an existing residential building is to achieve 100% owner occupancy within a reasonable time. This proposition was adopted by the Appellate Division, 1st Department, in its decision of the Jennifer case (285 AD2d 244, 729 NYS2d 34 1991) discussed on page 7 of this Newsletter.

The Court of Appeals stated that it was not deciding that issue at this stage of the case, thus leaving the door open to adopting this position in a subsequent appeal.

Accordingly, at this time, it is essential to identify the criteria for determining when a cooperative is "viable".

The Council of New York Cooperatives offers the following criteria to be met in order for a building to be defined as a "Viable" Cooperative or Condominium: Viability involves both the financial and the operational aspects of the cooperative/condominium, which are impacted by the number of "unsold" units.

  1. At a minimum, the number of units sold to bona fide purchasers, each of whom occupies a unit as a residence, must give the purchasing shareholders/unit owners complete corporate control. This means that at least enough units must be sold so that the purchasers can amend the organic documents without a veto by the sponsor/holders of unsold shares. In most instances this will mean that either 66 2/3% or 75 % of the units must be sold, or that the sponsor is otherwise unable to prevent amendments of the organic documents
  2. There can be no Sponsor control, either directly or indirectly, of building operations, including no ability to elect more than a minority of the directors. The sponsor does not control the managing agent, and there are no long-term contracts with the Sponsor that control any important facilities or services to the shareholders/unit owners.
  3. Unit owners must be able to market their units at a price and on terms that are not compromised or hindered by the number of unsold units, and must be able to refinance end loans on individual units. There must be no "red-line" determinations from institutional lenders for shareholder/unit owner end-loans.
  4. The cooperative must be able to refinance its mortgage on a commercially reasonable basis. There must be no "red-line" determinations from institutional lenders for refinancing of existing building mortgage or new building mortgages.
  5. The purchasing shareholders/unit owners should be able to control the number of transient tenants, so as to reduce unusual wear and tear on the building and to maintain a stable residential community.

A cooperative or condominium may be viable when less than all five criteria are met. The negative impact of failure to meet one or more of these tests may be reduced by corrective actions. Some of the considerations to determine whether viability exists when all conditions are not met follow:

1. Minimum Number of Sales.
If non-purchasing tenants constitute a substantial number of the units in a building the Sponsor may be unable to meet the minimum level of bona fide sales. A sponsor agreement or consistent practice to sell units as they become vacant is an acceptable component of viability.

In the event that the Sponsor demonstrates to the satisfaction of an independent Board of Directors or Managers that a need exists for "fair market" rental income to cover shortfalls of maintenance over rent, an agreement between the Sponsor and co-op to the effect that future sales will be made when the shortfall is covered may be sufficient to establish viability.

Similarly, if there are numerous free market apartments held by the Sponsor, appropriate agreements between the co-op/condominium and the Sponsor to avoid "flooding" the market by spacing sales at a negotiated rate over a given period of time could satisfy a viability test, as could an agreement that deals with spacing sales in a depressed market.

When sponsor sublets are to be permitted, the Sponsor should accept some level of control by an independent Board with respect to approval of sublet tenants. Sponsor protection with respect to permitted sublets (sublets after an agreed threshold or sublets permitted on a need basis) should be limited to sublets consented to by an independent Board, such consent not to be unreasonably withheld.

2. Sponsor Control.
Where the Sponsor owns a sufficient number of units because of the high number of non-purchasing tenants to enable the Sponsor to maintain control of the Board, the Sponsor should agree to refrain from voting in any election of Directors for more than a minority of directors.

In buildings with sponsor control irrespective of the number of units owned by it, the Sponsor should be required to take the following actions:

a. Waive any remaining "anti-rape" sponsor control provisions concerning the operating budget or capital expenditures.
b. Waive the right to vote for directors when the Sponsor has a continuing right to appoint any board members.
c. Amend any "100% of shareholder" requirements for amendments to co-op or condominium documents or board actions such as terminating management or other contracts.

3. Red-lining making end-loans unavailable.
The Sponsor should cooperate in obtaining institutional financing for individual units on rates and terms comparable to fully viable cooperatives, or at least agree to provide reasonable sponsor financing to purchasers of Sponsor units. But the Sponsor should not attempt to perpetuate control through foreclosures of financed units.

4. Red-lining affecting ability to refinance building mortgage.
The Sponsor should participate in the lending process by helping to arrange institutional financing, and agreeing to bank conditions such as "negative pledges"; the Sponsor should extend existing sponsor mortgage at competitive rates and terms; and, where large numbers of non-purchasing tenants exist, the Sponsor should guaranty or subsidize the building debt so that it is commercially reasonable.

5. Unit Values.
If unit values are negatively affected solely because of the existence of non-purchasing rent regulated tenants, the Sponsor may not be able to correct this situation and the cooperative would not be viable until sufficient units have been sold to allow unit sales at fair market prices.

6. "Sweetheart" Contracts.
The Sponsor should agree to permit an independent Board of Directors or Managers to terminate, at its sole election, any contracts between the building and the Sponsor, including any management contract with the Sponsor or any Sponsor affiliate.


Sign Up Today
Receive CNYC updates and bulletins by email! To sign up, click here and complete the online form.

Now Online
Member Inquiries
Questions & Requests from CNYC Members, to CNYC Members. Click to view.

click to view event details

You may register for CNYC events by calling (212) 496-7400 or by completing the Onlne Registration Form.

CNYC Membership

Is Your Cooperative or Condominium a CNYC Member?

Join Today!

DOT-COOP Registration

Does your building have its "Dot-Coop"? Register by clicking on this button:

250 West 57th Street, Suite 730
New York, NY 10107-0730
Tel: (212) 496-7400
Fax: (212) 580-7801
Membership | About CNYC | Events | Housing Conference | Current Articles | Article Archive | Links | Home | back to top
Copyright © CNYC, 1996-. All Rights Reserved. Policy Statements. Designed & Maintained by LLC