Bill Morris in Co-op/Condo Buyers on April 27, 2021
The Housing Stability and Tenant Protection Act of 2019 was intended to protect renters from unscrupulous landlords, but it has had unintended and harmful consequences for co-ops. These consequences stem from the fact that co-op boards have a landlord-tenant relationship with shareholders in the corporation – based on the proprietary lease – and have therefore been deemed subject to the same restrictions the law has imposed on landlords of rental properties.
These restrictions include limits on evictions, late fees, credit-check costs and application fees, among other things. Now another unintended – and unwelcome – consequence has come into play. By limiting security deposits to one month’s rent, the Tenant Protection Act has robbed co-op boards of a trusted tool when dealing with purchase applicants whose financial credentials are somewhat marginal: the escrow account.
Before the law went into effect, many boards negotiated an arrangement that granted purchase approval to marginal buyers if they put an agreed-upon amount of maintenance into an escrow account. Under some of these agreements, the money was refunded after a specified amount of time if the shareholder made timely payments; in extreme cases, the co-op held on to the money until the apartment was resold. If the account had to be drawn on to cover arrears, the shareholder usually agreed to replenish the account. All that is gone.
“It’s definitely a problem,” says Steven Sladkus, a partner at the law firm Schwartz Sladkus Reich Greenberg Atlas. “I was just dealing with a 50-unit Manhattan co-op where the buyer was borderline qualified. The board liked the applicant and wanted it to work – if the buyer agreed to put a year’s worth of maintenance in escrow. I told them they couldn’t do it.”
As always, there are workarounds. One is to secure a guarantor, a person or company that agrees to cover any arrears if the shareholder comes up short – a prevalent fear as the coronavirus pandemic continues to ravage the job market. Typically, a friend or relative of the buyer is the guarantor, but sometimes it’s a company that charges a fee. In rare cases, the seller, eager to consummate the deal, will agree to serve as guarantor.
The presence of a guarantor is no guarantee that the maintenance will get paid. “They may be solid financially today, but not tomorrow,” says Carl Cesarano, a principal at the accounting firm Cesarano & Khan. “If the guarantor can’t make the maintenance payments, the board may then have to start a lawsuit against the shareholder, which will cost time and money. In the meantime, they’re not getting their monthly payments.”
Cesarano advises caution when boards approve a purchase after a guarantor company signs a contract to cover the maintenance in case of default. “Boards need to read the fine print before approving such a purchase,” he says, “because that coverage may only last for a certain period of time.” When vetting personal guarantors, Cesarano adds, boards can give themselves an extra level of comfort by setting a high bar, such as requiring an income in excess of 40 times the monthly maintenance, the conventional bar for buyers.
Amid all this uncertainty, one thing is for sure. The Tenant Protection Act and the pandemic have been a one-two punch for co-op boards – and for buyers who are not quite capable of meeting boards’ purchase requirements. “I’ve seen boards that won’t even consider someone who’s on the margins,” says David Berkey, a partner at the law firm Gallet Dreyer & Berkey. “Now that boards can’t look to an escrow account, those people on the margins are having more difficulty buying co-op apartments.”
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