NEW YORK CITY

New York City real estate professionals are split on what effect the Federal Reserve’s expected raise in short-term interest rates will have on property values and real estate development. According to the latest survey by accounting firm Marks Paneth, 41 percent say an interest rate hike will cause co-op and condo values to decline, 34 percent say they will stay the same, and 18 percent believe they will actually go up.

The survey was conducted among more than 130 property owners, brokers, engineers, accountants and lawyers. Half of the respondents predicted a rate hike will slow co-op and condo construction, 41 percent said it will not slow construction, and 8 percent were unsure.

One thing most respondents – 62 percent – could agree on: a rate hike will do nothing to slow the galloping investment in New York co-ops and condos by foreign buyers.

The board, management, staff, and residents of a large Manhattan co-op suffered the harassing conduct of a shareholder but delayed legal action for many years. As the misconduct continued and spread to yet another category, the board decided that it could not delay any longer using the Pullman doctrine to terminate the shareholder’s proprietary lease. The board faced the daunting task, however, of securing the approval to move forward from two-thirds of its shareholders, even though the board struggled, as many do, to secure the presence of a majority of its shareholders at its annual meetings.

Worse yet, the board decided that it must act as the November and December holidays rapidly approached, and many shareholders would be focused on them, if not away altogether – and possibly having the holidays cast the harassing shareholder in a sympathetic light. The board decided to proceed nonetheless, and mostly within the confines of those holiday months, gathered and set forth in writing precise details of scores of harassing events, and other events of misconduct, as reported by more than 20 individuals, and formally presented them for votes first by the board itself, and next by the shareholders.

The board vote for termination was, not surprisingly, unanimous, with one abstention. But it was the shareholder vote that was particularly noteworthy. After reviewing the events and misconduct that the board presented, the termination was approved by the holders of more than 90 percent of the co-op’s shares. And soon afterward, the harassing shareholder communicated her willingness to vacate her apartment without requiring the co-op to prosecute.

Takeaway

The boards of large co-ops can secure super-majority votes of shareholders for Pullman-type proprietary lease terminations, but they should attempt to do so only if they are fully committed to the substantial and varied work that this will entail, including gathering information, soliciting proxies, and conducting the necessary meetings. If the shareholders sense a lack of commitment, they also might begin to doubt the validity of the grounds underlying the board’s request that they vote for termination.

Co-op shareholders might not always be so content with their board representatives, but they also will not tolerate a harassing shareholder. These shareholders realize that co-ops face far too many hurdles already, so at the very least it’s expected that they all will treat one another with a decent level of civility and cooperation. Even a harassing shareholder might get the message if a very high percentage of her fellow shareholders decides that she is no longer wanted as a resident of the co-op’s building. This shareholder’s offer to move out following such a vote was perhaps because she felt as Groucho Marx did when he resigned from the Friar’s club: “I don’t want to belong to any club that will accept people like me as a member."

We have represented many boards that have refinanced their existing underlying mortgages. Several have been faced with challenges from shareholders who believe that the expenses of refinancing, primarily the cost of prepaying the existing mortgage, do not warrant refinancing. The boards in question have carefully studied the refinancing market, the risks of rising interest rates, the ability to lock in favorable rates to build a reserve for future capital improvements, and the costs to be incurred if refinancing occurs. In the boards’ judgment, the benefits of refinancing far outweigh the burden of paying a prepayment penalty.

Therefore, some of the boards decided that it was in the best interests of all shareholders to move ahead with the refinancing. In one building, a small minority of disgruntled tenant-shareholders began litigation to stop the board from refinancing the mortgage. They also attempted to pass shareholder resolutions restricting the board’s ability to incur debt unless approved by the tenant-shareholders, and wrote letters to the proposed lenders objecting to the refinancing and threatening suit against the board.

The lawsuits were defended, invoking New York’s Business Judgment Rule, which provides that a court will uphold the decisions of a board of directors and not substitute its belief as to the proper decision on a particular business issue, provided it acts in good faith and in the interests of the shareholders as a whole. The proposed resolutions were ruled out of order, as they violate the terms of New York’s Business Corporation Law, which invests business decision-making authority in the cooperative’s board of directors and not in the shareholders. Finally, our firm worked with the board to explain its decision-making authority to the lenders and their title companies so they would not be intimidated by the shareholders’ actions and would close the mortgage refinancing.

Takeaway

When there are important financial decisions to be made by a board, such as refinancing an underlying mortgage, it should carefully study the benefits and costs of the transaction. The board should keep all shareholders informed of the steps it takes when making the study, and should advise them of the reasons why it decides to move forward with a transaction. It is wise for a board to involve counsel at this stage to help it craft clear communications to all shareholders explaining the process and listing the benefits to be achieved by refinancing. In many buildings, there may be some shareholders who do not agree with a board’s actions. By carefully explaining the benefits to be achieved, a board is likely to prevent extreme actions by shareholders, which might delay or upset the transaction. If, despite the board’s best efforts and intentions, some shareholders take actions to stop the transaction, it should have counsel defend its decision-making with the cooperative’s prospective lenders and title companies and, if needed, in court.

Do you have the right to review your co-op’s books to see how much the board paid in year-end bonuses to the staff?

