Sponsors: When They Stay and When They Go

Roy Smith moved into the Wainwright, a 67-unit rental building in Forest Hills, Queens, back in the fall of 1990. At the time, he was aware that the building was about to be converted to a condominium. When the conversion went through in 1992, Smith was able to buy his apartment at the insider price. He thought it was a sweetheart deal. He had no idea what he had gotten himself into.

It’s an oft-told tale in New York City real estate: the sponsor who never went away. According to the Wainwright’s offering plan, the sponsor was supposed to sell off apartments over time and relinquish control of the seven-member board to unit-owners. But the sponsor did not fade away. He continued to serve as property manager, hasn’t sold an apartment in years, and still owns around half of the units, which, until recently, allowed him to control the board – and, in effect, the building’s finances and its fate.

The arrangement goes against the goal of every cooperative and condominium: a majority of units occupied by the owners. When owner-occupancy becomes the exception rather than the rule – as it is at the Wainwright – the repercussions are almost invariably bad. It becomes harder for unit-owners to refinance their mortgages and for prospective buyers to secure mortgages – because lending giants Fannie Mae and Freddie Mac buy loans only when there’s a high rate of owner-occupancy. Another downside is the persistence of a “renter’s mentality” among residents, which means that a significant number of tenants lack a stake in the long-term physical and fiscal well-being of the property. And since sponsors usually do not need board approval for sublets, boards have less control over who lives in the building.

At the Wainwright, after two decades of this lopsided, unhealthy, but all-too-common arrangement – which Smith attributes to “a lot of apathy” – the unit-owners finally woke up and took action. “The driving force was discontent over the physical condition of the building,” Smith says. “It just boiled over.”

Disgruntled unit-owners filed a lawsuit, and in October 2013 the courts issued a preliminary injunction. The sponsor had already relinquished four seats on the board; now, only unit-owners could vote for those four seats. The sponsor also gave up his role as property manager – after quietly awarding a four-year management contract to his sister. It isn’t a perfect arrangement – the sponsor has filed for the right to appeal the court ruling – but the unit-owners at the Wainwright finally have tenuous control of their own destiny. In New York today, that passes for a happy ending.

“Our relationship with the sponsor is better now because I try to keep from getting confrontational,” says Smith, a retired chemistry teacher who became president of the board in May 2014. “It takes a lot of tact. But when there’s controversy, I have to make sure all three [fellow unit-owners on the board] are with me. My job is to make sure things keep moving while avoiding conflicts with the sponsor.” There is a surprising upside as well. “The sponsor does have know-how,” Smith says, “and you can tap into that sometimes.” The same goes for dealing with the new property manager. “She’s very assertive, and sometimes I end up in conflict with her,” Smith says of the sponsor’s sister. “But on some things, I’m genuinely happy.”

Ch-Ch-Ch-Ch-Changes

In the landmark 2002 case 511 West 232nd Owners Corp. vs Jennifer Realty Co., the courts decreed that offering plans are contracts, and that sponsors are obliged to sell enough shares within a “reasonable” time to create a “fully viable” cooperative or condominium – if such provisions are in the offering plan. But sponsors often flout these requirements, retaining ownership of apartments and seats on co-op and condo boards for years.

The reasons? The income from rental apartments is a never-ending annuity that can outstrip the one-time profit of an apartment sale. And, when rent-stabilized apartments are vacated, the sponsor can charge much higher market-rate rents and pay less in taxes, since rental income is taxed at a lower rate than income from an apartment sale. Sometimes – though not in today’s overheated real estate market – an economic downturn makes it difficult to sell apartments at an attractive price.

One problem with having the sponsor in charge is that by controlling the board, he has control of the building’s finances. This was the case at the Wainwright, where the sponsor, who also served as property manager, kept a lid on spending. As a result, monthly common charges remained flat for years, which, predictably, led to a sense of contentment among many unit-owners. But this also led to deferred capital improvements and a subsequent decline in the six-story brick building’s physical condition. “Before the lawsuit,” says Smith, “when people complained, nothing happened. The sponsor would respond in his own time.”

When the 2013 court ruling gave unit-owners control of a majority of seats, things started to change. In January 2015, the board fired the live-in super and replaced him with a married couple, Toni and Lena Bojaj. Both are experienced supers, and the board set prices on their handyman work for unit-owners at roughly half the going rate. Suddenly, long-ignored repairs and upgrades of apartments started getting addressed.“Things are better because the supers respond to complaints right away,” Smith says.

