Is There a Problem with Sponsor Ownership?

Aug. 14, 2015 — There's still a sponsor around. Is this a problem?

Sponsor ownership in a co-op can be a double-edged sword. Although it can be potentially problematic, there are some benefits to the co-op corporation. The most serious potential problems are financial. A financially weak sponsor with negative cash flow (the rents generated are less than the maintenance being paid) presents a risk to the co-op.

Another potential problem is the impact on sales, and the obtaining of mortgages – both the underlying mortgage for the co-op as well as individual mortgages on both sales for prospective purchasers and refinancing for existing shareholders. The issues are primarily tied to the number of remaining apartments owned by the sponsor. Another potential problem is board control and interference. There is also a potential issue with controlling and managing building staff and ensuring that the staff is not engaged in "private" work on sponsor apartments. The last potential problem relates to quality of life issues in a building that may be negatively affected by problematic sponsor tenants, both statutory and free market.

The potential benefits relate to the sponsor's historic knowledge of the building. The sponsor may be in possession of records, files, and building plans that would be important to the co-op. The sponsor may also have relationships with professional vendors, contractors, and lending institutions that could be leveraged for the co-op's benefit.

Neil B. Davidowitz is president of Orsid Realty.