When a Stranger Calls: Too Many Transients

In every cooperative and condominium, you can expect there to be some tension between shareholders and unit-owners and those who sublet (in cooperatives) or lease (in condominiums). Although there are many reasons co-op shareholders and condo unit-owners would allow someone else to reside in their apartments, there are also reasons boards and neighbors may be opposed. And not without justification, either.

Renters as Transients

The typical problem is that renters are viewed as “transients” – less concerned about the quality of life in the property because they have not invested in it. A renter just pays rent each month to an absentee owner and has no reason to be interested in maintaining the building. Furthermore, when people constantly move in and out, it deteriorates the building and can potentially increase the owners’ capital costs.

Mortgages Denied

The other direct issue with excess subletting or leasing is that it reduces the likelihood that owners will be able to satisfy Fannie Mae and Freddie Mac’s lending requirements – making it more difficult for owners to get financing. Even if they can obtain financing, it may be for shorter durations or at higher rates. Moreover, the greater the number of nonresidents, the less desirable it is for someone looking to purchase, which can cause a reduction in available purchasers and, therefore, have an adverse effect on prices. The inability of owners to get financing or be able to sell their apartments for enough to repay their own mortgages could cause more apartments to be sublet or leased – a downward spiral for every unit-owner or shareholder in the building.

Losing Control to Investors

The number of owners leasing or subleasing their apartments can get large enough to give them control of the board, which would enable them to create policies making it easier for other owners to lease or sublease their apartments or to object to money being spent for capital improvements. Someone leasing an apartment is usually less inclined to want to spend money on anything but aesthetics.

It’s important to note that when we say “renters” we do not mean rent-controlled, rent-stabilized, or otherwise protected tenants who have been in the building as long as, if not longer than, the owners. Nor are we referring to sponsors who own the apartments in which the rent-controlled, rent-stabilized, and otherwise protected tenants reside.

The focus here is on owners who:

1. purchased their apartments ostensibly as their homes and later decided to get into the leasing business;

2. have a home elsewhere and consider the building to be their guest house;

3. are ignoring the risks to themselves and their neighbors by turning their apartments into illegal motels via Airbnb, Home Away, and others. Frankly, if someone owns a private house, they have all the right in the world to let anyone they want stay there; but in a vertical city such as New York where a great many people, including children and the elderly, live in close proximity of one another, no one should feel they have the right to turn their residence into a business.

Home Is Where You Live

Every cooperative’s proprietary lease and every condominium’s bylaws clearly provide that an apartment is to serve as the owner’s primary residence and cannot be used for or as a business. Every board should be enforcing those rules to the hilt. Since every board is subject to the Business Judgment Rule, ignoring a clear and present danger could result in a board member having personal liability in the event of a lawsuit – something that no board member wants.

Lost Insurance Possibility

Owners who list their apartments on Airbnb and inadvertently risk their neighbors’ safety and peace of mind could be creating a nightmare for themselves. Although the Airbnb money may be nice, owners risk their insurance if an accident occurs. They can also lose the favorable tax treatment on the sale of a home and be subject to higher transfer taxes by the city. At the very least, owners should look for the indemnification provision from Airbnb or their insurance to protect themselves and their property from damage. My guess is there is none. If anything, owners probably waive any claim against Airbnb. Perhaps that extra money is not worth the risk after all.

The Guest May Try to Stay

Owners who rent out their apartments may also find that a “guest” refuses to leave. The owner will probably have to take the unwanted guest to court. And, as any landlord can tell you, occupants of apartments have many rights, and getting rid of a squatter will neither be free nor easy.

There are decisions in New York stipulating that unless the owner of the apartment is staying with the guest, the guest is not a guest but rather a tenant – even if the owner claims the guest is not paying rent. Of course, roommates are protected and a roommate is defined as an adult (and includes that adult’s underage children).

Accordingly, boards cannot ignore a constant stream of transients moving in and out of the building even if owners claim they are relatives and friends. Boards have a fiduciary duty to protect the building and that means protecting the residents from their own foolishness in allowing strangers to stay in their apartments.