You don’t want to miss it but you probably will because your eye is on the big picture and selling apartments is not what you were elected to do and besides the meeting has gone on long enough and it’s time for dinner...
Last year, a rent-controlled tenant approached the co-op board of her building with a welcome proposition: if the board would buy her out, she would leave, and they could sell the apartment for a handsome sum. “She got a big pile of money, and we will get an enormous pile of money,” says Carl Tait, president of the board at 152 West 58th Street, near Central Park. When all is said and done, this 33-unit co-op will clear $600,000 in tax-free cash. The building is currently under contract with a buyer for $950,000 for the two-bedroom apartment.
Condo and co-op boards rarely find themselves in the business of buying and selling units, but when they do, they can pad a building’s reserves. Still, selling real estate is not an easy business and often means board members play the parts of apartment renovator, broker, negotiator, and financier. There are potential complications too: a building’s bylaws can scuttle plans, the state of the housing market can turn on a dime, and coming up with cash to float the deal can prove vexing.
Buildings come into ownership of apartments in various ways. Sometimes, as was the case at 152 West 58th Street, the building’s sponsor defaults on the maintenance, and the building ends up owning unsold or rental units. In other cases, a condominium might decide to exercise its right of first refusal for a sale and suddenly owns an apartment. Sometimes, the board decides to sell the super’s unit or its rented retail space. Depending on the value of apartments in the building and the condition of the apartment itself, the profit margin can vary. But the opportunity to sell a unit can have huge rewards.
“It’s a windfall for the building,” says Steven Birbach, chairman of Carlton Management. “There’s not much of a downside.”
Many buildings end up in possession of a vacant unit when a rental occupant moves out. With rent-controlled or rent-stabilized apartments, this often happens only when the tenant dies. However, if conditions are right, the building could negotiate with a willing occupant to leave under sunnier conditions. But those negotiations can be tricky. Rental regulations provide strong protections to a rent-controlled or rent-stabilized tenant, who will often want a sizable severance price, especially if the apartment is in a desirable neighborhood.
Before cutting a deal, first consider the tenant’s particular protections. Is his income so high that he might lose his rent-protected status? Is the rent-stabilized unit close to the $2,500 a month threshold and likely to soon become market rate? These issues could provide the building with leverage when negotiating.
At the same time, the board and building management should carefully assess the value of the unit. In some cases, it won’t earn you enough to be worth the trouble. If it’s a “classic seven” on the Upper West Side, with a 45-year-old tenant who’s paying $1,200 a month, negotiating a buyout package may be a good idea. However, if it is a ground-floor studio in Queens, the rental income might be low.
“What’s it worth to pay these people to leave?” says Steve Wagner, a co-op and condo attorney and partner with Porzio, Bromberg & Newman. “That is an analysis that the board will have to do in order to decide if it’s worth their while.”
In the case of 152 West 58th Street, the tenant approached the board in 2011. At the time, the housing market was still soft and board members worried they might not be able to sell the unit for a good price. Their reserves were low and they didn’t feel comfortable taking out a loan. They offered her a small sum, and she demurred. Nine months later, when a similar unit sold for close to $1 million, they circled back to the tenant and agreed on a price that made everyone happy. In all, it cost the building $325,000 to settle and renovate the property for sale.
The Right to Refuse
Condos have limited options when vetting potential buyers. If the board doesn’t like the terms of a sale or a buyer, it can exercise its right of first refusal, which means it must buy the apartment from the seller for the same price as the proposed buyer. But that option is rarely exercised because the time permitted to exercise the right, sometimes as little as 20 days, is shorter than the time it takes to arrange and close the deal. However, occasionally a board does successfully exercise its right and take ownership of a unit. This requires swift action and careful planning. But in some cases, the payoff can be tremendous.
“You really need for it to be substantially below market value to be worth doing what you need to do,” says Elliott Meisel, a co-op and condo attorney and partner at Brill & Meisel. “It’s very difficult.”
Back in 2000, the condo board of 279 Central Park West received a request for a waiver of its right of first refusal from a seller who was about to close a sale. Convinced the selling price of $1.88 million was below market value, the members felt that, by matching the offer, the association could resell the unit for a greater amount and make a profit. The board quickly called a meeting of all the unit-owners to get their okay, and enlisted a broker to find a buyer willing to pay market value but put down a $1.88 million deposit – the entire sum the building needed to pay the seller. “We knew that we wanted to do it, but we had to find both the money and the time for authorization,” says Meisel, who represented the condo.
The broker delivered a buyer, but the building still needed more time to call a meeting and obtain unit-owner consent, so as the 20-day deadline approached, the board requested more information to restart the clock on the condo’s time to exercise its right of first refusal. That enabled the board to get the necessary approval and funds it needed to close on both transactions simultaneously, also saving the building transfer costs. The apartment closed for $2.12 million, netting the condo $200,000 after taxes and fees.
