When a Sponsor Illegally Overturns an Election, You've Four Months to Fight It
Sandra Mendoza, Dan Arana
July 2, 2013 — In an ideal world, the co-op sponsor or condominium developer steadily sells off apartments until control of the building goes to the residents and their elected board of directors. Trouble tends to arise when a sponsor / developer retains ownership of a significant number of apartments long after conversion or construction. And typically, a strong sponsor presence on the condo or co-op board brings a litany of problems — lower values because of the prevalence of rental apartments; increased wear and tear on the building because of rental-unit turnover; difficulty in refinancing mortgages for shareholders or unit-owners; and trouble securing mortgage financing for prospective buyers.
To top it off, the sponsor frequently controls the board and hires a management company or manages the property himself, which can lead to confusion and distrust about the building's financial health. For residents, it's almost always a lose-lose situation. Worst of all, the remedy is rarely pretty or cheap.
No Board Meetings
Consider the Wainwright Condominium in Forest Hills, Queens, which was built in the 1940s, converted to a condo in the 1990s and is now home to 67 apartments and one commercial space. Though the building went condo two decades ago, the sponsor still retains ownership of just over 50 percent. All the while the sponsor has controlled the board and managed the property.
"They never wanted to have a board meeting," says Dan Arana, a forensic scientist who bought an apartment there in 2008. "We felt that our requests were being ignored and the building was falling into disrepair. Security cameras weren't working. Our laundry room was robbed in late 2011, and our super was assaulted during the robbery."
We thought we couldn't fire
them as manager since they
owned more than 50 percent of
the units. That was our ignorance.
Sandra Mendoza, a cancer researcher at New York University, bought an apartment in 1993 — one of the last apartments the sponsor would sell. She soon got elected to the five-member board, which included three sponsor members and two unit-owners.
"When something needed to be fixed, we had to beg the sponsor," Mendoza says. "Instead of helping the building gain value, they drove it down. The boiler kept breaking down and they wouldn't replace it. I had major leaks by my windows because of failure to maintain the exterior bricks. But the sponsor made us feel like we didn't have a say. We thought we couldn't fire them [as manager] since they owned more than 50 percent of the units. That was part of our ignorance."
Arana has personal experience with the downside of high sponsor ownership. When he tried to refinance his mortgage with Chase, he was rejected — on the grounds that a building that's more than 50 percent sponsor-owned is a bad risk for a bank. As a rule of thumb, banks are reluctant to offer mortgages or refinancing in buildings where the sponsor owns more than 10 percent of the units.
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At the annual meeting in November 2011, Arana, Mendoza, and a like-minded unit-owner named Argemira Acevado won seats on the five-member board, wresting control from the sponsor. The new majority got the sponsor to agree to come to a meeting in May 2012, which Arana tape-recorded. At that meeting, Arana proposed that the board fire the sponsor as property manager and hire All Area Realty. The vote was 3-1 in favor. (The second sponsor board member did not attend the meeting.)
Blindsided
Two weeks later, the sponsor's attorney sent the board a letter saying a special meeting would be held in May. That "blindsided us," Arana says. The unit-owners did not bring a lawyer to the meeting, and they watched, stunned, as the sponsor, who — without giving a reason — invalidated the results of the previous election, removed the three residents from the board, installed five hand-picked members, and voted to re-hire the sponsor's management company.
It was a nightmare for the unit-owners at the Wainwright, who were so unsure about electoral procedures that they didn't challenge the sponsor's claim. By the time they did, more than four months — the statute of limitations for electoral challenges — had passed, and the sponsor's actions stood.
"They should have had a lawyer to advise them," notes Abbey Goldstein, a partner in Goldstein & Greenlaw, who subsequently represented the three ousted members. To this day, the condo association still does not have an independent (i.e. non-sponsor) attorney looking out for its interests.
The power grab was also, on the face of it, illegal. The landmark 2002 case 511 West 232nd Owners Corp. v. Jennifer Realty Co. established that the sponsor in a co-op conversion must turn over control of the board after 50 percent of the apartments are sold or five years have elapsed after the first closing, whichever comes first. In new construction, the number of apartments to be sold can be dictated by the sponsor, as long as it's spelled out in the offering plan and bylaws. Regardless of that number, the sponsor must cede control of the building within five years.
For two more tales of sponsor conversions, and lessons to be drawn from them, read part two, and watch for part three on Thursday, or pick up the June issue of Habitat.
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Photo by Jennifer Wu. Click to enlarge.