Co-op Boards Need to Rethink Resistance to LLCs

Any co-op that has sold shares to a ground-floor space to a doctor or other professional needs to wake up to the realities of today’s market. Times have changed. Many of these offices have been in operation for decades, but as their owners reach retirement age, a new generation of potential buyers has emerged. And that can create problems when a co-op board is resistant to change. 

“Co-ops are reluctant to sell to limited liability companies (LLCs) or any other kind of corporation,” says Stephanie Rappoport, a real estate salesperson with Compass. “They prefer an individual owner. They want to know and interview an individual before the sale.” 

Trusts are gaining acceptance with co-op boards, but many still resist selling to an opaque LLC, even if the space is for a professional office and not a residence. “It’s not a smart move to prevent entities from owning such a unit,” says real estate attorney Theresa Racht. “In this day and age, nobody is buying a medical office in their own name, it’s just not happening. They’re all running their business under an entity, that’s just how these kinds of businesses are run. And co-op boards need to become comfortable with that reality.” 

Many lawyers and brokers are of the opinion that a little re-education of co-op boards is overdue. According to Racht, selling co-op shares to an LLC is just a matter of changing the application process and the required paperwork. “For instance,” she says, “often these entities don’t have a lot of assets, so the co-op should require an individual guarantor who is responsible, somebody you can go to if the LLC doesn’t pay the maintenance.” In addition, Racht recommends a list of required documents: an agreement between the entity and the co-op stipulating how the space will be used; documents, provided by the state, that prove the person signing the papers is authorized to sign; plus tax returns from the entity, the guarantor, and the individual. “It’s important to look at all these papers from the entity and the principal,” says Racht.

Also the required references will be different. The co-op does not need to know if the doctor or other professional will be good a good neighbor; the co-op needs to know if the entity will be a good tenant. 

“Co-ops should see that there is really no harm to the building if such a sale is done right,” says Rappoport. “Plus, the co-op will get a higher price per square foot and a higher flip tax. There are so many benefits that outweigh the antiquated argument against LLCs.” 

Rappoport recommends that co-op boards re-educate themselves in partnership with brokers, management, lawyers, and accountants. “They need to understand the rationale behind LLCs and how sales should be handled,” she says. “I sell so many medical spaces that I became a huge advocate of permitting sales of commercial offices to LLCs or other corporate entities. Right now there are a lot of commercial spaces on the market. They need to be sold, because they are becoming a problem for the co-ops. I think it would benefit the co-ops and the LLCs. It’s a win-win situation.” 

Racht urges co-op boards to get educated now and not wait until a potential sale of a professional office space is imminent. Once there is a contract with deadlines and a bank commitment with an expiration date, the clock is ticking. Boards can’t always move that fast. “Any co-op with office spaces should have the requirements and papers in place,” says Racht. “The time do this is right now.”