Maintaining Value

Some forecasters with rose-colored glasses would have us believe that the worst of this recession is over. But in New York City, where real estate prices are a precise thermometer for measuring the economy’s temperature, the big chill continues. According to StreetEasy, co-op sellers in Manhattan cut an average of 7 percent and condo owners an average of 7.8 percent off asking prices during the final quarter of 2009.

Nice if you’re shopping. Not if you’re selling. And downright dangerous if you happen to sit on your board of directors.

The traditional tool to protect condo buildings from sellers who try to dump their apartments at artificially low prices – and thus drag down the value of every apartment in the building – is the so-called “right of first refusal.” That allows the condo board to match any seller’s asking price and buy the apartment, then turn around and re-sell it at a higher price. While nice on paper, this tool is rarely put into practice for two reasons. First, it’s difficult for condos to take out bank loans and second, few have enough cash on hand to snatch an apartment off the market during the 15- to 30-day window spelled out in most bylaws.

Co-op boards, on the other hand, can borrow money and dip into lines of credit. So, several co-op boards have acquired the right of first refusal as a way to protect their investments – after amending the corporate documents, a move that usually requires the approval of a super-majority of 67 or 75 percent of shareholders.

In recent years, condos have shown a tendency to act more and more like co-ops – screening potential buyers, for instance, or trying to limit subletting. Now, thanks partly to the recession and partly to the willingness of boards to think outside the box, some co-ops are starting to act more and more like condos.

Georgetown Mews, a 930-unit co-op in Kew Gardens Hills, Queens, is a case in point. Originally known as Campus Hall Apartments because of their proximity to Queens College, these low-rise garden apartments converted to cooperative status in 1986. The co-op navigated some heavy seas in its early years, including sponsor defaults, unpaid bills and a dangerously low reserve fund. The co-op managed to stay afloat.

Then, in the late 1990s, the board’s attorney suggested that the co-op could further stabilize its finances by introducing submetering, acquiring the right of first refusal and getting Time Warner cable service at a bulk discount rate. Despite some shareholder apathy, the required “super-majority” approved the changes to the proprietary lease and bylaws.

The submetering and, especially, the right of first refusal were prized by the board. “At that time, I said this [right of first refusal] was the best thing to do,” says Mary Fischer, who has served on the board since 1995 and became president in 1999. “People with rent-stabilized apartments were going to sell at a low price, and we didn’t want that to happen.”

Since banks base their appraisals on recent sales at a property, a string of bargain-basement sale prices could have dragged down value for all shareholders. Timing is everything, and in this case it worked in the co-op’s favor. When several investors tried to dump apartments at below-market prices, the corporation was able to meet the challenge.

“Having money in our reserve fund was key,” Fischer says, “and timing was key because the reserve fund wasn’t being used for anything else. We didn’t have to borrow from our line of credit. If we’d had to borrow, I don’t think we would have done it.”

The board exercised its right of first refusal. The apartments wound up selling at prices that protected the value of all shares and brought in money that enabled the board to keep maintenance stable.

“It worked out in favor of the co-op,” Fischer says. “What we accomplished by exercising the right of first refusal was to keep prices up so that people refinancing their mortgages or selling their apartments didn’t get stuck with a low price. Now it has panned out that shareholders are getting higher prices than we got when the board sold those apartments.”

James Goldstick, vice president of Mark Greenberg Real Estate, has managed Georgetown Mews since 1995, and he strongly urged the board to try to acquire the right of first refusal. “What have you got to lose?” he asked the board.

Goldstick notes that the right of first refusal can be a valuable tool for a co-op board during boom times no less than during a recession. A divorce, sudden financial troubles, the death of a shareholder with survivors far from the city – such factors can lead to a low-dollar sale even in the best of times.

But not all shareholders agree that they’ve got nothing to lose by granting this power to the board. At two properties Goldstick manages in Bayside, Queens, the shareholders voted against giving the board the right of first refusal. “They turned it down,” he says, “because they were nervous about giving the board the authority to spend hundreds of thousands of dollars.”

However, once a super-majority of shareholders has agreed that their board should have the power, there’s little doubt when the board should exercise it.

Goldstick says: “When there’s a third-party transaction and the asking price is significantly below market value, it’s in the best interest of the board of directors to make sure the sale doesn’t go through. If the co-op is in a position to buy that apartment, I’ll call the seller and ask if the co-op can match the offer and buy it. Very often something can be worked out.”

And sometimes it can’t. In one co-op Goldstick manages, the right of first refusal was written into the bylaws and proprietary lease when the building was converted in 2004. When an apartment went up for sale at a price well below market value, the resident of the neighboring apartment made a bid to buy it. Call it a neighborly gesture by the seller, or call it opportunism by the buyer, or call it something else. No matter what it’s called, the board did not want the sale to go through at that price.

“So the board exercised its right of first refusal,” Goldstick says. “The buyer and seller were not happy. The board offered to waive its right of first refusal if the buyer paid $75,000 [to the corporation], which he did. So the board added $75,000 to the reserve fund – and only had to pay the state and city transfer tax of 1.4 percent.”

Goldstick and Fischer agree that such preemptive strikes are not always worth the trouble. “The board should not do this to make $10,000 to $20,000,” Goldstick says. “But if there’s a chance to make $75,000 to $100,000 without taxing shareholders, it’s a home run.”

But if you want to hit it over the wall, you’ve got to be ready to swing the bat.“Get your money lined up before this happens, whether you’re in a condo or co-op,” advises James Samson, the board’s attorney at Georgetown Mews and a partner at Samson Fink & Dubow. “You’ve got to be ready to move quickly, and you’ve got be quick finding a buyer.”

Michael Zerka, who manages The Columbia, a 302-unit condo at Broadway and 96th Street for Blue Woods Management Group, won’t argue with that. Zerka, according to Blue Woods president Don Wilson, was “outstanding” in recognizing a potential problem, bringing it to the attention of the condo’s 12-member board, and getting the members to rectify it. When a unit-owner died, the executor entered into a contract to sell the apartment for $900,000, well below market value. Zerka thought it too low, and, at his urging, a majority of unit-owners voted to exercise the right of first refusal. Five sealed bids were received within the tight 15-day window allowed in the bylaws. The apartment ended up selling for $1,317,000.

“And $417,000 went into the building’s reserve account,” Zerka says. “That was a great deal. A home run.” Adds Wilson: “It was a little complicated to pull it off in such a short time. I think [Zerka] did a great job.”