Time for a Policy Rethink?

Most co-op and condo boards are very focused on the value of apartments in their buildings, and they adopt policies that address that. But these policies need to be reviewed on a regular basis. I’ll give you three examples.

Cash down payments. Historically, co-op boards thought that the greater amount of cash you required of a prospective purchaser, the more it would give the building a certain panache and thus increase value. They also thought that the more cash you had in hand, the better the co-op was protected relative to the collection of maintenance. I think boards are now reviewing those policies and coming to different conclusions. 

First of all, you’re competing against a market of new-construction condominiums that do not require any cash down and are trading higher than co-ops. And there’s a pool of prospective buyers who are younger and have significant incomes, but they have not yet been able to squirrel away millions of dollars to meet a 40% or 50% cash-down requirement. They’re financially strong, they’ll be great members of the community, but they either do not have those funds or may not want to use their available money for other reasons. The board still has the unilateral right to review applications and make sure that the prospective purchaser is strong. But if you increase the pool of prospective buyers, I think that will increase value. 

Sublets. Many boards thought that subletting would have detrimental impacts on the community. They wanted a building that was made up of people who owned their apartments, buying into the old adage that owners would take care of the building and their apartments better than renters. But that’s another policy that could have a detrimental effect on value, because prospective purchasers want options. If somebody gets transferred, or if someone has to care for parents and has to vacate but doesn’t want to sell the apartment, they don’t want to have to continue paying maintenance if they’re not there. The ability to sublet creates a financial benefit for them, and I think it makes sense to look at that sublet policy.

You still limit the duration of sublets, you still vet prospective subtenants, and you still make sure the majority of apartments are owner-occupied. You’re also cognizant of lenders’ requirements about the ratio of owner-occupied apartments to sublets — for prospective buyers, current shareholders who are refinancing their own mortgages and, last but not least, the building’s underlying mortgage when the board goes to refinance. All those factors have to be taken into consideration. When you allow subletting, you do it in an extremely conservative manner.

Pied-à-terre. Many co-op boards were historically against buyers who disclose that they would be occupying their apartment only at certain times during the week or maybe certain times during the year. The concern was that the apartment would become a crash pad for the shareholders’ families and friends. There’s a validity to that concern, but I think it can be addressed in the proprietary lease and house rules. The benefit of allowing pieds-à-terre is, again, you open up a broader population of prospective buyers. There are people who want to be in New York only on the weekends, and then they’re in their rural or suburban home during the week; or they want to be in New York during the week because they’re working. We’re in a new world of people working remotely, and I think policies have to correspond to that changing world in order to protect apartment values.