Stocks and Co-ops

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The stock market has gone up and down a lot lately. Does that affect the value of the stock that I own for my Brooklyn co-op apartment, or anything else about my apartment?

On one level, the stock that you own in your co-op is no different from the stock that you might or could own in Google or Apple. Your co-op is a corporation probably governed under New York’s Business Corporation Law, the very same law that governs most New York business corporations.

Also, the co-op stock that you own is, in some sense, publicly traded. The brokers in either case would broadcast the availability and terms of sale of such stock to the public at large (although they do so, of course, by very different means, with real estate brokers using Multiple Listing and other such services, and stock brokers using the various stock exchanges and the over-the-counter market).

Indeed, New York law considers the sale of co-op stock the sale of securities, with requirements quite similar to those that the federal securities laws and regulations impose on the sale of publicly owned business corporation stock. The co-op stock sold by investors (either the original sponsor of your co-op or those called “holders of unsold shares”) must be registered and accompanied by a disclosure document (an offering plan) describing the rights, obligations, and risks of the ownership of such stock (viz., apartment), and, so long as such investors continue to sell apartments, they must be updated with amendments that disclose the ongoing condition of the co-op and any material new developments.

Co-op stockholders like yourself should realize that the financial condition of their co-ops, and the physical condition of their property, will be critical to well-informed or counseled potential purchasers, just as the results and condition of publicly traded business corporations are, or should be, important to potential purchasers of their stock.

All that said, the value of your co-op stock correlates most strongly to the ups and downs of the real estate market generally. It is certainly true, of course, that when the stock market is doing well, purchasers may be more likely to also feel “bullish” about real estate, although many experts caution these days that the stock market is not the economy.

The good news is that apartment purchasers, of co-ops in particular, usually live in their investments. So they are less motivated (or able) to rapidly get into and out of such investments. Thus, the values of these co-ops will not have nearly the same degree of volatility as the value of even “blue chip” stocks. In the end, even if you suffer a downward hit in the value of your co-op apartment (as most have done over the past few years), you can grit your teeth a bit, stay put if at all feasible, and wait for the economy and co-op market to rebound.

One of our shareholders has asked our co-op to purchase his shares, saying that he cannot pay maintenance anymore, and has been unable to sell his apartment. Is there any reason we should not do this?

You must first and foremost consider the shareholder’s precise circumstances and thus the true motivation for making that proposal. If he has a loan secured by the apartment, he also probably cannot afford to pay that, and already might have attempted and failed to secure that lender’s approval for a short sale. If that is the case, then in all likelihood the apartment cannot be sold under current market conditions for even close to the amount of the loan, let alone for any additional amount that the shareholder might want the co-op to pay.

In those circumstances, it is quite tempting for you to simply say no, and let nature take its course. One day soon, the lender presumably will prosecute foreclosure proceedings against the shareholder, and co-ops have the great advantage of getting paid past due maintenance and other amounts from foreclosure sale proceeds before payments to the lender. So, in this scenario, the co-op might decide to suffer the rest of its shareholders’ subsidizing the shareholder’s unpaid maintenance until the foreclosure sale proceeds are realized, even though this could take quite a while, especially with the extra scrutiny of foreclosures recently. At least the co-op would know that someday it will likely get paid in full.

In the meantime, the co-op should take steps to terminate the shareholder’s lease, and to so notify the lender, as is usually required but also to prod the lender to action. This also will benefit the co-op in a scenario in which the shareholder is keeping current with payments to the lender but not to the co-op.

The co-op’s purchase of the apartment gets far more tempting if the shareholder has no loan, or a loan that is substantially less than the value of the apartment. The co-op must consider the question in such cases of why the shareholder simply does not sell the apartment himself. If the co-op feels confident, however, that the price is a good deal (i.e., there is real potential for profit on resale, whether currently or in the future), then the co-op might ask few, if any, questions, and simply and quickly proceed with the transaction rather than suffering the delay, expense, and uncertainty of living with a shareholder default situation for a substantial time, or risking that the shareholder might decide to ask for more in the way of purchase price, or change his mind altogether.

If no lender is involved, the co-op might want to purchase the apartment. Even if the price reflects little discount from current market value, or current market conditions make it hard to evaluate the apartment, buying the unit will eliminate the need for the co-op to invest funds in taking legal action against the defaulting shareholder. It also allows the co-op the option, before trying to resell it, of renting the apartment for a period, which should yield a rental in excess of the maintenance due on the apartment (even in a co-op with a large or otherwise unfavorable underlying mortgage).

This assumes that the shareholder is prepared to, and actually does, promptly vacate the apartment, so that it can be prepared and shown for resale or rental. Co-ops should not take this for granted, or even accept the selling shareholder’s assurances in this regard except under a properly structured and drafted agreement to this effect. In fact, your co-op should resist the temptation to save money by trying to consider, much less consummate, this transaction without the assistance of legal counsel. In essence, the co-op needs legal advice and assistance at least comparable to that given any other purchaser of a co-op apartment, even though the co-op is in many respects a “captive” purchaser, already in a legal and financial arrangement with the seller.

Typically, for example, the selling shareholder will want or need to stop paying maintenance immediately, if he has not already stopped, but to remain in possession for at least a month or two, if not much more, to make arrangements to move elsewhere, and to clean out an apartment in which the shareholder very well may have resided for many years. The co-op needs to deal with this carefully to avoid a protracted period without getting maintenance or rent on the apartment.

One option is for the co-op to accept ownership of the apartment at the earliest possible date, and allow the then-former shareholder to stay in occupancy pursuant to an agreement that has serious consequences for the former shareholder if he does not vacate by a date acceptable to the co-op. If the co-op is paying a substantial amount for the apartment (even if discounted from market rate, as it should be), this can be managed by the deposit of all or a portion of the purchase price in an escrow account upon which the co-op can draw to compensate for lost rent and any costs of having to evict a former shareholder who does not vacate when agreed.

I could go on from here about the details of the actual transfer of ownership from the shareholder to the co-op, and from the co-op to the new owner (assuming that the co-op chooses to sell instead of rent either immediately or at some point). Instead, just let me say that the co-op should purchase only with all of the protections standard for any other purchaser (e.g., securing a proper lien and judgment search to assure that the shareholder’s lender and other creditors have no ongoing claims on the apartment), and should sell only after making sure that the purchaser receives information and documents about the financial and physical condition of the co-op to assure compliance with any legally mandated requirements.