Sponsor, Go Home

A co-op where the majority of units are still owned by a sponsor is stuck in limbo — it is a cooperative that exists for all intents and purposes as a rental building, unable to get a majority of owner-occupants. For some buildings, the relationship with the sponsor is amicable — the sponsor pays on time, tenants are responsible, and the board more or less is able to carry out its duties without too much interference. For others, however, it has been just the opposite. The directors feel like they have no control over their property, their investment, or their destiny. Whichever way it is, though, utter just two words and, suddenly, the boards respond with one voice, hopeful for change.

The words: Jennifer Realty.

Five-Eleven West 232nd Street is a spacious 1937 prewar building, located on the corner of Riverside Drive across the street from Ewen Park. It's a quiet setting on a narrow, one-way street. Eastern and western wings flank the central section of the building. Inside the main lobby, polished wax floors, chandeliers, and the original woodwork give the entrance a classical elegance.

In 1988, the property was converted to a cooperative, but the sponsors, the Wiener family doing business as Jennifer Realty, could only sell a handful of units and eventually retained 41 of the 66 apartments — 62 percent. As with so many other co-ops in similar situations, the typical problems of high sponsor ownership followed: buyers had a difficult time finding financing, the building struggled to get refinancing, and the board felt impotent because it was not able to choose the quality of tenants. In addition, the co-op was hamstrung by sweetheart deals on a laundry room and a parking lot.

The sponsor had ceded control of the board five years after conversion, but the new board was overwhelmed and unsure of what to do. Their hold also seemed tenuous. Of the five seats on the board, the sponsor, who also kept the presidency, retained two. What the board needed was a spark.

ALVAREZ TAKES CHARGE

Enter michael alvarez. Born and raised in the building, Alvarez is a financial analyst for Citigroup with a B.A. and master's degree from Columbia University. While reviewing the offering plan in 1995, he noticed that there were a number of deadlines set down in the document that needed to be met, such as regaining control of the sweetheart leases. In addition, he says, the property was "going down the tubes.

"The situation was dire. As the market went south, the quality of the tenants went down precipitously," says Alvarez, who actually lives in one of the sponsor's rent-controlled units and unsuccessfully tried to buy another unit from the sponsor. "We've had too many problems here because of that — break-ins, vandalism. The sponsor is here for the rent and is not as interested in the community as the board is. They can look at this and say it is part of doing business, getting a couple of bad ones." The board needed to act.

According to Alvarez, though, the board was afraid. Anytime a discussion turned a way the sponsor didn't like, it threatened to stop maintenance payments. Lacking the initiative and backing to challenge the sponsor, the board cowed to the pressure. What choice did they have? Seeing this reluctance, Alvarez, who is confined to a wheelchair, put his name up as a candidate in 1995, marketing himself as someone with the know-how and skills to get things done. The sponsor responded.

"He said I was a rebel, that I wouldn't be good for the building, that I didn't have the best interest of the co-op in mind. When the shareholders heard this, I think it backfired. I was elected."

Once in position, Alvarez immediately went to work. The board hired a new managing agent, HSC Management in Yonkers, and, under the guidance of property manager Carl Borenstein, hired attorney David Berkey, a partner with Gallet Dreyer & Berkey. Berkey had recently been successful in helping another HSC property deal with a sweetheart lease. Coincidentally, the sponsor at the other property was also Jennifer Realty.

THE BOARD TAKES OVER

Again, the sponsor threatened lawsuits. But this time the board didn't back down. It filed the paperwork and made the sponsor aware that it was going to litigate the matter. Then, possibly because of the other case, Jennifer Realty settled, breaking the sweetheart lease.

The board took control of the laundry room and parking lot. In less than a year, the momentum at 511 West 232nd Street had shifted. "This is what the board always wanted but it just lacked the unity, the strength, and the gusto to go after them," notes Alvarez.

In the next few years, Alvarez and fellow board members Maureen Gonzalez and Amy Saltzman set to work on fixing the "numbers and the bricks" from top to bottom. The finances at the property were given a much-needed overhaul. The sponsor had been lending money to the co-op and the building owed it $50,000. To remedy this situation, the board passed a one-time assessment to pay off the debt, essentially making Jennifer Realty pay itself back. With the income from the leases and a refinanced mortgage, the board was able to start working on a reserve, putting the funds in high-yielding treasuries. Those efforts paid off. There is now $250,000 in the reserve fund.

With that money, the board turned to capital work, inspecting the roof, the façade, the grounds, and the boilers. It then set priorities about what were the most necessary capital projects and began implementing them.

By the time 1998 rolled around, the board was feeling fairly confident about the current status of their property, but less so about its future. Observes Alvarez: "After doing all this stuff, we were still stuck with the fact that we are a landlord building. Ultimately, we can't and couldn't function as a true co-op. You can't run a board, you can't run board meetings or hold annual shareholder meetings when the sponsor owns the majority of shares."

But didn't the board accomplish much under the same conditions? Yes, says Alvarez, but there is much it can't do. For instance, because it has been unable to hold an annual meeting — the sponsor, with a majority of shares, won't let it — the board has been unable to change its proprietary lease. Also, the directors have had to appoint a board member because there hasn't been an election. In addition, because the sponsor has two seats, the board can't hold a meeting if someone is going to be absent. It had hit the wall.

THE LAWSUIT BEGINS

Looking back over the past few years, the board realized that no units had been sold since 1991. When the sponsor rejected a potential buyer in 1998, Alvarez and company decided to push the issue. They wanted sales to continue. When these talks with the sponsor went nowhere, the board opted to go to the next level: sue Jennifer Realty in order to force it to sell units. It was and is uncharted territory.

