Sublet Sticker Shock

As a lifelong renter, I recently found myself doing something I had never done before: trying to sublet an apartment in a co-op. The experience was an education for me – and it contains lessons for all renters, brokers, property managers, and co-op shareholders, as well as the boards that govern their buildings. The biggest lesson of all was about that devious little four-letter word – fees – why they’re so large, and just how vital they are to the financial health of co-ops.

My education began the day I got word from my landlord that he was not going to renew my lease on the condo apartment I’d been renting for the past six years in Alphabet City. He was putting the apartment up for sale, and I could stay on a month-to-month basis until he found a buyer. Then I would have to go.

Aware that the New York real estate market was once again overheated, I immediately began my hunt. After dozens of demoralizing dead-ends, a friend put me in touch with Jeremy Bolger, a licensed real estate salesman with Halstead Property who handles sublets and sales at Seward Park co-op, a sprawling, high-rise complex on 13 acres of the Lower East Side of Manhattan that opened in 1959 and is now home to some 5,000 people in 1,728 apartments. At any given time, about 100 of those units – fewer than 10 percent – are occupied by sub-letters.

Bolger showed me a lovely one-bedroom apartment with a terrace and knockout views of midtown and downtown Manhattan – for about the same rent I’d been paying in Alphabet City, across the street from a housing project. There would be a one-year lease, with an option to renew for a second year at no increase in rent. I was interested, very interested. One small hitch: Bolger was waiting for a deposit from a woman who had already looked at the apartment and said she wanted to rent it.

By the time that prospective sub-letter backed out of the deal, I had already given up my search and decided to put my belongings in storage and resume my quest later in the year. After a second prospective sub-letter backed out of the Seward Park apartment, Bolger called again. This time I decided to go ahead with the sublet application.

Now things got interesting.

Do They Want My First Born, Too?

After I handed over a deposit check equal to one month’s rent to get the listing taken off the market, Bolger e-mailed me the co-op’s sublet application. I was stunned. The document was 77 pages long – about half of it devoted to house rules and arcane stuff about lead-based paint disclosures, smoke detectors, and window guards. But the other half of the application was a way of holding a magnifying glass up to my financial profile and my personality. The board would be looking into standard things like my credit report, criminal and litigation background, checking and savings accounts, and personal tax return with W-2 form for the most recent calendar year. The board also wanted reference letters from my employer and landlord, plus two personal and two business reference letters. In a lifetime of renting apartments, I had never been so closely scrutinized. In the Alphabet City condo, for example, I had dealt only with the apartment owner, who was willing to overlook my less-than-stellar credit rating by demanding a two-months security deposit.

Which brings us to the co-op’s fees.

I had known upfront that Bolger’s broker fee was going to be the standard 15 percent of a year’s rent. I was confident that this hefty fee was negotiable. After all, when I’d rented the Alphabet City condo in 2009, I had convinced the owner and broker to make the fee disappear. But that was during a recession, a renter’s market. Now, with the market hot again, landlords and brokers have regained the upper hand.

As I continued reading the application, my eyes began to bulge. There was a $400 fee payable to the co-op’s management company, Charles H. Greenthal Management. There was a $100 fee payable to the co-op, an $80 fee for each criminal background check, and a $75 fee for each credit report check. There was also a $500 move-in fee and a $500 move-out fee. As an added bonus, if my financial condition were deemed satisfactory, I would have to appear in person before the co-op board’s screening committee.

I asked Jeremy Bolger what would happen to these fees if I were turned down by the board. “The fees are non-refundable,” he said, “all except the move-in and move-out fee. They don’t cash those checks before the move is complete. If there’s no damage to the building, they tear up the check.”

"So you’re saying that I’ve got to pay more than $800 in fees for the privilege of applying for a sublet – with no guarantee that I’ll be approved?”

“That’s right.”

When I told him that the fees were a deal-breaker, he replied that he would be willing to reduce his fee to 12.5 percent, which would more than cover the application fees. I would still have to take my chances with the board, with no guarantee I would win approval. I decided to roll the dice. Happily, I was approved.

Where the Unusual Is Typical

After I’d moved in, I sat down with Seward Park’s on-site property manager, Frank Durant, who echoed something I’d been hearing from other property managers, brokers, and board members: the non-refundable $800 I’d paid in sublet fees was not unusual in New York co-ops. In fact, the fees are considerably larger in some, and they’re just a small slice of the fees pie generated by sublets.