Lena Bojaj says the property was in “chaos” when she and her husband were hired. But in two years they’ve turned things around – with occasional help from the sponsor. “He’s been very easy to deal with, he’s very reasonable,” Lena says. “When one of his apartments was leaking into the unit downstairs, he wasn’t concerned only about his own apartment; he was concerned about the apartment downstairs, too. He came down and took a look and told us what to do.”

The new board has undertaken many long-neglected projects. These include upgrading security cameras, pruning the overgrown backyard, improving drainage in a new alley on the north side of the building, cleaning out the basement to increase storage space, replacing an old chain-link fence with a more secure iron one, and switching control of the central thermostat from the sponsor to the supers. This last change put an end to chronic complaints that apartments were too cold in winter. The board also authorized major plumbing and piping repairs.

“It wasn’t cheap,” Smith says, “but we had enough money in our operating fund and reserve fund to cover it. We then had two substantial assessments to replace the money in those funds.” Smith has been pushing for incremental annual increases in common charges, but the majority of unit-owners prefer one-time assessments. “At some point, we’re going to have to increase common charges,” he says, “and I’m afraid that it’ll be a major increase if, say, the boiler goes.” While the Wainwright has been headed in the right direction since unit-owners wrested control from the sponsor, Smith knows that the arrangement is fragile. “It is,” he says, “like détente during the Cold War.”

We Can Work It Out

It doesn’t have to be that way. A textbook illustration of cooperation between a sponsor and a board is Devonshire House, a 98-unit condo near Washington Square Park in Manhattan. The Cheshire Group and its partners bought the elegant, pre-war rental building in 2007 and set about renovating and selling apartments. The developer sold its final apartment in 2016, after giving up its seat on the condo board. “If we own one or more apartments, we want to have a seat on the board,” says Susan Hewitt, president of Cheshire. “We’re not interested in setting pet policies, but the sponsor has institutional memory and can come up with more efficient solutions to building systems, as well as marketing information.”

Hewitt realizes that her company’s willingness to relinquish control puts it in the minority among sponsors. She also understands why. “The Jennifer Realty case gives boards the right to sue sponsors [who fail to live up to the offering plan], but it doesn’t compel them to,” she says. “If no one complains to the attorney general’s office, no one will know about it. And sponsors don’t like it when boards get rid of them as the management company and take their hand out of the cookie jar.”

Leslie Fielden rented an apartment in Devonshire House when she was in law school and has lived there ever since. A real estate attorney, she now owns her apartment and is president of the five-member condo board. She had a ringside seat at Devonshire House’s conversion from rental to condo.

“From my real estate work, I know how contentious these things can be,” Fielden says, “but in fact, our conversion wasn’t contentious. That’s because we had the same goals as the sponsor: we wanted to maintain the beauty and character of the building and keep values high. The most important thing is for the board and the sponsor to understand that they have shared interests and goals.”

Another key is the sponsor’s ability to walk the fine line between being involved and being meddlesome. “This situation worked out for the board and the unit-owners,” Fielden says, “because Susan Hewitt didn’t get involved in the day-to-day running of the building, unless we asked her opinion as a real estate professional. When we had problems and unit-owners contacted me, she worked with us to resolve issues.”

Which brings us back to the Wainwright in Forest Hills. On December 6, the condo held its annual meeting, a nerve-wracking event for president Roy Smith, who worried that the unit-owners’ hard-won control of the board would dissolve if just one seat tipped into the sponsor’s column. His fears proved groundless. “Unit-owners returned the same board,” Smith said the morning after the meeting. “We’re still kind of up in the air [over the sponsor’s possible appeal of the summary judgment], but it looks more hopeful for the building. We’re good for another year.”

Now the board is ready to deal with the elephant in the room: the fact that the sponsor still owns nearly half the units in the Wainwright, a major impediment to the goal of owner-occupancy. “There is a renter’s mentality,” Smith says. “Only about one-third of the current units are occupied by owners.”

“Should the board go to court to compel the sponsor to sell shares?” asks the board’s attorney, Abbey Goldstein, a partner at Goldstein & Greenlaw. “Sponsors have deep pockets, and sometimes they’re willing to fight to the death. Co-ops and condos have to be ready to dig deep.”

Adds Smith: “The next logical step would be to get the courts to force the sponsor to sell his units. We know it’s possible, but lawsuits aren’t cheap.”