"I told them it was a chance," remembers Borenstein. "It could work. There could be a favorable settlement. But they had to be prepared to get nothing, as well. I was very skeptical. I couldn't tell them this was a guarantee."

The board and the community supported Alvarez, though, and litigation began. The board would claim that there was a breach of contract on the part of Jennifer Realty and that it had committed fraud, as well. Basically, that the sponsor knew at the time they converted that it was going to hold units and not sell them, thus misleading the board. It was 511 West 232nd Street's argument that all parties understood that the sponsor would work to sell its units.

Says Alvarez: "These shareholders have really felt that they have been cheated. They thought they were buying into a co-op, but they end up in a rental building. And the only way to increase the value of the property at this point is for the sponsor to sell."

Therein lies the rub, the sticking point that has made the property a focal point in the co-op community. What is the responsibility of the sponsor to sell? Where is that stated?

SEVEN LITTLE WORDS

Marc Luxemburg, a partner with Snow, Becker & Krauss and president of the Council of New York Cooperatives & Condominiums, says it is all right there at the very top of the front cover of the offering plan. In seven words.

Observes Luxemburg: "It says right there that this document is 'a plan to convert to cooperative ownership.' What does that mean? It doesn't mean convert to sponsor ownership. 'Co-op ownership' has a recognized meaning and no debate about it is needed. You can't get more explicit than that." And that's what he told the court of appeals in an amicus brief from CNYC supporting 511 West 232nd.

Jennifer Realty moved to dismiss the case and was successful on the breach of contract claim. However, the other causes were upheld. The appellate court reversed this later, sustaining the breach of contract claim and dismissing the others. The appellate court heard arguments on April 25, 2002, regarding dismissal of the case. Should the claim be upheld, the case would then continue. If not, if it is dismissed, 511 West 232nd Street's argument is over (for more details, see "Case Notes: An Implied Promise," Habitat, December 2001).

Jennifer Realty's attorney, Marc Axinn, a partner at Brill & Meisel, and the Real Estate Board of New York are arguing that the "promise" has to be more explicit than those seven words: "a plan to convert to cooperative ownership," especially when the court would be ordering one party to give up its property, essentially forcing it to do so.

"Just like you wouldn't want your own personal property taken this way, the same applies to the sponsor," says Axinn, whose firm also represents co-ops in other cases. Axinn wrote the original offering plan for the property.

"Jennifer Realty complied with all the laws," he notes. "Everyone understood. They offered all the apartments originally. Some were bought, some weren't. There is no rule that says they have to sell the unsold shares. So, 13 years later, the appellate court says there is nothing in the contract saying they must sell, but, however, it is implied that you would sell. There is a saying in the legal profession, 'Look into the contract before you look into the mind.' What the board is saying is that we should have looked into their minds. Yes, they agreed to the contract, but they were really thinking something else. It is wrong for the courts to be applying rules that are not there."

That, in essence, is what the case hinges on: are those seven words and a common belief by co-op purchasers that sponsors would work to sell their units enough to force the sale of those units? Did both parties agree to this when they entered the contract? If it was understood that they would eventually be sold, is 10 years too long to hold the apartments?

Axinn admits that the arguments made by 511 West 232nd Street are good policy arguments, but the solution, he says, is a legislative not a judicial one. The court has to base its decision on what is in the contract, not what it would like to have in the contract. He also points out that the offering plan provided for the likelihood that there would be unsold shares. Steps like sponsors yielding control of the board after five years prove that both sides were aware that there was little chance every single unit would be sold.

"The sponsor acted within the rules of the game and suddenly, midstream, you are changing the rules? That's creating the possibility of unforeseen risk and loss for the sponsor," argues James Shifren, a partner in Stroock & Stroock & Lavan who wrote the amicus brief for the Real Estate Board of New York in support of Jennifer Realty. "The answer must come from the legislature. Otherwise, who figures out when it is okay for the sponsor to hold on to units? Do they have to sell at a loss? How long can they hold onto units for? What is a 'reasonable effort' by the sponsor to sell? There are a lot of variables for this to work."

Shifren says the Jennifer Realty case does represent a new strategy by boards but predicts that the end result will be confusion and more litigation. Whichever way it goes, he thinks the court will give a definitive answer on the subject and that the ramifications of that decision and the end result of the Jennifer Realty case will be very far-reaching.

STILL IN LIMBO

In the meantime, little is happening at 511 West 232nd Street in the Bronx. Litigation has separated Jennifer Realty from the board, although it still maintains its two seats. The publicity the case has generated may not be helping the sponsor but it is helping the board. Seeing articles in the various law journals and periodicals has created excitement among the shareholders.

If there is anything this case proves, it is that boards may be growing more eager to go to the mat to get their independence. How long they can fight remains to be seen. Alvarez says other co-ops have offered to help pay their legal expenses, but he points out that the litigation is punishment in itself since Jennifer Realty is basically paying for suing itself.

How long can he keep going, though? He doesn't pull punches. If they don't win the appeal and the outlook turns bleak again, he doesn't think he or any of the other board members will stay long.

"If our goal is to take the units away from [the sponsor], how much longer can we stay if it doesn't work? Basically, I'll be working for the sponsor then, for free. He is the one benefiting most from having me on the board. The property looks great, expenses are down. It would be like giving him a free on-site manager for his investment."

His advice to boards in similar situations: try to work with the sponsor to get it to continue to sell units. If that doesn't work: "Try what we're doing. By hook or by crook, you have to get them to sell."

A decision from the appellate court is expected soon.