Queens Co-op Turns to White Knight Investor to Solve Unsold Shares Issue

"The unsold shares were interfering with the co-op," observes Abbey Goldstein, a partner at Goldstein & Greenlaw and the board's attorney. "It was hard to sell units because there was a nine-member board and the sponsor represented four seats, so if they didn't show up for a meeting, there wasn't a quorum."

Smith outlined other reasons why the board wanted Muss, a family-owned company based in Queens, to sell its unsold shares: "If a building is 100 percent owner-occupied, the people care more for the building, and you have more control over people who are not abiding by house rules. If you have to go through a sponsor, you have no control. We have no control over who rents a sponsor apartment, while we can control who buys shares. Also, mortgage rates depend on the level of owner occupancy."

In addition, banks are less willing to offer mortgages to potential buyers, or refinance mortgages and approve home-equity loans for shareholders in co-ops with a high percentage of rental units. To top it off, buyers are wary of co-ops where sponsors or other investors hold significant blocks of shares.

Muss completed a bulk sale of its unsold shares in Donner Gardens — 120 apartments — in 2008, just before the city's real estate market and the national economy took a nosedive. The buyer was another Queens-based company, Norcor Management, and while the board welcomed the sale, there were also moments of be-careful-what-you-wish-for anxiety. "We were very nervous," Smith says. "Muss wasn't horrible, and at least we knew who they were."

The board's anxiety proved groundless. As the economy and the city's real estate market rebounded, Norcor did what the majority of investors in bulk sales do — as their rental apartments became available, Norcor put them up for sale at market prices, realizing a handsome profit. Harry Otterman, the president of Norcor, also helped the Donner Gardens board through some projects, large and small, including elevator and garage door repairs, replacement of all windows, and repairs to parapet walls and lintels.

"They brought a lot of knowledge and expertise," Smith says, "and they're very responsible about dealing with their tenants. We've developed a great relationship. They sell apartments for great prices, but they don't flood the market, which would bring down the prices. They want to help the building keep value while making a profit for themselves."

Otterman says that his company's interests are in line with the interests of co-op shareholders. "The success of the co-ops we've converted and managed — that's our success, too," says Otterman. "As a marketer, the nicer a co-op looks, that's to my advantage."

Otterman says Norcor, which owns a total of 1,000 apartments and manages 20 buildings, mostly in Queens, has so far sold a dozen apartments at Donner Gardens — about 10 percent of its holdings — and it will continue to sell as long as the market remains healthy. "Our business plan is to sell apartments when the market is hot and hold onto them when it's not," he says. "The market controls what we do in general. Now the market is quite good."

Investors Formerly Known as White Knights

Goldstein, the lawyer for Donner Gardens, advises boards that when a new investor buys a block of unsold shares from a sponsor, the board should view the transaction as both an opportunity and a cause for caution. The board is in a position to negotiate concessions from a new buyer, Goldstein says — "things like the investor's membership on the board, procedures for subletting, and contributions from the investor for improvements to the common areas."

The Donner Gardens board, for example, got Norcor to agree that it would hold two seats on a slimmed-down, seven-member board but could not cast votes on the other five seats. This short-circuited any prospect of the investor controlling the board.

The board's leverage in these negotiations arises from its power to designate the investor as the "holder of unsold share," which carries the right to sublet apartments, and the right to sell apartments without board approval — rights coveted by most investors.

"I view this as a time for boards to be wary," Goldstein says, "but also as an opportunity to obtain reasonable concessions from the investor." 

Photo by Danielle Finkelstein

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