“Your fees paid for the clerical work – reviewing the application, setting up the interview, arranging the move-in and move-out, running the credit and criminal background checks, establishing debt-to-credit ratios,” Durant said. “The fees the prospective sub-letter pays basically bring in very little income. It’s just to process the application. The real income comes from fees charged to shareholders.”

When a management company seeks to win a contract from a co-op, Durant and other property managers explained, the company lays out its annual and ancillary fees. The former are paid by the co-op; the latter, depending on the nature of the fee, are paid either by the co-op, the shareholder, an apartment buyer, or an apartment sub-letter.

As it turns out, the level of scrutiny I underwent during my application to Seward Park was relatively mild. “Some co-ops visit the apartment where the applicant is living,” Durant said. “They check how the applicant lives. That’s crazy. We don’t do that. I think our process, even though it’s more restrictive than rental or condo apartments, is appropriate for this community.”

Seward Park was built to relieve overcrowded conditions in the Lower East Side’s tenement slums, and it began life as a limited-equity Mitchell-Lama co-op. In 1996, shareholders voted to let sales prices rise to a prescribed cap, and in 2000 they voted, by a large majority, to go to market-rate sales.

The sublet fee structure was revised upward in 2010. The current policy forbids shareholders from subletting their apartments during their first two years in the building. After that, the shareholder pays a fee equal to 100 percent of maintenance for the first two years of a sublet; 112.5 percent for the second two years; and 125 percent every year after that. Those fees generate more than $700,000 of the co-op’s annual operating budget of $25 million – not an insignificant contribution. And it certainly puts my $800 in perspective.

“The fees may seem high, but shareholders keep subletting their apartments,” Durant says. “The amount of subletting actually increased after the fees increased. Our maintenance is so low that it’s still worthwhile to sublet.”

Monthly maintenance, which has not risen since 2011, ranges from a low of $550 for some one-bedroom apartments to a high of $900 for some three-bedrooms, which is low for Manhattan and, indeed, for many Brooklyn neighborhoods.

“In order for us to maintain the affordability of the co-op, we look at a lot of ways of reducing costs and producing ancillary income,” Durant says. In addition to the sublet fees, there’s a flip-tax, storage rental for bikes and other possessions, rent from the complex’s 50 commercial spaces, and rent from parking lots and garages.

The shareholders seem happy with the triple duty the sublet fees are performing – generating revenue while protecting the co-op’s high rate of owner occupancy and helping keep maintenance low.

“I think because we have a relatively small percentage of sublets, we have a strong community,” says board president David Pass. “Sublet fees account for less than six percent of our budget, but if we got rid of them we would have to increase maintenance. Keeping maintenance low has been a traditional concern of the board.”

“I’m happy with what the fees are doing for the co-op,” adds Karen Wolfson, the board’s second vice president, whose parents were among the original shareholders at Seward Park. “You don’t want too many transients.”

Pass sees another advantage. “I think subletting now is a nice feeder system for people to live here, and then discover they want to buy. Sub-letters often become shareholders.”

It All Makes Sense, Sort Of...

Now that I have put my $800 sublet application fees into perspective, I also begin to see that my initial shock over the fees might have been the result of a failure to communicate rather than some diabolical chicanery.

“Those fees are standard to brokers, but not to somebody who applies for a co-op sublet once or twice in a lifetime,” says Ian Mayglothling, managing director of the closing department at Douglas Elliman Property Management. “The broker is trying to make a commission. It behooves the applicant to do his or her own research.”

Bolger, the salesman who showed me the apartment and shepherded my application to the board and managing agent, says at least one of the potential sub-letters who backed out of renting my apartment was put off by the high application fees.

“We do our best to let people know upfront what fees are involved,” Bolger said. “There are more moving parts than with a traditional rental. When we do these subleases, the people we show them to are used to traditional rental apartments. A co-op sublease requires more time.”

I think Bolger is an honest man and I take him at his word. Even so, I feel that I should have been made aware of that $800 application fee – and the complexity of the application process – before I put down my refundable first-month’s-rent deposit. It might have turned me off and led me to look elsewhere. Then again, if it had, I probably wouldn’t be looking out my living room window at the Empire State Building.

So, this is a New York real estate story with a happy ending. The moral of the story, as expressed by Mayglothling, is simple: sub-letter, beware.