The problem had been going on for two years but had increased dramatically in the last two months. An elderly couple who rented in an Upper East Side co-op was coming apart. The wife was suffering from dementia, and her hapless husband was overwhelmed with the responsibility of caring for her. She fought with him at times, would wander the hallways singing – and to top it off, the apartment was a mess. Frail himself, the husband couldn’t cope.
The board was in regular communication with the owner of the apartment – a “holder of unsold shares” – trying to resolve the issue when matters came to a head. “The wife was singing loudly in the lobby, and she flipped out when the staff tried to silence her,” recalls Neil Davidowitz, president of Orsid Realty, the managing agent for the property. “It was awful.”
The board is now in the unusual position of forming an alliance with the traditional foe of co-ops: the holder of unsold shares, more commonly referred to – often incorrectly – as the sponsor. “Sponsors and boards have adverse interests, and therefore there is a lot of natural tension,” explains attorney Bruce Cholst, a partner in Rosen, Livingston & Cholst. “Sponsors typically want one thing and one thing only: short-term profit. So they want to maximize resale and rental value in the short term. That means keeping maintenance and assessments to a minimum whether or not they are going to finance legitimate long-term building needs, and they want cosmetic improvements rather than capital improvements that benefit the building long term. Sponsors want non-restrictive sublet and pet policies because they facilitate resales, whereas boards tend to be more concerned with the long-term quality of life implications of these policies.”
When, why – and how – does a board work with this “enemy”?
The history of bad blood between the two sides dates back to the rental building conversion boom of the 1980s. Sponsors were the building owners who converted to cooperative or condominium status, with units sold to the public. However, in most cases, they would keep a number of apartments and retain majority control of the boards. As a result, they would have the largest say in rules, regulations, and spending for their buildings.
According to bylaws and court cases, this control was supposed to be relinquished after five years (or earlier if a certain percentage threshold was reached). By that time, sponsors had frequently resold their units to other investors; hence the name “holder of unsold shares” (which can refer to the sponsor or its successor). But even after the five-year point, some abusive sponsor/holder behavior did not change. “Sponsors would use building materials and building staff for sponsor apartments. Very often, that could be tens of thousands of dollars,” says Steven Birbach, chairman of Carlton Management. “And it used to happen a lot.”
Conversions would get extremely contentious. Once the shareholders gained control of their board, they would enlist a third-party managing agent to analyze the maintenance and building logs – known as forensic accounting – to bill back to the sponsor. Some cases went to court and took years to settle.
Even after relinquishing control, sponsors irritated boards because they were largely exempt from building bylaws and rules as a part of the conversion agreement. One of the sponsor exemptions was that they could rent out their units at market rates for an extended time (and sometimes in perpetuity). Boards preferred that all units be owner-occupied, because banks frowned on loaning money to buyers into properties with a large percentage of rentals. This further added to friction between the two parties. Sponsors did not have to get board approval for their renters or buyers.
Take, for example, the 72-unit White Plains co-op that has renters and owners living in the same building – although they might just as easily be living in different worlds. The board spent a number of frustrating years dealing with two holders of unsold shares. “They don’t have to answer to anybody, and they put whoever they like in these apartments,” recalled the board secretary when the situation was at its worst. “We have one apartment now where we know at least seven adult males live.” The board became aware of their presence only when a fire broke out in that unit and the fire department reported six beds in a two-bedroom apartment.
The other holder of unsold shares was equally “horrible,” noted the secretary. “He owns the apartment above me. People have been there for 15 years, and he hasn’t painted once. He hasn’t fixed the fixtures and, because of that, a fixture beneath the sink broke and I woke up at six in the morning to water pouring through my living room ceiling. He reimbursed me for out-of-pocket expenses, but he wouldn’t reimburse the co-op. He said they had insurance that would cover it. He’s not responsible.”
Yet even the bitterest of rivals must come together when there is a common interest at stake. When a tenant issue escalates to the point of litigation, for example, the holder will often work with the board to get testimony from shareholders to support his or her case, but may also try to get out of paying the legal fees. “Typically, things go smoothly unless the sponsor tries to ask for costs in addition to testimony,” says attorney Cholst. “But this is the sponsor’s legal battle.”
