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Two Possible Worlds

Thirty years ago, no one could have predicted the wave of conversions and new construction that would make the co-op and condo industry – which then consisted of several hundred Manhattan cooperatives and a handful of condominiums – the important and successful segment of the housing industry that it has become. However, as Marty McFly discovered in the Back to the Future film trilogy, the future of our industry has various possibilities. Thirty years from now, our children could be witnessing an industry bogged down by litigation and disputes over minor issues, making co-ops a moribund form of housing. Or they could be seeing co-ops and condos as a major component of the city’s housing stock, an excellent investment vehicle for its inhabitants, and a mechanism for providing a superb quality of life for all. This article is like Marty’s DeLorean, which will allow us to go to the past and then back to the future and see if co-ops and condos, our metaphorical children, are ruining everything or if they have succeeded in improving upon what we have done in the last 30 years.

Out of the Past

First, let’s see where we have been. Co-ops have been around for over a century but really only came into their own in the mid-’80s. That’s when landlords started a wave of conversions to escape from rent regulations and, (unconsciously) following the advice of Jacob Astor, made a fortune by “buying wholesale and selling retail.” There was (and is) no law affecting co-ops other than the Business Corporation Law, but most co-ops were housing affluent people so there were few disputes.

However, following the wave of conversions, disagreements and litigation began in earnest. Since many fights centered around the payment of maintenance, the parties found themselves in landlord-tenant court with housing court judges being asked to rule on issues that could prove confusing: after all, the landlord is also a tenant and the tenant is part of the landlord, and the judges would be required to interpret corporate documents in a landlord-tenant context.

 

What about condos? They did not exist until 1964, when Governor Nelson Rockefeller and Attorney General Louis Lefkowitz sought out a form of housing where owners could obtain financing (until 1971, co-op apartments were not financeable). The pair stumbled onto the condominium, a housing concept in Puerto Rico. Using that as a model, New York State then enacted a Condominium Act – and the rest of the U.S. followed. But since 1964, the other states (and even Puerto Rico) have modernized their laws. Twenty-five states even use the Uniform Condominium Act and others the Uniform Common Interest Ownership Act, while New York has remained loyal to a law that is inadequate. Over the years, the state legislature has added several provisions. I co-authored a proposal that permitted financing – and then spent several years attempting to get the legislature to enact it, only to have it vetoed by the governor because he thought that it involved the rental laws. It was finally passed and signed into law when it was reintroduced by upstate legislators.

As a result of all this, the laws that interpret the rights and obligations of roughly half a million New Yorkers are based on a business law that has no applicability to housing, housing laws that are written with a landlord rather than a co-owner in charge, and a law based on an agrarian economy. Periodically, either the city council or the state legislature steps in to enact a specific law intended to satisfy a particular constituency, which makes the operation of the property more expensive for others and frequently more difficult to manage.

Unfortunately, this piecemeal approach seems to be based on a premise that assumes that the volunteer boards – who attempt to keep order – are avaricious and immoral. However, co-op and condo boards are not making a profit; they are only attempting to protect the homes and investments of their fellow owners. The reason there is so much litigation and so many disputes is that there is no co-op law in New York and the condo law is inadequate. What is required is a broader focus: enacting a co-op and condo law for the 21st century, if you will.

Facing the Future

If the state legislature fails to deal with this situation, by 2042 co-op and condo boards will be populated by owners who have little business or practical experience on which to base their determinations, because the owners who should be on the board will avoid it to shield themselves from lawsuits, liability, and aggravation. The price of housing will be stagnant because of the never-ending increase in maintenance and common charges caused by the costs of litigation, insurance, and the ever-increasing number and expense of governmental mandates and real estate taxes, the one form of tax that the city can raise without approval from the state.

Meanwhile, quality of life will deteriorate, because the boards will have no control over who purchases or leases an apartment – and dogs will be everywhere. Yes, dogs. Everyone who wants a dog will find a doctor to write a note saying the resident needs a “comfort dog,” thereby causing those people who are afraid of dogs, allergic to them, or who cannot stand the constant barking to move out of the city.

Since it might be discriminatory to forbid owners from piling on as much debt on their apartments as they want, there will be an increase in defaults, but since housing court judges don’t want to evict someone when the board may have done something that is, in the judge’s mind, objectionable, buildings will fall into disarray because the funds are not available to make repairs and replacements. By then, the city will have also enacted several new local laws, which require that a tax be paid if the building uses too much energy or perhaps if the building’s feng shui is adversely affecting the neighborhood.

However, realizing that the city on the hill – that was New York – is about to fall into the sea, Marty McFly picks up garbage from the street, fuels up the DeLorean and returns to 2012 and tells us what needs to be done. The initial step is to do what Florida, California, Texas, and many other states have done: enact a law that actually deals with protecting both owners and boards from second-guessing by actually specifying the law.

That means detailed provisions relating to board elections and operations, annual and special meetings, books and records, the role of managers, the requirement that mediation and arbitration be required to resolve disputes and that litigation cannot begin until after certain required steps are taken, an expeditious and relatively inexpensive way to remove troublesome owners from buildings, and ways of dealing with the myriad quality-of-life issues, including residents who refuse to allow needed repairs to be made.

It also means establishing a meaningful real estate tax law where co-ops and condos aren’t forced to deal with a Ponzi scheme each year: i.e., being compared to rental buildings and then having to prove that your garden apartment complex in Astoria is not worth the same as the Empire State Building. It means, as then-city council member Carolyn Maloney said in the 1980s, that a home is a home is a home. That’s right: treat co-ops and condos as if they were single-family homes stacked on top of each other and not a different kind of rental building.

Finally, it means requiring that an economic impact statement be completed by city hall, the city council, or the state legislature before they enact expensive mandates and legislation, so they can see what the latest idea is going to cost their constituents. Finally, it is going to require a separate part in the court to deal with co-op and condo issues, because regardless of the existence of the proprietary lease, these are not landlord-tenant relationships; co-ops and condos are more akin to partnerships.

There it is, our brave new world. Whether 2042 is like Pandora’s box and leaves us with nothing more than hope depends on people with foresight recognizing that they can no longer be passive regarding such an important part of our society. As for me, I will plan on spending the next three decades doing what I have been doing for the last three: trying to be part of the solution, not the problem.

 

Stuart Saft, a partner at Dewey & LeBoeuf, is president of the Council of New York Cooperatives & Condominiums.

 

 

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