Bill Morris in Board Operations on January 20, 2017
Under most offering plans, sponsors promise to sell apartments and eventually relinquish control of the co-op or condo board. But many sponsors flout court rulings and hold onto apartments – and board seats – for years. This prevents co-ops and condos from having the majority of apartments occupied by their owners, which makes it difficult for residents to refinance their mortgages, and for buyers to secure mortgages. It also prevents shareholders and unit-owners from controlling their own destinies.
But it doesn’t have to be that way. A textbook illustration of cooperation between a sponsor and a board is Devonshire House, a 98-unit condo near Washington Square Park in Manhattan. The Cheshire Group and its partners bought the elegant, pre-war rental building in 2007 and set about renovating and selling apartments. The developer sold its final apartment in 2016, after giving up its seat on the condo board.
“If we own one or more apartments, we want to have a seat on the board,” says Susan Hewitt, president of Cheshire. “We’re not interested in setting pet policies, but the sponsor has institutional memory and can come up with more efficient solutions to building systems, as well as marketing information.”
Hewitt realizes that her company’s willingness to relinquish control puts it in the minority among sponsors. She also understands why. “The Jennifer Realty case gives boards the right to sue sponsors [who fail to live up to the offering plan], but it doesn’t compel them to,” she says. “If no one complains to the attorney general’s office, no one will know about it. And sponsors don’t like it when boards get rid of them as the management company and take their hand out of the cookie jar.”
Leslie Fielden rented an apartment in Devonshire House when she was in law school and has lived there ever since. A real estate attorney, she now owns her apartment and is president of the five-member condo board. She had a ringside seat at Devonshire House’s conversion from rental to condo.
“From my real estate work, I know how contentious these things can be,” Fielden says, “but in fact, our conversion wasn’t contentious. That’s because we had the same goals as the sponsor: we wanted to maintain the beauty and character of the building and keep values high. The most important thing is for the board and the sponsor to understand that they have shared interests and goals.”
Another key is the sponsor’s ability to walk the fine line between being involved and being meddlesome. “This situation worked out for the board and the unit-owners,” Fielden says, “because Susan Hewitt didn’t get involved in the day-to-day running of the building, unless we asked her opinion as a real estate professional. When we had problems and unit-owners contacted me, she worked with us to resolve issues.”
The success story of Devonshire House may be the exception that proves the rule. Far more typical is the story of a 67-unit condo called the Wainwright in Forest Hills, Queens, where unit-owners have finally won a preliminary injunction and wrested control of the board from the sponsor – more than two decades after the conversion from rental to condo.
Roy Smith, the current board president, knows that the arrangement is fragile. “It is,” he says, “like detente during the Cold War.”
Sadly, the Wainwright is not the only building feeling the chill.
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