The Sublet Conundrum

Small co-ops, big problems. The concept of co-ops is based on the idea of being friendly and having shared interests, but enforcing rules and regulations in smaller buildings can be challenging. If you’re in a 10- to 15-unit building, shareholders are integral to one another’s lives, which makes it much more complicated to enforce rules when that puts you at odds with your neighbors and friends. In the worst-case scenario, divergent interests can result in costly lawsuits.

It’s a numbers game. I have one co-op, a very small one, where a handful of shareholders who have lived there over the years have sublet their apartments for short periods. But there are other shareholders who have seemingly sublet their apartments in perpetuity. Their families grew, and they moved into other spaces. That’s tricky, because the core operation of a co-op is built around primary occupancy. Traditional guidance suggests that buildings should have at least 80% owner occupancy, and that’s the expectation of lenders and potential buyers.

Between a rock and a hard place. The board recently imposed rules that stipulated the duration you could sublease an apartment, set terms about requests for extensions and required that a nominal sublet fee be paid to the co-op. But you ideally want rules in place before problems occur, but because of the co-op’s current situation, that is quite likely to happen. At this co-op, it’s a lose-lose scenario. The longtime subletters are taking up the space that new sublet requesters want because of the 80% threshold. If that were crossed, nobody would be able to buy into the building because banks won’t lend to them. The same applies if the co-op had to refinance its underlying mortgage.

Collaboration is key. The best thing that the board can do is come together and try to calculate the losses and risks for all parties and decide what is acceptable. But it’s important that members understand their fiduciary responsibility. The ideal outcome would be for the existing shareholders and new subletters to find a compromise. It’s my job to help the board navigate that process.