Read (and Write) the Fine Print
When a co-op board sells a unit, it must wear two hats: one as the seller and the other as the discerning board carefully reviewing a potential shareholder’s financial dossier. Just because a board enters into a contract with a buyer doesn’t mean the board has relinquished its right to reject the shareholder. To keep the two roles separate, make sure the contract spells that out clearly.
“There should be no confusion with a board sending out a contract and automatic approval,” says Karen Schwimmer, a transaction attorney at Porzio, Bromberg & Newman, who is representing 152 West 58th Street in the sale. “There must be an acknowledgment that the contract does not mean they’re automatically approved.”
The contract isn’t the only document that should be carefully vetted. Before a board puts a unit on the market, reread the building’s bylaws. Superintendent units, for example, don’t necessarily have shares and, in order to sell the unit, the board may need to allocate some. The same can be said for trying to sell roof rights. If a condo decides to exercise its right of first refusal, read the bylaws carefully to make sure there is enough time to complete the transaction. In some cases, the rules are designed to make it nearly impossible to execute.
If a building finds itself in a position where it must pay for a unit in order to sell it, coming up with the cash can prove tricky. Sometimes, a board will dip into its reserve funds. Other times, it may take out a loan. At 152 West 58th Street, the board reached out to the shareholders and asked them to loan the building the money at an interest rate of three percent for the first 12 months, and four percent for the next six, to pay off the tenant. Several shareholders stepped up.
A building must carefully weigh the risks before it dips into its reserves or takes out a loan on speculation. Markets can turn, fees can run high, and at the end of the day, a building may not net enough to take on the risk. “You are playing with someone else’s money,” says Meisel. “If you made a bad bet and the spread between what you paid for the unit and what you got wasn’t a lot of money, you could even lose some money.”
At 51 Fifth Avenue, the co-op board came into possession last year of a 2,000-square-foot two-bedroom apartment overlooking a church. The board enlisted a broker who told them to put the apartment on the market for $1.5 million as is. That’s when the property manager stepped in.
“I said, ‘You’re being silly and you should sell it at market rate!’” says Ellen Kornfeld, a management executive at the Lovett Company, of her conversation with the co-op board. “We got new floors, kitchen, bathrooms, doors, wall coverings. We did everything. We spent $140,000 on the renovation and we sold it for $2.25 million. Not a bad profit, huh?”
Renovating an apartment can add tremendous value if the apartment is in a prime location. Property managers often work with the same contractor who can get lower prices on finishings and materials.
However, in some cases, a simple paint job may make the most sense. A co-op in Freeport, Long Island, has been selling off unsold units in its community for decades ever since the sponsor walked away from 19 units in the 60-unit community. At the time, the co-op feared that the burden of so many unsold units would be a financial disaster. Instead, it has turned into a lifeline. Over the years, they have sold off units to pay for various capital improvements and collected rental income from the others.
“They thought they were looking at foreclosure and bankruptcy,” says Birbach of Carlton Management, whose firm handled the community. “I told them not to worry. I told them we are going to be fine. We rented them out quickly and turned a negative situation into a large positive situation.”
But Freeport doesn’t command the prices that Fifth Avenue can. So, when units are sold, they often sell for less than it costs to renovate a Manhattan apartment. Therefore, rather than gut-renovate the kitchen and bathrooms, Birbach recommends the building give it a fresh coat of paint, replace the carpet and give it new appliances, which comes to about $5,000. “It makes it sellable,” says Birbach. Currently, the building has one unit under contract for $120,000.
My Fair Broker
Once a board decides to put a unit on the market, it should interview several brokers. Start with your property manager, as many are often real estate brokers as well. Interview several candidates. They will suggest a price and can advise a building on what improvements will have the biggest payoff.
A broker serves another valuable purpose: she can act as a buffer between the board and the buyer, especially in the case of co-ops, where the buyer will also have to go through a board approval process.
“The situation is relatively sensitive and I instinctively think it would be good to put a little bit of distance between the board and the shareholder,” says Siim Hanja, a broker with Brown Harris Stevens. “It gets a little bit too close and personal. If it doesn’t go well, you’re laying the groundwork for some major conflict down the road.”
Some boards, lured by the prospect of avoiding the hefty broker fee, still go it alone. At 152 West 58th Street, the board decided to list the apartment on StreetEasy.com (a real estate listing site), in the New York Times, and on Craigslist. They saved money by not hiring a professional to come in and decorate the unit (called “staging”). Instead, they showed an empty apartment. In all, they spent $900 on marketing the property. At the open house, buyers would ask what the president of the board was like. “You’re looking at him!” Tait would respond, as he showed the apartment.
But if a board intends to handle the sale on its own, it must be prepared to field dozens of calls, coordinate open houses, and vet potential buyers all on its own. It also must trust that it can assess the fair market value of the property.
“If they’re not keenly aware of the marketplace, they could be surrendering significant value on the table,” says Hanja. “It’s just not their business.”