A Renter Buyout Can Be a Win-Win-Win

Owner-occupied apartments are the life-blood of a healthy co-op. The urge to replace renters with owners is one area where the desires of co-op boards dovetail with the desires of many developers and sponsors, especially in today’s overheated real estate market.

But experts offer three words of advice to co-op boards that want to encourage renters – especially those in rent-regulated apartments – to exit a building and make way for owner-occupiers: proceed with caution.

“Co-ops don’t like having units that aren’t owner-occupied because banks don’t like that,” says attorney Ian Brandt, a partner at Wagner Berkow, who frequently represents renters in buyout negotiations with sponsors, developers, and landlords.

“If a co-op is very low-sold – only 20 to 30 percent – there is no question that the shareholders suffer from that,” adds Mary Ann Rothman, Executive Director of the Council of New York Co-operatives & Condominiums. “If people are able to get loans or refinance them, it will probably at a higher interest rate and there may even be a higher rate for a co-op’s underlying mortgage than in a building with higher percentage of owners. Only once a building is 65 to 70 percent sold is it considered to be a viable, functioning, co-op.”

Rothman and Brandt caution co-op and condo boards from getting caught up in battles with renters.

“First, understand that the current New York City administration would frown at taking affordable housing off the market,” says Rothman. “The law allows renters and people with disabilities and senior citizens to remain in place and to pay a regulated rent. This is why co-ops and condos often take a long time before they are significantly owner-occupied. Second, every apartment is owned by someone, whether it is the sponsor or an investor or an actual shareholder who lives in the building.”

There are two ways to get a tenant out, explains Brandt. “Either they are not using the property within the terms of their lease,” he says, “or you can pay them to leave. Usually, in a co-op, the entity that pays a renter to leave is the shareholder who has the particular stock on the unit. Everyone wants to see the rent-stabilized tenants go. That is usually negotiated with the (apartment owner) – usually an investor.”

Brandt has stories of aggressive tactics – intentional disruptive construction noise, demolition of sections of a building, intimidation – that have become commonplace in conflicts between long-term rental tenants and developers. There are also stories where tenants have been offered big money to move out – sums that can reach millions of dollars.

“It can be a win-win situation,” Brandt says. “The tenant can get a sufficient amount of cash and then go out and buy a comparable unit. The landlord or developer or board then has an unencumbered unit they can take to the market and make a profit.” And, in the bargain, a sale will increase the percentage of owner-occupied units in the building and enhance the overall health of the co-op.

“The co-op gets paid monthly maintenance regardless of who owns the apartment,” adds attorney Bonnie Berkow, a partner in Wagner Berkow. “But the purpose of a co-op is to be owner-occupied.”

In other words, while sponsors, developers and landlords may not be worried about the health of a co-op, their goals are often identical to the co-op board’s: get rid of renters and sell the apartment to someone who will live in it. And when renters get a pile of cash to vacate, that can produce a win-win-win situation.