Jennifer Realty Revisited

When the Court of Appeals ruled last year that 511 West 232nd Owners Corp. v. Jennifer Realty Co. could go forward, some in the co-op community were ecstatic. "The decision is a major milestone, a step in the right direction towards getting our co-op to be what it was meant to be - neighbors being owners," said Michael Alvarez, the president of the co-op, which had initiated the suit against the building's sponsor, the Jennifer Realty Company last year. "While this is not the end of the battle over sponsors failing to carry out their offering plans, it is certainly the beginning of the end of that battle," attorney Marc Luxemburg, president of the Council of New York Cooperatives & Condominiums, observed at the time.

According to some, however, the hosannas may possibly have been premature, thanks to New York State Attorney General Eliot Spitzer. He has waded into the mix, proposing regulations that have stirred up some new dust over an old case. Under the attorney general's proposed regulations, sponsors would be required in offering plans to prominently disclose whether or not they will be selling 51 percent of the units. A similar warning must be provided if there is no provision for the owner-occupants to occupy a majority of the seats on the board of directors. But there is no requirement that the sponsor has to sell within a designated time period.

"To me, when someone commits to convert a building to a cooperative, which means apartments owned by owner-occupants, I don't see that as a right of the sponsor to hold onto units," notes James Samson, a partner with Bangser Klein Rocca & Blum. "Once he converts to cooperative ownership, he has to sell the units off. Not tomorrow, but I think sponsors should not be allowed to wait 15 years to sell." He adds: "I think the proposed regulations are outrageous. If he doesn't sell 51 percent, he will dominate forever."

"This is not right," agrees one New York attorney, who says the proposed regulations give sponsors too much wiggle room. "It's one thing to be stuck with rent-controlled or rent-stabilized tenants. But these new regulations say the sponsor can reserve units, and state he is not going to sell for forever - and it's still a co-op." That isn't a co-op, it's "a half-breed," insists the attorney.

The case against Jennifer Realty began in 1998. Frustrated that the sponsor still owned more than 60 percent of the units - 41 of the 66 apartments - and didn't seem intent on selling any in the near future, the board took the unusual step of suing the sponsor for breach of contract, claiming that it was implied in the offering plan that the sponsor would continue to sell units. It was the first such action by a board on record.

Under the Martin Act, the state law that governs cooperative conversions, for a housing co-op to be set up, a sponsor must sell either 51 percent of the units (known as an "eviction" plan) or 15 percent of the units, (a "non-eviction" plan). Co-op experts point out that banks have historically been reluctant to offer financing to prospective buyers in buildings where the sponsor owns the majority of shares - this reluctance dating back to the late 1980s and early 1990s, when sponsors defaulted on paying maintenance, sending co-ops into bankruptcy. Co-ops with high sponsor-owned unit numbers get less favorable terms for mortgage refinancing and tend to have greater wear-and-tear damage from the turnover in renter population, say co-op advocates who oppose a sponsor owning a majority of the co-op's units.

Steven Lief's situation is typical of this scenario. Lief, former president of 3515 Hudson River Parkway, a Riverdale co-op, says his building struggled for more than 10 years to convince the sponsor to sell his units. Between 1987, when Lief moved in, and 1999, when the board sued the sponsor for failing to divest a majority of the apartments, there hadn't been a single sale of a sponsor-owned unit. Of the 78 apartments in the building, cooperators owned only 26.

The board eventually dropped the suit when the sponsor sold several units but today, the sponsor, who controls 49 percent of the property, still makes himself heard in the running of the building. He has four of the nine seats on the board. "No member of the board of directors has been elected without his votes," reports the former president.

But others argue that such situations are the price of converting and that the Jennifer decision could have a chilling effect on conversions. Sergio Rothstein, a New Yorker who straddles two worlds - renting commercial space from a sponsor and co-owning three buildings himself - predicts that building owners won't convert their buildings if they don't have the freedom either to sell the apartments or hold on to them.

"What you want to have is the freedom to sell the building, to sell these units, under the circumstances when the prices are right, and, at the same time, retain some equity interest in buildings that you have built over time."

Some think the AG's position is a way to warn buyers - and that it was the best he could do with limited enforcement powers in this area. David Berkey, an attorney for 511 West 232nd Street and co-chairman of the state bar association's committee on co-ops and condominiums, calls the attorney general's proposed regulations "a step in the right direction."

Says Berkey: "The committee's collective feeling is that the proposed regulations are evenly balanced between the needs of the sponsor and the needs of the purchasers - that they provide information which is especially relevant to a purchaser, because you want to know if you are buying into a building, or whether the sponsor will hold forward for rental. I think the market will show sponsors if they intend to sell [just] a minimum number of units and hold [on to the rest], people just won't buy them."

He adds: "I don't think the attorney general could do much more. The only way they could get them to relinquish units would be to prove fraud, which is hard to do."

But Mark Axinn, a partner with Brill & Meisel, which represented Jennifer Realty, believes the attorney general's proposed regulations exceed his jurisdiction. While he is sympathetic to shareholders who want to control their buildings, giving shareholders that power lies with the state legislature.

"There is no question that the legislature could pass a statute requiring sales or requiring disclosure about sales, but it has chosen not to. And for either the attorney general or the courts to impose a requirement which is not in the law is overreaching."