Permit and Protect

The British are coming! And so are the French, Italians, Germans, and Greeks. With a weak dollar, co-ops may soon have to relent on restrictive admissions policies and let ’em in. But permission must come with protections. What are the risks that boards take in permitting foreign ownership? What steps can be taken to reduce risks?

Co-op Hotel. The initial concern is that the apartment will be used like a hotel by the foreign owner and the influx of transients will have an adverse affect on the building. However, this danger can be reduced by having the purchaser execute “a use and occupancy agreement” stipulating who can reside there and noting that any violation would enable the board to terminate the purchaser’s right to use the apartment. The agreement could also provide for liquidated damages.

Jurisdiction for Foreigners. A second concern is that the foreign owner will not be subject to local jurisdiction, necessitating expenses in locating the purchaser and serving him or her with a summons to New York courts, if necessary. This can be easily rectified or avoided if the foreign purchaser executes a “Submission to Jurisdiction and Irrevocable Designation of Agent for Service of Process” form, which can be part of the use and occupancy agreement or a stand-alone agreement. The form designates the Supreme Court of the State of New York in the relevant county and the United States District Court for the Southern District (Manhattan or the Bronx) or the Eastern District (Brooklyn, Queens, Nassau, or Suffolk) as the court having jurisdiction over all disputes between the parties. It also designates someone, preferably the purchaser’s attorney, as its agent for process-serving. As a result, the service of a complaint or other document on the local agent is equal to service on the owner of the apartment. (A copy of the submission to jurisdiction form can be found on p. 46.)

Timely Payments. Another concern is the fear, particularly in small buildings, that the foreign purchaser’s failure to pay his or her maintenance/common charges or assessments in a timely fashion will create a financial hardship. This risk can be greatly reduced by having the foreign purchaser place a sum in escrow from which the money can be deducted if required payments are not forthcoming. Moreover, in the event that the funds are used, the foreign purchaser would be required to provide additional funds so their original amount will always be held in escrow.

Nevertheless, cooperatives have a diminished risk of nonpayment because they have a first lien on the shares. In the case of foreign condominium purchasers, the risk is reduced because their purchase is usually all cash.

Fewer Full-Timers. A further concern is that there will be fewer full-time resident-shareholders or unit-owners to utilize the building’s amenities and assist in operating the building. However, that could also be viewed positively by the shareholders or owners who will have better access to the building’s staff and amenities.

An additional concern is that a foreign purchaser will change the nature of the building and, perhaps, require more amenities, which may increase the costs to the other shareholders or unit-owners who may not want the same things.

However, the desire of purchasers to increase amenities regardless of the cost or reduce services to lower costs is not limited to foreign purchasers. It is just as likely with the substantial increase in apartment prices over the last two decades that many buildings will be faced with the same concerns. Unless boards are prepared to take actions to reduce the market value of the apartments in their buildings or seek purchasers who do not want anything to change, it makes little difference whether the purchaser is foreign or domestic. Boards that take actions that reduce the market value of apartments will not likely remain in possession of their board seats for very long.