RIGHT OF FIRST REFUSAL

Georgetown Mews, a 930-unit co-op in Kew Gardens Hills, Queens, is a case in point. A low-rise, garden-apartment complex that converted to cooperative status in 1986, it navigated some heavy seas in its early years, including sponsor defaults, unpaid bills and a dangerously low reserve fund. But the co-op managed to stay afloat, and in the late 1990s, the board's attorney suggested that the co-op could further stabilize its finances by introducing submetering, acquiring the right of first refusal and getting cable service at a bulk discount rate. Despite some shareholder apathy, the required supermajority approved these changes to the proprietary lease and bylaws.

"At that time, I said this [right of first refusal] was the best thing to do," says Mary Fischer, who has served on the board since 1995 and became president in 1999. "People with rent-stabilized apartments were going to sell at a low price, and we didn't want that to happen."

Since banks base their appraisals on recent sales at a property, a string of bargain-basement sale prices could have dragged down value for all shareholders. Timing is everything, and in this case it worked in the co-op's favor. When several investors tried to dump apartments at below-market prices, the corporation was able to meet the challenge.

Another Reason to Keep a Good Reserve Fund

"Having money in our reserve fund was key," Fischer says, "and timing was key because the reserve fund wasn't being used for anything else. We didn't have to borrow from our line of credit. If we'd had to borrow, I don't think we would have done it."

The board exercised its right of first refusal. The apartments wound up selling at prices that protected the value of all shares and brought in money that enabled the board to keep maintenance stable. "What we accomplished by exercising the right of first refusal," Fischer says, "was to keep prices up so that people refinancing their mortgages or selling their apartments didn't get stuck with a low price. Now it has panned out that shareholders are getting higher prices than we got when the board sold those apartments."

James Goldstick, vice president of Mark Greenberg Real Estate, has managed Georgetown Mews since 1995, and he strongly urged the board to try to acquire the right of first refusal. He notes it can be a valuable tool for a co-op board during boom times no less than during a recession. A divorce, sudden financial troubles, the death of a shareholder with survivors far from the city — such factors can lead to a low-dollar sale even in the best of times.

But not all shareholders agree that they've got nothing to lose by granting this power to the board. At two properties Goldstick manages in Bayside, Queens, the shareholders voted against giving the board the right of first refusal. "They turned it down," he says, "because they were nervous about giving the board the authority to spend hundreds of thousands of dollars."

However, once a supermajority of shareholders has agreed that their board should have the power, there's little doubt when the board should exercise it.

What If the Buyer or Seller Disagree?

"When there's a third-party transaction and the asking price is significantly below market value, it's in the best interest of the board of directors to make sure the sale doesn't go through," Goldstick says. "If the co-op is in a position to buy that apartment, I'll call the seller and ask if the co-op can match the offer and buy it. Very often something can be worked out."

And sometimes it can't. In one co-op Goldstick manages, the right of first refusal was written into the bylaws and proprietary lease when the building was converted in 2004. When an apartment went up for sale at a price well below market value, the resident of the neighboring apartment made what the board considered a too-low bid that the seller was ready to accept.

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