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Co-op Owned Apartments: A Unique Business Decision

Apr 02, 2021

Andrew Stern, Tane Waterman & Wurtzel

Sometimes a co-op's most valuable assets are the apartments that it owns, but they have tenants in them. With money tight today, you might want to get these apartments back. The question is, how do you do that?
Co-ops in New York City often own apartments inside their buildings, and there are a number of ways to utilize them. Sometimes the answer is to rent them, but sometimes that's not what the co-op needs. And we may be at a point in our industry where more and more co-ops will want to take those apartments back from tenants and sell them or put them to other use. But in certain situations it can be difficult.
Let's say it’s a co-op that was converted a long time ago and eventually ended up owning those apartments that had at one time been owned by the sponsor. Is that a problematic situation?
It often is. If you have an apartment that the sponsor owned and it somehow came into the possession of the co-op, in some instances those preconversion tenants are entitled to rights under rent regulation. But there are more challenging situations. You often have co-ops that have taken apartments back in the context of litigation or in satisfaction of a debt, or they bought them from an estate. There are any number of scenarios where a co-op can end up owning an unregulated apartment and renting it out. But for various reasons — sometimes in order to comply with applicable regulations and sometimes for financial or business reasons — it makes sense to sell those assets. So how do you resolve the issue of the tenancies? That's where buyouts come into play. Because with the court systems being in the state they're in, it is often more efficient to find a business solution rather than a legal one or litigation.  
Can you give me an example of a business solution? What are the options here, and how do you do it?
Well, you have to approach the tenant and see if you can offer them consideration of one sort or another in exchange for the surrender of the apartment. You want that apartment vacant, so you're basically going to approach these individuals and offer them consideration when their lease expires or before the lease expires. In some instances, the residents don't have a lease, or they're not in there properly. It can run the gamut.
The issue that arises — and why it's so important to consult with counsel when you're making these moves — is that under New York City law, if you solicit these arrangements incorrectly, you could be harassing the tenants. This could expose you to all manner of liability, including compensatory damages, punitive damages, attorney's fees and civil penalties. It's a mess that no co-op board wants to be a part of, so you want to practice preventive medicine. You want to make sure that when you make your offer, you're complying with the necessary regulations in order to ensure that you're not doing anything problematic.
So how do you make the approach? Knock on their door? What exactly should you do?
You can knock on their door or send them a letter. Depending on who you’re dealing with, you've got to make a judgment call as to what the best approach is. But I would say, from a conservative lawyer's point of view, that under no circumstances should you make an approach without a written component. The reason for that is that you want to be able to demonstrate that you met the requirements of the anti-harassment laws, and the only way to do that is to make sure that your efforts to comply are memorialized in writing.
Let's say someone lives in an apartment and I’ve determined that it’s worth $400,000 on the open market. I knock on their door and I say, "We'd like to know if you're interested in moving, and if we can offer you something which would make that move a lot easier. I happen to have it written down here." Is that the correct method?
Right. What I would like when my clients make these approaches is to see them knock on the door, preferably with a person who has a relationship with the resident, so that it isn't actually predatory in any way, shape or form or even appears to be. In many instances where I'm handling cases, the residents don't have a right to extended occupancy. In fact, most of the co-ops are dealing with month-to-month tenants who don't have leases. And even if they did have a lease, if it's not subject to renewal there's an end date to their right to occupy the apartment. As a consequence of this, the market value of the apartment isn't really the underlying consideration for pricing.
So how do you determine pricing for an apartment?
It’s a business decision that boards have to come to, and they should consult the appropriate parties. From my perspective, when you have an instance where the real value of the buyout is the avoidance of litigation and the transaction costs that are involved in asserting your rights through the judicial system, that's really where the pricing comes in. For example, if you have to serve a 90-day notice on the resident and litigate a housing court case to assert your rights because they're a month-to-month tenant and they don't have a right to be there, the savings to the co-op by handling this as a business matter is really time more than anything.
But again, the exposure if you don't do it right actually far outweighs the pricing. So it's essential that when you approach the resident, you tell them, "I'm the owner" or "I'm an agent for the owner." Then you say, "The reason I'm approaching you is that we would like to recapture the apartment. We would like to offer you something in consideration for that." That could be cash, a waiver of rent arrears or whatever deal the board determines is appropriate.
You also have to tell the resident that they have the right to say no to the buyout, and that if they say no, they have the right to continue residing in the apartment, at least until a court of appropriate jurisdiction makes a determination. They have the right to say, "We don't want to be solicited." In which case, you can't solicit them without a judge's say-so for 180 days. They have the right to consult with an attorney. I tend to be upfront with prospective residents and tell them that they can find all the regulations on the Housing Preservation and Development website in a handbook called the ABCs of Housing, and that they should take a look at them.
In your experience, does this overall approach work?
It does. I mean, I've not seen it where you show up at the doorstep and the agreement gets signed with the person who was making the initial offer. But what you're really doing is inviting a conversation, because the resident may need an extra month or more to leave. They may want an additional sum of money. They may need another structure to the buyout deal. So there are a number of different factors that can come into play to make this an arrangement that's acceptable to both the co-op and the existing resident. And I say resident rather than tenant because sometimes they are month-to-month tenants, licensees or any number of things. But at the end of the day, they're the person living there, and you want to make your peace with them, and hopefully you want to arrange for a parting of company that's acceptable to all.

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