When the Sponsor Won’t Go …

The issue of unsold shares is very significant in cooperative corporations. There are certain matters regarding it that any board of directors must know about in terms of the rights of the holder of unsold shares, the rights of the co-op in dealing with holders of unsold shares, and the problems that exist for any co-op or prospective purchaser or seller of apartments.

A sponsor is the equivalent of a holder of unsold shares, being the original person or entity that converted the building to a cooperative. A holder of unsold shares is exempt from many of the rules which are typical of co-ops. For instance, if the seller of apartments is a holder of unsold shares, approval of sales is typically not required by the board. Likewise, he generally will have an unrestrained right to sublet and renovate units, without board control. (The proprietary lease may contain exceptions).

So the holders of unsold shares are in this blessed position, and the co-op and the shareholders, in my opinion, suffer from it. Many buyers can’t get financing, depending on how many shares the holder of unsold shares owns. More precisely, the more units that are unsold, the less desirable the building. And if it’s getting to the point of 50 percent – the numbers here are not precise – you can count on the fact that it will be less desirable as an investment and that you might well have financing problems. There’s also the problem of the co-op itself getting financing, when it comes time to refinance its underlying mortgage.

I think it is a good operating principle that you always want as few unsold shares as possible. There’s no such thing as a good unsold share. There may be a good owner of unsold shares, but his ownership is inimical to the interests of the co-op as ac whole. In my humble opinion, having shareholders reside in their apartments, as opposed to renters, leads to a better quality of life. You want more owners living there and fewer transient renters. Nothing personal against renters.

Another critical issue is the voting rights of somebody who is a holder of unsold shares. If you have this individual or entity that owns 40 percent of a co-op and you have elections, it doesn’t matter how much unanimity there is among the rest of the shareholders. If the sponsor can vote his 40 percent of the shares, together with a handful of others that are aligned with him, it’s almost impossible for the balance of the shareholders, even when they are united, to overcome that voting strength. In effect, it’s a way for the sponsor to dominate the board, if not control it outright.

What do you do to get rid of a holder of unsold shares? Co-ops, more and more, are considering ways to force the sponsor to sell. Where you have an entity that controls a large number of units, the co-op has, in my opinion, an absolute incentive to go forward and press the sponsor to sell. If necessary, the board should sue, seeking an injunction to compel it.