Bill Morris in Board Operations on February 28, 2013
The need for a solution arose because 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.
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 co-op 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 renovation credit increases
the co-op's value because it
forces people to upgrade their
apartments for the 21st century.
The co-op 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."
Points to Consider
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."
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