Co-op Boards' Arbitrary Price Floors Can Damage Apartment Values

A top priority for most co-op boards is maintaining the value of apartments in their buildings. A common tool for protecting value is the rejection of sales applications at a price the board deems too low — and thus likely to drag down values building-wide.

But this practice, according to the appraiser Jonathan Miller, can backfire and actually damage apartment values.

In a recent issue of his Housing Notes newsletter, Miller cites a recent lawsuit, Stromberg v. East River Housing Corp. In this case, the shareholders Eleanor Stromberg and Douglas Price sued their co-op at 577 Grand St. for arbitrarily and improperly rejecting a proposed sale of their apartment. Stromberg and Price entered into contract with a buyer to sell their apartment for $520,000 based on an appraisal conducted by a third party, which valued the property at $525,000. When the co-op board rejected the proposed sale, the buyer increased his offer to $540,000. The board rejected the second offer and announced that it would not accept a sale price below $600,000. After the buyer walked away, the sellers sued the board.

In its ruling, the state Supreme Court noted that the business judgment rule's broad protections do not give co-op boards the power to create an arbitrary price floor. Thus, Stromberg and Price prevailed in their lawsuit.

"In other words," Miller writes, "business rules that the board created to protect themselves can't be based on an arbitrary number like their $600,000 price threshold represented. The board wants that price, but the market doesn't care what the board wants."

A related strategy for protecting apartment values is for co-op boards to insist on "phantom" concessions and rebates to boost a unit's price, at least on paper. Offering such hidden concessions to close a deal isn’t necessarily unethical, The Real Deal reports, but brokers and attorneys contend that the devil is in the details: "A seller covering closing costs or paying the transfer tax, as condominium developers often do, is widely seen as acceptable. But when co-op boards compel the use of rebates or credits that reach a certain level — particularly when they exceed 3% of the price — attorneys and brokers get squeamish."

And rightly so, in Miller's view. "Aside from the lender, if there is one, nobody outside the deal knows concessions were given, let alone what they were worth," he writes. "This practice is fundamentally unethical because public records become distorted. The sale at the inflated price goes into the public record and is subsequently used as a comp in the marketplace, perpetuating the false value."

Which brings us back to the fact that arbitrary price floors and hidden concessions can actually do the opposite of what they're intended to do.

Miller concludes: "These co-op boards think they are protecting their values when, in reality, the brokerage community talks about bad board behavior among themselves, which reduces buyer traffic in these particular buildings, ultimately damaging the market value. This gives buyers another reason to leave co-ops in favor of condos."