New York's Cooperative and Condominium Community
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How Windsor oaks developed a renovation credit to keep apartment values from spiraling downward.
Floor pricing can help co-ops avoid “fire sale” prices, which devalue the whole building.
Ronald Kaye moved into the sprawling, campus-like Windsor Oaks apartment complex in Bayside, Queens, in the 1960s. Back then, the garden apartments – in 53 two-story brick buildings sprinkled across 40 acres – were rentals. Windsor Oaks went co-op in the 1980s, and Kaye, an accountant, eventually became a shareholder, then a board member. Today, he’s board president.
When he joined the board in the 1990s, it had already established minimum sale prices as a way of protecting the value of all shares, a practice known as “floor pricing.”
But as the property aged, disparities arose. Some apartments up for sale had been renovated several times, while others had been left virtually untouched since the complex opened in the 1950s. It was a middle-income property with an aging populace, so many sales came in the wake of shareholder deaths. In such cases, survivors were frequently eager to unload the apartments and were willing to accept “fire sale” prices, according to attorney Eric Goidel, a partner at Borah, Goldstein, Altschuler, Nahins & Goidel, who has represented the board for the past 27 years. Floor pricing was a way of preventing such lowball sales.
“In the case of estate sales,” says Goidel, “they often tried to sell without great regard to price. The board wanted to avoid a death spiral – down, down, down – in prices.”
But it wasn’t the only challenge facing the co-op. “The board had to wrestle with several issues,” Goidel continues. “What do you do for someone who put money into their apartment? What do you do for a person who bought in 2007 at the peak of the market, while an original shareholder bought in for $20,000? Even in a downturn, the market wasn’t the sole factor driving prices; so was the condition of the apartments.”
Says Kaye: “We’re always looking at our sales, to see if they’re keeping up with prior years. When the market turned [in 2007], some of the fixed-up apartments were selling, but people who hadn’t done work on their apartments were having trouble selling.”
Even before the market soured, Kaye and his eight fellow board members had started talking about a way to retain the floor prices while taking into account the disparity in the condition of apartments – and therefore the prices they were likely to fetch on the open market.
“We did not want to lower the minimum prices,” Kaye says, noting that the apartments come in two sizes, with minimum prices currently set at $209,183 for the smaller floor plan and $232,126 for the larger. “If you peg the minimum too low, the banks make that the market price and that lowers the value of the whole property.”
The board’s discussions led to a novel solution – something board members call a “renovation credit.” Here’s how it works: if an apartment is in need of work and is unlikely to fetch the board’s floor price on the open market, the seller can reduce the asking price by as much as 10 percent – provided the buyer agrees to pay the full floor price and invest the difference in renovations to the apartment. That “renovation credit” is then put in escrow and up to 90 percent of it can be released to pay the contractor for the cost of the work. The remaining ten percent is paid after the managing agent inspects the apartment and confirms completion of the work.
“We’re rewriting the rule now,” Kaye says. “The new maximum renovation credit will probably be higher, about $30,000, which will cover a kitchen and a bathroom, or whatever’s needed.”
He estimates that about one-fifth of sales now involve a renovation credit. As the city’s real estate market has picked itself off the floor, sales volume at Windsor Oaks has picked up, Goidel says, while prices have stabilized.
“Over time,” he adds, “the renovation credit has increased the co-op’s value because the sale process forces people to bring their apartments up to the 21st century.”
No Love Lost
But floor pricing is not universally loved at Windsor Oaks – or at many other co-ops across the city. According to a report in The Daily News, Tom McCluskey’s sister was living at Windsor Oaks when she died of pancreatic cancer, and soon after that McCluskey’s father was admitted to a Manhattan nursing home. McCluskey, a Queens native who now lives in Los Angeles with his wife and young daughter, put his late sister’s apartment on the market for $223,000, a price that met the co-op’s minimum. The apartment languished on the market for more than a year, causing emotional strain.
Mary Ann Rothman, executive director of the Council of New York Cooperatives & Condominiums, is not a fan of floor pricing, but she believes the Windsor Oaks board’s renovation credit may help people who are having trouble selling their apartments. “I think [floor pricing] imposes restrictions on people who need or want to sell that are unrealistic and unfair,” Rothman says. “In normal situations, there’s no need for a floor price. That’s what the market is. But this renovation credit is a compromise that allows people to move on.”
The Windsor Oaks board was not deaf to detractors of floor pricing. To determine if a distaste for the policy was shared by most shareholders or was the feeling of a minority, the board decided to put its floor pricing policy to a vote of all 898 shareholders last spring. The renovation credit almost certainly played a role in the final tally, which came back with an overwhelming majority of shareholders voting in favor of the floor pricing policy.
“People who criticize this policy ignore the fact that boards have the power to reject prices they deem too low,” Goidel says. “The board felt they had to do this because they have to balance the sellers’ needs with the shareholders’ need for value. At any given time, roughly three percent of the apartments are on the market. The board has a greater obligation to the shareholders who are not trying to sell.”
Several lawyers stressed that the renovation credit must be handled carefully, so that the discrepancy between the appraisal price and the sale price does not become confusing, misleading, or even illegal.
“Boards and managers should make sure the brokerage community notes the reasons for a below-market sale,” Richard Siegler and Eva Talel, partners at Stroock & Stroock & Lavan, wrote in the New York Law Journal in 2009. “Thus, if shares are sold at a discount because the apartment needs significant repairs, subsequent purchasers would know the reason. Presumably, if a subsequent purchaser knows the circumstances surrounding a below-market sale, that sale would not affect the price of a later sale so long as the physical conditions of the units are different.”
Renovation credits will work under one condition, observes Ronald A. Sher, a partner in the law firm of Himmelfarb & Sher: “You can do it if you show on the transaction documents that the price has been agreed to by a concession, and that concession has to be specifically described in the transfer documents.”
Lending institutions and their appraisers must also be considered, along with the unique position of potential buyers. If buyers get a loan based on the appraised price of an unimproved apartment, but then have to come up with the money to cover the difference between the appraisal and the floor price, they might get squeezed.
“I think the renovation credit is a unique and intriguing approach,” says Tom Smith, a partner in the law firm of Smith, Buss & Jacobs. “But I think a potential problem is the excess cash the purchaser would have to have since the bank’s appraisal is based on the apartment’s unrenovated condition.”
The answer, he believes, is to convince lenders to look not at the past, but at the future.
“It’s called a forward appraisal,” Smith says. “It’s an appraisal based on the apartment’s value after the work is completed.”
That shouldn’t be too hard to get, since the board at Windsor Oaks will put that money in escrow – and hold onto it until the apartment is brought into the 21st century.
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