New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

HABITAT

ARCHIVE ARTICLE

Sublets as Value Booster

Most co-op boards frown on excessive subletting. They feel it can cause problems with financing and also may negatively affect the complexion of the building. There’s a co-op in Greenwich Village where a disagreement over sublets has almost led to internecine war. What’s the story?

We manage a 68-unit co-op predominantly made up of studios. Almost 30 of the apartments are rented out, and we have a real split – probably similar to our country right now – where some people want to allow subletting and some very strongly do not. We’re trying to find the best way to appease everybody. It’s been quite a challenge. There are so many studio apartments that people are not living there long-term, so it lends itself for rentals.

 

Almost 50% of the building is being sublet. That’s a red flag for lenders, who don’t like to see a high percentage like that. Have you run into problems getting financing or with buyers being unable to borrow money to get into the building?

Interestingly enough, we have not. And we have been told one of the reasons why we have not, even though it’s above that 10% or 15% threshold that banks would like, is because they’re mostly studio apartments. And the banks understand that it’s very hard to have couples, families or anything more than single people in studio apartments.

 

Two years ago we refinanced the underlying mortgage. We explained the building’s makeup and what was going on there and had a few banks who were more than happy to lend. So we were able to do the refi without a problem. But I will tell you, every single time another sublet application comes through, we get concerned.

 

As the property manager, are you the referee between these two warring sides?

Yeah, I think that’s a perfect word. The reality is there’s no one who’s 100% wrong or right here. So what we’re trying to do is, rather than give our opinion, to make sure that whatever decision this board comes up with has a long time frame, say a three- to five-year time frame. That way, if in fact people do have to stop subletting, they have time to do it.

 

The bigger issue is that the minute the sublet policy changes, the values are going to go down tremendously. We estimate these apartments could have a 20% to 25% higher value when people know that they can rent them out, especially in the West Village. Between the schools and the population there, even in these tough times, people always want to live there. And even throughout the pandemic, we have seen apartments sell there – one of the reasons being because they can be rented out. We had a family buy for their child who was going to NYU. So, it’s a real balancing act. But our point to the board is, don’t do anything rash, take plenty of time, and let people know a new sublet policy is 24, 36 or 48 months down the road.

 

There’s an idea in the co-op community that a high level of subletters and renters in a building is going to damage the texture, the character of that building. The so-called renter’s mentality. Have you found that to be the case at this property in the Village?

Not this building. This building is all studios and one-bedrooms, so you’re not going to have big families coming in, and you are going to have a lot of turnover and a lot of wear and tear. For the most part, these are single students or young professionals, and they’re all pretty much in the same place in their life. So yes, I do think if someone owns an apartment they may give it a little more attention or be a little more careful, but I don’t think it’s a problem at this building in the Village. We’ve managed this building for well over 10 years, and I’ve had as many issues with shareholders as with subtenants. So, while that concept makes sense, I just think you have to look building-to-building. 

 

When do you think you’ll have this puzzle figured out?

They’re going to have to have some solution by the first of the year. It’s just getting too contentious. And because of the pandemic, you have more and more people looking to sell their apartments and get out of the city. So, as apartments are going on the market, it’s only fair that buyers know if they’re not going to be able to sublet long-term. It’s certainly going to affect the pool of prospective purchasers.

 

To sum up, what would you advise other co-op boards that are tackling a revision of their sublet policies? 

Boards have to consider all of the shareholders when making these decisions. You can’t make a rash decision. They really have to weigh the pluses and minuses and how it affects everybody. Depending on how this decision comes down, the whole board could be voted off, and the policy could be changed again. So I think the most important thing when making a decision like this is to think it out, spend a lot of time and make sure you look at every different angle and everybody’s perspective.

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