Good News for Co-ops and Condos: Sponsors Are Selling

After decades of fighting their sponsors, New York City co-ops and condominiums may finally be catching a break. Almost 20 years have passed since the state’s highest court, the Court of Appeals, decided the landmark Jennifer Realty case, holding that co-op apartment corporations may sue their sponsor-developers for breach of an implied promise to sell their unsold shares in the corporation. Despite the ruling, most owners of unsold apartments continued to rent rather than sell their unsold units, especially when the rental market remained strong.

But change has been slowly coming. Starting in 2019, there was a marked increase in sponsor sales of co-op and condo apartments throughout New York City. This happened not only in new construction but in many buildings first converted to co-ops and condominiums in the 1980s and 1990s. While many of those buildings had seen very few transfers for decades, they now are enjoying a resurgence in sales. For example, since Jan. 1, 2020, my clients have closed more than 120 individual sales to new owners of previous rental apartments in several different neighborhoods in Brooklyn and Queens.

The current sales uptick benefits both co-op shareholders and condo unit-owners. Buildings with high concentrations of rental units often have more difficulty attracting new buyers, financing underlying debt and maintaining a stable population of residents. What we are seeing now is that the increase in sponsor sales has reduced those concerns for boards, residents and lenders.

The shift in sponsor attitudes toward selling resulted from several legal and market factors. First, there were extensive changes in the New York rent laws with the passage of the Tenant Protection Act in 2019, which included increased protections to both rent-stabilized and free-market tenants, rendering ownership of rental units less attractive in many cases.

Second, changes to the Internal Revenue Code proposed by the Biden administration – especially to Section 1031, which allows investors to defer capital gains – have also caused many sponsors to re-evaluate their holdings. Concerned that the law may be changed soon, sponsors are selling now in order to take advantage of the existing tax-deferral provisions, which may be curtailed either by changes to the tax code or by Congress as part of the current infrastructure bill.

Additionally, some investors are looking for alternative properties for portions of their holdings. Many owners who have invested in New York City multi-family buildings for decades, including co-ops and condominiums, are using this opportunity to diversify into other types of properties in New York and other locations.

Finally, market forces driven by myriad new buyers, many of whom are often new Americans, have fueled sales from Briarwood to Bay Ridge to the Bronx. The result has been a boon for sellers.

No matter what the reason, boards and residents in New York co-op and condo buildings should embrace this development. More sponsor sales means a higher percentage of owner occupancy. And that’s better for everyone. 

Mark N. Axinn is a partner at the law firm Phillips Nizer. He represented Jennifer Realty Co. in the landmark Court of Appeals case in 2002.