When the sublets in a co-op exceed about 25 percent of the total units in the building, trouble usually comes knocking. Values can plummet, buyers can have trouble securing loans, and the board can run into resistance from lenders when it tries to re-finance the corporation’s underlying mortgage.
Trouble was brewing in the co-op building at 111 Third Avenue, where 32 of the building’s shareholder-owned units were occupied by subletters – a shade over 25 percent. That number was not especially troublesome. But the sponsor owns 31 of the building’s 155 units, reducing the percentage of owner-occupied units, widely regarded as the barometer of a co-op’s health, to around 58 percent. That’s solidly in the danger zone.
“The co-op was reaching the point at which banks would be reluctant to lend on the property at all,” says the co-op’s manager, Seth Kobay, president of Majestic Property Management. “The board needed to take action to control the situation.”
While the co-op had the usual rules regarding sublets, the board realized it needed to do more. With the input of its attorney and manager, the board considered raising the annual sublet fee from one month’s maintenance to two, and it explored other alternatives to discourage subletting while not making it impossible to sublet.
Then came the aha! moment. The board decided to establish a “sublet pool.” They would cap the number of allowed sublets at 31 (25 percent of the shareholder-owned units). They added a $500 sublet application fee (in addition to the managing agent’s fee), payable to the co-op. They would rank each sublet order in the pool from 1 (most recent shareholder in the pool) to 31 (oldest allowed sublet). Anyone in a position higher than 31 would not have the option to sublet that year. Each year, the board would notify subletting shareholders of their positions on the list. It set a future date for longtime subletting shareholders to come off the list: in two years, they would have to decide whether to move back into their apartments and keep them, or sell.
By keeping a lid on the number of sublets, the co-op board was protecting the values of all shareholders’ apartments while strengthening the corporation’s borrowing power. In the bargain, the board increased its control over who is living in the building.
“While subletting is a recognized need for many co-op shareholders,” Kobay says, “it is not a given right. Boards are there to protect all owners from the dangers of undesirable people living in the building, and from the negative effect excessive subletting will have on values in the building.”
The board at 111 Third Avenue was just doing its job. Ingeniously.
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