Vendors who had not been paid in months. A budget deficit. Maintenance that had not been increased for five years. A vocal dissident group of shareholders looking to overthrow the current board. A capital plant that required work. A board that needed a solution.
These were the challenges facing one of my clients, a 360-unit, city-supervised Mitchell-Lama cooperative in Brooklyn, when the president proposed selling the building’s parking lot. The co-op consists of two high-rise buildings on one tax lot plus a 60-space parking area on an adjacent tax lot. (Had there been only a single tax lot for the entire real estate, there would have been the need to hire an architect and get a filing to separate that single tax lot into two.) The building was saddled with two mortgages, the collateral for which was, of course, all the co-op’s real estate. Open space existed between the two buildings.
Honestly, when I first heard the idea, I didn’t think that either the mortgagee or the Department of Housing, Preservation, and Development (HPD), the supervising city agency, was going to think too much of it. After all, as a budgetary planning mechanism, one-shot infusions of cash are traditionally not to be relied upon for long-term relief. But that parking lot property was worth over $3 million. That’s a pretty good cash infusion.
Naturally, the idea raised many questions: what did the governing documents say about the co-op’s authority to sell off its land? Did the shareholders have to vote on the matter? How long would mortgagee approval take – if we could get it at all? How long would a purchaser wait for such approval? Didn’t we want to include deed restrictions on what eventually would be built next to our building? Where were the shareholders then going to park? (It should be noted that many of the same considerations apply when a building looks at any underutilized space such as maids’ rooms, hallways, super’s apartments, or yards with an eye toward turning such spaces into cash.)
The certificate of incorporation, while not specifically giving the corporation the authority to sell real estate, did empower it “to do all other things necessary or convenient to carry out its powers.” That was sufficient. It specifically required the consent of the supervisory agency (HPD) to any sale of its real property. There was no provision for the shareholders to have to approve such a sale. The bylaws also had no relevant restriction and, in fact, specifically put the board in charge of the corporation’s property. There was nothing in the New York State Business Corporation Law that hindered such a decision.
No Sale Without Consent
I knew, even before looking, that no such sale would be permissible under the mortgage documents without the consent of the mortgagees, and so it was. I wrote to the first mortgagee and HPD (which had granted the second mortgage) requesting such permission (HPD needed to consent even though it had not been a mortgagee).
It appeared that neither mortgagee had ever received a similar request (i.e., where a borrower requested permission to sell off a good chunk of the lender’s collateral but also agreed to review the matter). In the course of this stage of the proceedings, which took well over a year, it turned out that HPD had actually assigned its second mortgage to the first mortgagee but no assignment was ever recorded. Aha. Yet another issue that had to be straightened out. Eventually, the first mortgagee would agree to the sale if HPD would agree. There were, of course, fees of thousands of dollars involved for an updated title report and many other documents required for such consent to be official.
HPD asked for a great deal. It wanted a statement by an architect that the floor-to-area ratio of the remaining lot would not be affected. This is not something a lawyer would generally consider, but we did it to protect our client. It would have been unfortunate to have spent money on the preliminaries only to find that the high-rises on the property that remained after the sale now violated zoning restrictions since the property on which they stood had now been shrunk.
HPD wanted its lawyers to review the matter. They subsequently decided that the case had to go through a uniform land use review procedure (ULURP), which could take another 9 to 12 months and would involve a public review component and additional work. The lawyers also ruled that, since the property was originally granted to the corporation by the city, the matter required the consent of the city council and the mayor. Following much discussion, we were able to convince the city that ULURP was not necessary and, after many more months, we obtained consent.
Meanwhile, I was negotiating a contract with the purchaser selected by the board (there was much talk regarding brokers and brokerage agreements, although the corporation eventually found its purchaser without such assistance). One of the directors was a real estate broker, a fact that raised its own questions. She did not receive – nor was she entitled to – any commission on the sale, although she had acted as liaison for the board during negotiations with the purchasers and their attorney.
The board had also decided that it would sacrifice certain open space on the (remaining) tax lot on which its buildings stood in order to recreate the 60 parking spaces there. We required that the purchaser pay for an architect to determine if this was possible and, if so, to draw up the plans for it. We required the purchaser pay for and create the new parking lot before the closing. We had to escrow seller funds in case we were unable to close (because we never got all the required consents). But the purchaser had spent money to build the replacement parking spaces and wanted to be reimbursed. We required certain insurance coverage for the purchaser and its contractor(s). We put in a deadline after which either party could cancel the contract. But necessary consents had not yet been obtained. I required the purchaser to cooperate with inquiries by HPD and/or the first mortgagee. I provided that if the mortgagee conditioned its approval on a pay down of the mortgage, we could cancel the contract. I contracted that there would be a deed restriction that the property sold could only be used for residential purposes. There were many considerations.
The End Is But the Beginning
From beginning to end (and there were certainly moments where I doubted this transaction would ever close), the sale took three years, involved lots of money held in escrow, lots of expenses and fees, and lots of tangential issues. It was nearly anticlimactic when the closing actually occurred (and the purchasers first showed up with uncertified checks!), but occur it did. With HPD’s approval, a chunk of the net proceeds were used to pay off vendors who had patiently waited for satisfaction. The bulk of the money was put into a restricted capital reserve, which will be needed to make necessary building improvements. Since the funds cannot be used for operating, the deficit still exists and a maintenance increase is about to be imposed to remove the deficit.
As in every building, there are still shareholders who are unhappy. But the corporation can now fund millions of dollars in needed capital improvements without refinancing (and a further maintenance increase) or additional borrowing (and further maintenance increases). The money was sorely needed and happily received.
Had this been a private cooperative (or had there been only a single mortgage), the approval process would have been streamlined. This board originally wanted to use the sale proceeds to pay off its first mortgage and save hundreds of thousands of dollars annually that could be used to fund operating expenses. While HPD did not permit this (believing that building repairs should take priority) a private cooperative board would have had more leeway to decide how to use these funds.
In either situation, the input of the cooperative’s accountant is valuable and recommended. In both situations, the issues of initial document review, consents, contract negotiation, physical practicalities, and a determination on the use of the proceeds, apply.
The process was far from simple. But it can be done. And in the end, that’s what counts.