In her Ask Real Estate column in The New York Times, Ronda Kaysen tackles this ticklish topic: “Boards use various methods to decide how to divvy up bonuses, and they do not have to enlighten shareholders about their methodology.  Shareholders do, however, have a right to inspect the books and records of a building, and staff bonuses fall into this category.

“Some co-ops allow shareholders to read board meeting minutes and review the co-op’s financial records.  You could start by sending an informal email to the board resident, asking for the info.  It is certainly the appropriate time of year to be curious about such things.”

The board had decided to revise its bylaws and proprietary lease. Now what?

It is a familiar story: the co-op corporation’s bylaws and proprietary lease were antiquated. Both documents were poorly drafted, rife with internal inconsistencies and conflicts with current law. There were no longer relevant provisions regarding the original sponsor, and they were not adequately meeting the current needs of the co-op. The time to update had clearly come, and the board asked its attorneys to draft revised documents. And that is where the story ends for far too many boards.

Preparing revised documents is the easy part. Getting to the desired result – obtaining approval of two-thirds of the shareholders – is the hard part. But we helped our client achieve it. How?

The nation’s largest banks have been working behind the scenes to unhorse the mortgage finance giants Fannie Mae and Freddie Mac – and, in the bargain, capture their hefty share of the country’s $5.7 trillion home loan market.

While the banks’ quiet campaign has the support of the Obama administration, according to a report in The New York Times, some housing experts fear that allowing big Wall Street banks to gain greater control of the mortgage market will increase costs for borrowers.  They say it also could hurt smaller lenders and lead to more taxpayer-funded bailouts of banks Washington regards as too big to fail.
Fannie Mae and Freddie Mac, which now back 80 percent of the nation’s mortgages, should not be dissolved, in the opinion of Elise J. Bean, a Senate counsel who oversaw a deep investigation into the causes of the recent financial crisis.
“Fannie and Freddie have their flaws,” Bean told the Times, “but that doesn’t mean the answer is to hand over their business to the banks.”

Affordable housing is beginning to look like an endangered species in New York City. To make sure it doesn’t go the way of the dodo, a City Council task force has proposed eliminating property taxes for the city’s 1,271 limited-income co-ops in exchange for tighter rules – including strict limits on the income of buyers and the price at which units can be sold.
 
As reported by The Wall Street Journal, the task force’s proposals sprang from a pair of yin-and-yang trends: distressed limited-equity co-ops fell behind on their property taxes by $7 million in fiscal 2014, while successful limited-equity co-ops have been selling for as much as $1 million – and, in one case, more than $2 million – effectively removing them from the city’s stock of affordable housing.
 
“The current situation both imposes more taxes than we think are necessary and leaves the public with far too weak guarantees of long-term affordability,” said Councilman Mark Levine, co-chairman of the task force, which also proposed requiring limited-equity co-ops to hire outside property managers. “It is crying out for reform.”

Since October 2012, all heating oil sold within New York City has had to contain at least two percent biodiesel (called B2). Biodiesel is a type of biofuel, a fuel oil that includes a plant product or any other organic compound such as processed vegetable oil. This lets it burn cleaner and thus more efficiently than petroleum oil. Some groups cite political and other concerns against the use of biofuel, but it's city law. On October 26, the New York City Council's Environmental Protection Committee debated a bill to raise the biodiesel percentage to five percent (B5) by October 2016 and, in steps, to 20 percent (B20) by 2030.

Smoking bans within individual units are legally enforceable. Certain condominium associations that we represent have amended their bylaws to ban smoking within individual units as well as within the common areas. Since courts have already ruled that secondhand smoke is a legal nuisance, condo boards usually respond aggressively to owner complaints about smoking odors. However, these boards determined that there were issues. Even if they could locate the source of smoking odors, it could be difficult to hold the offending owner fully responsible for allowing the smoke to infiltrate into other units because of the construction of their buildings. In addition, engineering solutions were potentially costly and not guaranteed to resolve the problem. To avoid the cost of investigating, arguing, and resolving recurring smoking complaints, the boards proposed a general ban on smoking within units, and the unit-owners resoundingly agreed. One unit-owner sued the board, claiming that the bylaw amendment unconstitutionally infringed on his rights of privacy and exceeded the powers of the condominium. After reviewing relevant case law, the court signaled to the owner that he surrendered certain rights by joining a condo association, and that the association owners did have the right to amend their bylaws to ban smoking. The unit-owner agreed in court to comply with the ban and to pay a substantial portion of the association’s legal fees. But despite his agreement, the owner has continued to violate the smoking ban. As a result, the association has been compelled to file a motion for contempt. The owner now faces substantial monetary fines and may ultimately have to sell or vacate his unit.
 
Takeaway
 
Any rule needs to be enforced to be effective. Associations need to be prepared to enforce a smoking ban to protect the interests of its owners. Smoking is not considered a disability under the Fair Housing Act or the Americans with Disabilities Act, for which a “reasonable accommodation” must be made. However, the power of a smoking addiction can apparently overwhelm an addict’s best efforts, even when faced with a court order.

Nosy neighbors rejoice: BuzzBuzzHome has just made it easier to get the scoop on the new construction in your neighborhood.

BrickUnderground reports that the map "lets you search by listings or by neighborhood (the better to find out area stats like price per square foot), as well as by filters like price, rental versus sale, number of bedrooms, and so on." Be honest -- you could learn about that new condo tower through press releases like everyone else, but isn't it more fun to poke around yourself?