New York State Court of Appeals: sponsors must sell units quickly. (co-op apartments).
The case has been sparked by Jennifer Realty Corporation's refusal to sell more than 50% of the converted apartments at 511 W. 232nd St. in the Bronx, a building which has been turned into a co-op in 1988. Instead, the realty rented the apartments at markets rates, making it hard for the co-op to get refinanced and driving down the value of the units. Prior to the current lawsuit, however, the sponsors had no obligation to sell more than 15% of the apartments after the conversion had taken place.
Now, co-op lawyers say, the sponsors will have to take more responsibility for the financial well being of the co-op. According to Robert Braverman, managing partner at Braverman & Associates, the Jennifer case is groundbreaking because it recognizes the inherent obligation to sell on the part of the sponsor.
"There has never been any law which stood for that proposition," he says. "The sponsor didn't have to sell the shares within any period of time. And now the court has upheld the theory that at the time the sponsor has converted the building it took a duty to sell as many shares as it could to create a viable cooperative. This decision is a victory for many co-op buildings where sponsors refuse to sell co-op apartments despite a favorable market and an upswing in the sales prices."
Jeffrey A. Moerdler, a real estate lawyer with Mintz Levin Cohn Ferris Glovsky and Popeo PC, says the hoarding of the apartments hurts the shareholders in more ways than one.
"There are some buildings in New York where it is a very serious problem," he says. "In some cases, the sponsor controls more than half of the apartments in the building and lenders will not refinance it or will not refinance individual units. In most of these buildings, there is a negative cash flow and some sponsors are not financially strong enough to keep paying up."
But the Real Estate Board of New York challenges the contention that sponsors have any legal obligation to sell.
"There is no law or regulation that prohibits the sponsor from holding the share apartment indefinitely," says Warren Wexler, a spokesman for the Real Estate Board. "So that has been our position. But now the court found otherwise and it remains to be seen how the lower courts will rule on the individual cases."
Lisa Strobing, executive vice president of Bellmark, a residential broker, says she understands the sponsors' desire to hold onto apartments during a downturn, but ultimately, the units have to be sold.
"To sell is in the best interest of the shareholders because they will have an easier time getting refinanced or selling their apartments," she says. "When the prices are very depressed I can understand why the sponsors wouldn't want to sell. But in an environment like this, it's in the co-op board's best interest".
Asked why a sponsor would wish to hold onto 40 apartments for a decade, Strobing says the reasons may vary.
"If the sponsor thinks the units will stay at the same price or increase in value, selling might not bring as good a return as renting," she points out. "But it depends on the case. I know a landlord who just wants to maintain control of the building. So he holds onto his apartments and gets to sit on the board."
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|Publication:||Real Estate Weekly|
|Article Type:||Brief Article|
|Date:||Jun 26, 2002|
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