A Revolving Door of Renters Can Spell Trouble for Your Building

Vested interest. Perhaps with the exception of long-time renters who have lived in a property as long as their fellow shareholders or unit-owners, renters are typically less concerned about the building as a whole because they haven't made an investment in it. Even renters who care about keeping their apartments in good shape are not really invested in the building's upkeep, including major capital improvement projects.

Mortgages denied. Another more serious issue in buildings with too many people subletting or leasing is that it makes it very difficult for the building to get financing from Fannie Mae and Freddie Mac. Even if they do obtain financing, buildings may be penalized with higher rates.

Losing control to investors. The number of owners leasing or subleasing their apartments can get large enough to give them control of the board, which would enable them to create policies making it easier for other owners to lease or sublease their apartments or to object to money being spent for capital improvements. "Someone leasing an apartment is usually less inclined to want to spend money on anything but aesthetics," says attorney Stuart Saft, a partner at Holland & Knight.

Home is where you live. Every cooperative's proprietary lease and every condominium's bylaws clearly state that an apartment should be the owner's or shareholder's primary residence and cannot be used for or as a business. "Every board should be enforcing those rules to the hilt," says Saft. "Since every board is subject to the Business Judgment Rule, ignoring a clear and present danger could result in a board member having personal liability in the event of a lawsuit — something that no board member wants."

Lost insurance possibility. What about owners who list their apartments on Airbnb and inadvertently risk their neighbors' safety and peace of mind? They could be creating a nightmare for themselves. Although the Airbnb money may be nice, owners risk their insurance if an accident occurs. They can also lose the favorable tax treatment on the sale of a home and be subject to higher transfer taxes by the city. "Frankly, if someone owns a private house, they have all the right in the world to let anyone stay in their house that they want. But in a vertical city such as New York, where a great many people including children and the elderly live in close proximity of one another, no one should feel they have the right to turn their residence into a business," says Saft.

Shareholders and owners who purchased their apartments ostensibly as their homes and later decided to lease them out or who turn their apartments into illegal motels can spell lots of trouble for a co-op or condo building. The issues examined here arise when a building becomes a revolving door for countless renters. "Nobody objects to the rent-controlled, rent-stabilized, or otherwise protected tenant who has been in the building longer than or as long as the owners," clarifies Saft. "These are the folks who chose not to buy when the building was converted and for whom the building has been home for decades. Nor do we object to the sponsors who own the apartments in which the rent-controlled, rent-stabilized, and otherwise protected tenants reside."