John LaGumina, of The LaGumina Law Firm, points to boards that worked with the sponsor – and boards that didn’t. In one case, a cooperative had not been paid maintenance for many months on an apartment owned by the sponsor because of an underlying dispute between the sponsor and the rental tenant. The board debated bringing a lawsuit, but the co-op’s manager attempted to establish a relationship with the sponsor in hopes of avoiding litigation.
“I supported the approach of the property manager,” says LaGumina. “In spite of the breach by the sponsor, costly litigation could result. The cooperative board accepted my advice, although not without some dissent from members who apparently saw my advice as a sign of weakness.” Ultimately, the agent was able to come to an acceptable resolution that involved virtually no legal fees, and the economic benefit far exceeded what a lawsuit would have brought in.
There are times, however, when it is impossible to come together. If the sponsor agrees to take a particular case to court and the issue drags on, and the tenant still refuses to comply, the “sponsor may have second thoughts about funding the case,” says Davidowitz, of Orsid, “and might say, ‘The courts are not going to see it our way. I’m not going to waste more money on this.’”
Consider this scenario, suggested by Robert Tierman, a partner in the law firm of Litwin & Tierman: “You’ve got a free-market tenant who is renting a year at a time, and he’s creating a nuisance so the co-op wants him out. The investor may say, ‘Let him be. He’s only got six months left on his lease and then I won’t renew. I’m not going to waste my time suing someone who’s only got six months left on the lease.’ But the co-op gets tough and serves a notice to cure both on the investor-owner and the subtenant. The landlord will then sue his tenant in landlord-tenant court. If he doesn’t do so, the co-op can default the two of them, which takes time and money, and the chance of getting legal fees back is not that great.”
A better approach would be to talk with the nonresident owner and work something out. “The co-op might cut them some slack,” Tierman says. “There is no advantage for the investor to have a disruptive tenant. The investor will probably want to have a good relationship with the co-op, too.”
An even more extreme situation would be if the case goes to court and the tenant agrees to rectify the issue, but the board still wants to move forward with an eviction. At that point, Davidowitz says, the relationship can become frosty, because the sponsor feels as if it has taken care of its responsibility – and paid the legal fees – but the board wants to push on, costing the sponsor more time, effort, and money.
According to Cholst, when the holder isn’t diligently working to solve the tenant problem because of legal costs or other issues, the board must exert pressure. “The board can start eviction proceedings for the sponsor himself – and this may motivate the sponsor to take responsibility even if he doesn’t want to.” If a sponsor owns numerous units, his share of a tax assessment can represent a large sum. The board may then have to confront the sponsor for arrears. “It can affect the co-op’s cash flow,” he adds. “You really need to lean on the sponsor.”
While there is no guarantee that a judge is going to rule in your favor, sometimes a lawsuit may be the only recourse. If you’re forced to litigate and can afford it, “you don’t have a choice,” attorney LaGumina says. “But there are uncertainties in any litigation. If you’re stubborn, it could backfire.”
In such situations, boards should strive to see matters from the sponsor’s point of view. Is a compromise possible? Remember: a bad relationship with the sponsor can lead to unnecessary problems. If the sponsor desires, for instance, it can withhold information that the co-op needs for a tax certiorari challenge. The co-op needs to know the rental income. If the sponsor doesn’t give that, the filing may be incomplete.
Melissa Gibbons, the board president of 17 East 96th Street for the past three years, says her board’s protocol for reaching out to a holder is as simple as an informal phone call suggesting a way of dealing with a tenant issue. “They usually get back to us within an hour,” she says. “Now, they might say they have a better idea, and we say, ‘OK.’”
Gibbons says her board and the sponsors have the same goals, so both sides try to keep the lawyers out of it, particularly when it comes to tenant problems. She is definite about one point: “If it can’t be [solved by] a simple knock on the door, then we’ll take the legal route.”