But as subleasing in apartments increased, so did other types of problems. Besides giving buildings an air of transience, with renters who cared less than owners about upkeep, it also frequently resulted in banks not granting or refinancing individual or underlying mortgages: If 40 percent or more of the building were rental, banks often considered it a risk.

It took co-ops years to bring sublets under control — and now the cycle may need to begin again. "As the economy gets worse," says management executive Gerard J. Picaso, president of Gerard J. Picaso Inc., "a number of boards will probably have to rethink their sublet policies."

But many aren't doing so yet, says Donald Levy, vice president of the management company Brown Harris Stevens. Despite the roller-coaster ride of the market, the plight of would-be sellers trying to attract buyers "is not generating an enormous amount of sympathy on the part of boards," Levy says. From these boards' point of view, shareholders bought into their buildings knowing the rules, and boards are not now going to amend the subletting clause of the proprietary lease because some shareholders might be experiencing hardship in selling. These boards, says Levy, believe market price is not the board's responsibility.

That view is not unique to Levy's co-ops. Of nearly a dozen management executives and board directors contacted, only one says that his cooperatives were willing to reconsider their rules on subletting.

Sitting on the Docket of the Bay

For instance, Bay Terrace, a co-op in Queens, is reluctant to lift its restrictions because of difficulties its board encountered when it allowed sublets — specifically, explains board president Warren Schreiber, the lack of control the board had with subtenants. If there were problems, the board found itself having to make certain that the non-resident shareholders dealt with them. The chain of responsibility was stretched too thin, says Schreiber.

"If people in apartments are not following the rules," he notes, "that creates additional problems for the board," which does not want to spend time or resources enforcing policies against tenants who have no vested interest in the co-op.
Nonetheless, some boards are considering change. Picaso reports that a 100-unit building he manages in Greenwich Village has amended its policy to allow owners to sublet for three years — instead of two — once every five years. In a 200-unit building he manages on the Upper East Side, the board has okayed a request for a sublet — its first in 10 years.

Mort Rosen, a partner in the law firm Rosen & Livingston, says a few boards have asked him to look at their sublet policies and have inquired whether it's time to do a revision. "It really depends on the board and the circumstances," he says. Ways to amend the bylaws without opening the floodgates for subletting include phasing it in slowly, says Rosen. You might also set a minimum time that shareholders must live in the building before they can sublet, and limit the number of years a sublet can last — two years in any five-year period, for example. Boards can also limit the number of years a unit can be sublet and then insist that a shareholder move back into the apartment or sell it.

Some boards have a "hardship" policy, Rosen points out — for instance, if a shareholder is posted overseas for an assignment and is going to be gone for one to two years. Boards can consider allowing shareholders who are having a difficult time paying their maintenance to sublet while they get their financial house in order.

To avoid a run on requests for subletting, boards can consider charging a fee, payable up front when a shareholder wants to sublet. But be careful about setting it, warns Rosen; the higher the fee, the greater the chance of accusations of gouging. In Bailey vs. 800 Grand Concourse, a Bronx shareholder was having financial difficulties. The board approved a sublet, with the caveat that Bailey pay a 30 percent fee up front. Although he paid it, the amount was apparently too high; trapped by the high fee and high mortgage costs, Bailey fell behind in his mortgage and the bank foreclosed. Furious, he sued the board, claiming the sublet fee was illegal. He won the suit, and the co-op had to compensate him for lost equity.

When reviewing requests for sublets, boards must take many factors into consideration. At the very least, they need to consider expanding the definition of hardship cases, says Rosen, to help shareholders keep their apartments and keep paying their maintenance and mortgage on time. As Picaso sums up, boards "need to be ready for the worst."

Illustration by Jane Sanders

Adapted from Habitat January 2009. For the complete article and more, join our Archive >>