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What rent should an ex-cooperative be charged?

When a cooperatively-owned apartment building is sold at foreclosure, what rents can the people still living there be charged? This question has been asked by lenders, bidders, workout specialists and appraisers for the last two years and they are still getting no firm answers.

In April, 1991, the courts decided shareholders of a defunct cooperative became subject to rent control as soon as the building was no longer cooperatively owned. This is usually the case when there is foreclosure on a first mortgage. Title to the building, formerly vested in the cooperative corporation, goes to the buyer at the foreclosure sale. The fate of the building's residents is still in question.

There are usually three classes of occupants: Former owners who live in their apartments; non-purchasing tenants who live in units held by the former sponsor; and people who rented after the conversion and, because the building was a cooperative, were not subject to controls.

The obvious solution is to charge all three classes in the same manner: people living in the building before the conversion would keep their rent controlled rent, and those who bought or moved in after this conversion would have the controls that were in place at the time they moved in or ceased ownership. This solution, however, avoids the underlying issue: who takes the risk of a cooperative conversion?

As it stands now, it is impossible -- or at least extremely difficult -- for a foreclosed cooperative building to be valued. The courts left the decision regarding first rents to the Division of Housing and Community Renewal (DHCR) after deciding that tenants who paid maintenance during the foreclosure were subject to rent stabilization. The DHCR has yet to consider the issue formally, possibly to create uncertainty in a effort to stall foreclosures.

For a building to be correctly valued, a reasonable assessment of the rent roll must be available. The lack of rent guidelines in this area have made that assessment nearly impossible to calculate methodically, so lenders and appraisers are currently using their judgment and speculating about buildings' rent rolls.

It is safe to assume that non-purchasing tenants will go on as they did before the conversion and default, subject to the same regulation. Tenants who rented during cooperative ownership are in a more tenuous position: the sponsor who could not sell the unit could charge a free market rent, which usually makes the actual rent of the unit higher than it would have been under regulation. Although there is no official guideline in this matter, the current proposal is to charge the tenant the same rent, but renewal leases are granted subject to the guideline increases.

The case of the former apartment owner is much more difficult. Should shareholders of a defunct cooperative be given the benefits of rent regulation after the lender forecloses? Or should they be charged the fair market rent for the unit, sharing in the risk of investing in shares o " a cooperative in an effort to help the lender or purchaser to recoup its investment? Another question remaining is how to set the unit's rent.

The still unofficial proposal involves using a "built up" rent method to set the first and subsequent rents: the last rent charged before closing of the conversion, increased by all guideline allowances since that date. This again seems to favor the tenant over the lender or purchaser, relieving him or her of any risk associated with a cooperative conversion and leaving the lender with a building that has little hope of being a profitable investment for a potential buyer.

The present uncertainty left by the DHCR in this area creates a de facto moratorium on cooperative building foreclosures. While this may be socially desirable, it is an extremely inappropriate way to deal with the situation. Although the present wave of foreclosures may have peaked, the issue of rents still remains and should be dealt with through public debate and legislative action.
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Title Annotation:Legal Review; rent pricing for apartment cooperatives sold at foreclosure
Author:Grant, Jeffrey D.
Publication:Real Estate Weekly
Article Type:Column
Date:Jul 21, 1993
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