When the Sponsor Won’t Let Go

Roy Smith moved into the Wainwright, a 67-unit rental building in Forest Hills, Queens, back in the fall of 1990. When the building was converted to a condominium two years later, Smith was able to buy his apartment at the insider price. He thought it was a sweetheart deal. He had no idea what he had gotten himself into.

It’s an oft-told tale in New York City real estate: the sponsor who, despite the landmark Jennifer Realty case, won’t let go. According to the Wainwright’s offering plan, the sponsor was supposed to sell off apartments over time and relinquish control of the seven-member board to unit-owners. But the sponsor did not fade away. He continued to serve as property manager, hasn’t sold an apartment in years, and still owns around half of the units, which, until recently, allowed him to control the board – and, in effect, the building’s finances and its fate.

The arrangement goes against the goal of every cooperative and condominium: a majority of units occupied by the owners. When owner-occupancy becomes the exception rather than the rule – as it is at the Wainwright – the repercussions are almost invariably bad. It becomes harder for unit-owners to refinance their mortgages and for prospective buyers to secure mortgages – because lending giants Fannie Mae and Freddie Mac buy loans only when there’s a high rate of owner-occupancy. Another downside is the persistence of a “renter’s mentality” among residents, which means that a significant number of tenants lack a stake in the long-term physical and fiscal well-being of the property. And since sponsors usually do not need board approval for sublets, boards have less control over who lives in the building.

At the Wainwright, after two decades of this lopsided, unhealthy, but all-too-common arrangement – which Smith attributes to “a lot of apathy” – the unit-owners finally woke up and took action. “The driving force was discontent over the physical condition of the building,” Smith says. “It just boiled over.”

Disgruntled unit-owners filed a lawsuit, and in October 2013 the courts issued a preliminary injunction. The sponsor had already relinquished four seats on the board; now, only unit-owners could vote for those four seats. The sponsor also gave up his role as property manager – after quietly awarding a four-year management contract to his sister. It isn’t a perfect arrangement – the sponsor has filed for the right to appeal the court ruling – but the unit-owners at the Wainwright finally have tenuous control of their own destiny. In New York today, that passes for a happy ending.

“Our relationship with the sponsor is better now because I try to keep from getting confrontational,” says Smith, a retired chemistry teacher who became president of the board in May 2014. “It takes a lot of tact.”

The new board has undertaken many long-neglected projects. These include hiring two new supers, upgrading security cameras, pruning the overgrown backyard, improving drainage in a new alley on the north side of the building, cleaning out the basement to increase storage space, replacing an old chain-link fence with a more secure iron one, and switching control of the central thermostat from the sponsor to the supers. This last change put an end to chronic complaints that apartments were too cold in winter. The board also authorized major plumbing and piping repairs.

“It wasn’t cheap,” Smith says, “but we had enough money in our operating fund and reserve fund to cover it. We then had two substantial assessments to replace the money in those funds.” Smith has been pushing for incremental annual increases in common charges, but the majority of unit-owners prefer one-time assessments. “At some point, we’re going to have to increase common charges,” he says, “and I’m afraid that it’ll be a major increase if, say, the boiler goes.”

While the Wainwright has been headed in the right direction since unit-owners wrested control from the sponsor, Smith knows that the arrangement is fragile. “It is,” he says, “like détente during the Cold War.”