The evolving co-op market and legal environment.

The cooperative apartment market has been changing recently in significant ways under the impact of evolving market conditions, new laws and court decisions.

Over the past six months, all multifamily property owners in New York, co-ops included of course, increasingly have had to deal with health, safety, and environmental issues.

Co-op residents have gained more power to question sublet fees and to choose cable companies. Distressed cooperatives remain an important issue for residents and city officials, and we may yet see the passage of more legislation to control conversions.

Lead paint abatement potentially is a particularly onerous issue. Interest rates have risen and the higher rates have made the New York State Energy Investment Loan program more attractive than ever. New regulations on fire signs are going to keep management as busy as ever.

The Resolution Trust Corporation won the right in court to make failed cooperatives viable through rent deregulation of the properties it takes over. (Currently, tenant interests are seeking leave to appeal this decision to the U.S. Supreme Court.) Many owners of regulated apartments hope the RTC decision signals a trend, or at least will have some positive effect on their business. The court ruled that the RTC could disaffirm statutory leases (rent controlled and rent stabilized) on foreclosed apartment units held by the RTC and, thereby, impose market rental rates on these apartments, the rent regulations notwithstanding.

The Federal Home Loan Mortgage Corporation has been pursuing a similar strategy regarding the deregulation of co-op units on which it has foreclosed. But it has failed, at least initially, in a case involving a Brooklyn co-op apartment house that the agency took over when the co-op corporation defaulted on a mortgage. Freddie Mac had taken the case to the U.S. District Court for the Eastern District of New York to have the court declare that the apartments of former tenant shareholders were no longer subject to the protection of the Rent Stabilization Law. The federal judge denied the FHLMC's request for a declaratory judgment, and held that the former co-op apartments still were rent stabilized.

A judicial development that will have widespread effects among co-op owners is the court decision holding that a co-op board has only a narrow right to impose sublet fees. Co-op boards cannot impose sublet fees, for example, unless such fees are provided for in the corporate documents.

In the face of rising interest rates, the State Energy Office's Energy Investment Loan Program (EILP) should appeal to owners even more than the program already has. With the higher rates, owners now have more incentive than ever to take advantage of EILP subsidized low interest rates in connection with making energy saving capital improvements.

The 2.5 percent energy efficiency loans available with the EILP are quite attractive in today's market, and we recently arranged one for Celtic Park Owners, Inc., which owns a 749-unit cooperative apartment complex in Woodside-Sunnyside, Queens, NY. Using the EILP, the co-op recently closed on a five-year $359,000 EILP loan at an effective interest rate of 2.5 percent. The EILP covers financing for new windows, insulation, lighting and energy management systems, as well as new boilers and burners.

Another recent court case signaled a victory for the cable television subscriber, and a qualified win for cooperative buildings. In order to preserve the consumer's right to meaningful choice and price competition, the court ruled that a building cannot deny access to a cable company. According to the decision, co-ops cannot accept exclusive contracts for cable TV services. On the other hand, cable companies must minimize and compensate a co-op for any negative aesthetic impact of their cable installations.

Meanwhile, lead paint liability looms as a potentially destructive issue in the apartment market during the remainder of the Nineties. Perhaps as much as 95 percent of all of New York City's housing stock contains lead-laced paint, and a single lead poisoning lawsuit can result in an award as large as $10 million.

In the face of such potentially immense liability, insurers have successfully petitioned the New York State Department of insurance for the right to exclude lead poisoning coverage. As a result, lead poisoning liability increasingly is going to be difficult to insure against. Additionally, in the past six months, lead paint poison abatement regulations have been made stricter.

New York City Department of Health regulations now require owners to hire a trained "lead-abater" and to fully document procedures when removing and/or encapsulating lead paint to cure a violation.

A safety regulation, certainly less costly and controversial than the lead poisoning rules, is the newest amendment of the New York State Fire Prevention Code that requires the installation of reflective signs on all exits and on all entrance doors to apartments and facility rooms. The signs must be six to twelve inches above floor level, and they must label room numbers, exits, and room names (i.e., "boiler").

Proposed legislation that deserves the attention of the real estate and co-op industry involves pending bills that would tighten conversion requirements. Proposed changes include:

* Increasing the sales requirement for non-eviction plans to 25 percent of units sold to current tenants as opposed to the current 15 percent sold to any buyer;

* Requiring sponsors to correct serious building code violations and hazardous conditions prior to closing;

* Requiring conversion sponsors to post a security bond to guarantee their financial obligations for the first three years;

* Allowing shareholders the right to sue under the Martin Act. (As the Martin Act currently stands, only the attorney general has the right of action.)

Some of the important trends of the past six months raise more questions for the future than answers. For example, lead paint poison liability is an especially troubling area that has become more problematic as insurers seek to bail out and regulations tighten. And there are the issues raised by the RTC decision and Freddie Mac's following RTC's lead and demanding deregulation of apartments it holds after a foreclosure. Despite the recent adverse decision in Freddie Mac's suit, it will be interesting to see how the questions raised by these court actions impact the conversion process.