How to Structure a Building Sale

We represent a small five-unit building with a retail space in Soho. When it was offered a well-above-market price for the building, there was interest among the shareholders, but it took weeks to get the shareholders to agree on their respective share of the net proceeds from a sale. Ignoring the assigned share allocations, each shareholder held a different view of what his or her apartment was worth (certain shareholders had renovated, some had not, some were on higher floors, one had roof rights, etc.). After hours and hours of meetings and discussions among the shareholders and counsel, an uneasy agreement was reached to permit the preparation of a contract of sale.

As it was essential that the deal be structured as a sale of individual units rather than a sale of the building by the corporation, all shareholders had to agree to sell. If it were a sale by the corporation, it would have created a double taxation — first on the cooperative level at the corporate rate (after taking into account the depreciated value), and then at the individual shareholder level where each shareholder would have been taxed on distributions of the net proceeds. There were also some IRC Section 1031 issues for certain shareholders.

The developer agreed to the terms and a contract was prepared and sent to the developer’s counsel. After fully negotiating the contract with the developer’s attorney, the developer withdrew its interest as it became uncomfortable with being saddled with the corporation’s exceptionally low basis. Significant legal fees were incurred and it caused considerable disruption in the building. During the negotiation process (which went on for a protracted period of time), the business of the building was put on hold, and shareholders could not make plans (e.g., refinance/sell/sublet) because of the uncertainty surrounding the sale. Relations among the shareholders became more fractured and contentious.

Takeaway

Developers are going to great lengths to buy buildings, and because of the restrictive marketplace and scarcity of product, unorthodox methods are being employed that can disrupt shareholder harmony and not result in the panacea that was promised.

A proposal to sell the building at a multiple of market value may seem incredibly appealing, but trying to reach consensus among all parties is no easy task. An early assessment of the willingness of the totality of the shareholders is essential prior to engaging in the idea of a sale.