Resident Shareholders, Unite!

This is FAR too complex a topic to address in a brief post, but I figured I'd try to contribute some basic insight from the perspective of an investor who has dealt with more than his share of sponsor-dominated co-ops over the years.

Most rental buildings that converted to co-ops did so in the mid to late-80s. The vast majority of former owners of these buildings did what you might call an 'honest' conversion from rental status to co-op, insofar as they made a diligent effort to sell as many units as they could at the time of conversion. That is, after all, the hallmark of a stable co-op - one whose shareholders are primarily a disparate group of owner occupants, not investors, and CERTAINLY NOT a single individual who owns a significant chunk of units that he sublets.

When a rental building converts to a co-op, if the former owner of the building still owns any number of individual units, he is known as the 'Sponsor'. While it would be understandable for a sponsor to continue to own SOME unsellable units (i.e. those owned by rent-stabilized tenants who cannot be evicted) even after the conversion, in theory, the sponsor's role should be to sell units to tenants or on the market as soon as he is able. In so doing, he benefits and stabilizes the co-op and, presumably, his own bottom line.

Unfortunately, that is not how all sponsors act. Some of them made co-ops of their rental buildings not because they had any real interest in selling apartments, but because they wanted to get out from under rent-stabilization laws. A little background on that:

In a rent-stabilized building, when a tenant moves out or dies, the apartment and the next tenant REMAIN subject to rent stabilization. Thus, even when a tenant moves out, the rent can only be raised by an incremental, state-mandated amount. But a co-op building, on the other hand cannot be rent-stabilized by definition. That said, individual units, however, CAN have their rent-stabilized status grandfathered in, but ONLY as long as the original tenant at the time of conversion (or his lawful, familial successors) maintain the apartment as a primary residence. Thus original, non-purchasing tenants at the time of conversion to co-op continue to enjoy the benefits of rent-stabilization, just as they would if the entire building remained rent-stabilized. But once those original tenants die/move out, the apartment becomes deregulated and subsequent tenants do NOT enjoy the benefits of rent-stabilization in a co-op building, unlike in a rental one.

This is the loophole that unscrupulous sponsors 20 years ago discovered, and continue to exploit to this day. A sponsor would convert his building to co-op and sell some nominal numbers of units to unsuspecting buyers in order to comply with state guidelines (more on that in a bit), but keep the vast majority of units for himself. Once the requisite thershold was achieved, the buildings were considered co-ops, but for all intents and purposes, since the vast majority of units were held by the sponsor and subleased, the building was operated as a rental. The sponsor might have refused to sell 85,90, even 95% of units in the building. Then the waiting game kicks in. As tenants move out, the sponsor then had the capability to re-rent the apartment, just as he would in a standard rent-stabilized building. Except because the apartment is in a co-op, any means of stabilization/rent 'control' dies with the tenant. The landlord has the right to rent it out to whomever he pleases, and without the consent of the board.

In theory, the sponsor is supposed to do his damndest to sell the units off as they become available. And indeed, when units became available in newly 'hot' areas during the boom, some of these unscrupulous sponsors did indeed start selling off inventory. But many others did not. They took advantage of vacancies to re-rent apartments to new people for higher rents. The sponsor benefits while the co-op and its shareholders usually suffer.

This course of action is devastating to co-ops for a number of reasons. First and foremost, if the sponsor owns over 50% of the shares, it's generally impossible (or extremely difficult) to get financing on an apartment. Thus, those intrepid pioneers who bought the very few apartments in a particular building that is being converted to co-op are screwed if they try to refinance their original loan (usually given by the sponsor himself) or if they try to sell to an outside party. With buyers unable to finance a purchase, the apartment effectively becomes valueless.

Another way the high sponsor ownership in a building can kill a building is with undue control of the board, managing agent, attorney, etc. Unfortunately, many co-op shareholders assume that the party that owns the majority of shares in a corporation controls the board. This, however, is untrue. By law, a sponsor CANNOT control half or more than half of the board, no matter what percentage of the ownership he has. And utilizing the sponsor's preferred managing agent or attorney is a clear conflict of interest.

Co-op shareholders who live in buildings with high sponsor control must be EXCEEDINGLY diligent when it comes to deciding who does what kind of work in a co-op. Remember that sponsors and managing agents have NO right to dictate who the lawyer or managing agent is, and they are only allowed a minority of the board. Once you realize that, you recognize how much power you have.

You most read and understand the by-laws of your coop corporation and your proprietary lease.

The by-laws say when, usually after 5 years, the sponsor must give controlling, more than 1/2, the membership of the board to shareholders.

The by-law will spell out how voting is to take place and how to hold a special election. After 5 years the shareholders elect their won members to the board. If it is a 7 member board you elect 4 members. Voting is usually cumulative, that is 1 share = 1 vote. You can vote %100 of you shares for 1 person or 26% for each of 4 people. The sponsor will vote his or her shares for hie or her member I am surprised that no one from the AGs office was at the meeting as they are the regulatory agency for coops