Dealing with existing tenants during conversions.

Condominium conversions have once again taken center stage in New York City's exceedingly active residential real estate market, a boom not seen since the 1980's. During that time, most landlords were repositioning buildings to remove them from rent control and stabilization laws, and when these properties achieved the requisite percentage of sales, sponsors could then evict non-purchasing tenants.

In contrast to the 1980's, today building owners or sponsors are motivated to convert their properties for vastly different reasons. Chief among them are the increase in construction costs for new developments and higher operating expenses for existing rentals properties. In addition, shrinking profit margins for developers and landlords, extraordinarily high purchase prices for individual units, a strong New York economy and the topping out of rental prices, have all combined to make this an ideal time for a surge in building conversions.

For landlords interested in joining this conversion boom, there are two approaches--eviction and non-eviction--methods that both have pros and cons.

In an eviction plan, the landlord can remove any non-purchasing tenant, except eligible senior citizens (an occupant who is over 62) or persons with disabilities. Following the conversion, the non-purchasing tenant can remain in the apartment for either balance of the lease term or three years. However, landlords considering this option must keep in mind that in order for the eviction plan to take effect, the sponsor must have contracts to sell 51 percent of the apartments to the tenants.

On the contrary, in a non-eviction conversion, rent-stabilized and rent-controlled tenants who fail to purchase their units can retain rental status after the conversion and must be issued renewal leases. In a non-eviction plan, the sponsor is required to sell only 15 percent of the apartments.

Interestingly, tenants who are presently not protected by either rent control or rent stabilization, must purchase their units or move by the end of the current lease--if it ends prior to or during the conversion. Landlords need to consider that such a tenant has the right to buy their unit if they are still residing in the apartment when the final Offering Plan is accepted by the Attorney General and distributed, but do not have the right to a renewal lease if it expires while the conversion is proceeding. If renters remain in the residence prior to the declaration of a non-eviction plan, they must be issued a renewal lease at a not unconscionable rent, which has been interpreted as the fair market value at each renewal. Many believe regardless of the kind of conversion the sponsor selects, it is likely that market rent tenants will either purchase their units or the sponsor will quickly move to evict them when the lease terminates.

As a result, when deciding on the conversion plans a sponsor can consider a market rent apartment as a unit that is likely to be sold. Therefore, the higher the percentage of market rent apartments in the building, the more attractive an eviction plan becomes. If 70 percent of the tenants in a building are market rent tenants and 51percent of the apartments have to be sold to declare a non-eviction plan effective, landlords may seriously consider doing eviction conversions. However, if only 20 percent of the apartments are market rent apartments, there is less likelihood a building can be successfully converted under an eviction plan without a substantial discount in the prices.

The issue of vacant units can be two-edged sword. On the one hand, the more vacancies the more apartments the sponsor can sell, but if the building has excessive long-term vacancies when the Red Herring is filed with the Attorney General's Office (i.e. more than 10 percent of the apartments are vacant, which is called warehousing) the sponsor cannot convert the building. Therefore, if more than 10 percent of the apartments are vacant, the landlord will have to rent those apartments before proceeding with a conversion. Interestingly, the landlord has no obligation to maintain the building 90 percent rented the day after the Plan is filed with the Attorney General. Once the Red Herring is served on the tenants and delivered to the Attorney General for review, the landlord can evict as many tenants as they want in a non-eviction conversion, while in an eviction conversion the sponsor would want to leave the market rate tenants as month-to-month renters while the Plan is pending.

It has been nearly 20 years since the last flood of building conversions, leaving many current owners unfamiliar with the challenges of converting rental properties. While there are many considerations leading up to the decision to file with the Attorney General, the steps outlined above provide an owner with the best approach to the conversion plan, in order to capitalize on this presently hot condominium market.

STUART M. SAFT, ESQ.,

PARTNER, WOLF HALDENSTEIN ADLER FREEMAN & HERZ LLP, CHAIR, NATIONAL COOPERATIVE BANK