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how bad is it for a coop when "investors" start buying sponsor apartments in the building? Cons?
Investors (holders of unsold shares) also do not need board approval to sell to other investors, or to sublet. If your co-op has sublet fees, they are also not subject to them.
Especially now that we are going back into a time of very tight credit -- banks want to see a high percentage of owner-occupants, which investors will never be.
PROS: If the investor is "designated by the Sponsor" (in the language
of the Offering Plan), this usually means that a guarantor is backing
up the deal in case of default. We actually had four such apartments
in our building -- all rent-controlled -- that were sold by the
sponsor to various investors under such an arrangement. In the dark
co-op days of the early 1990s, *all* of the investors defaulted.
Luckily, the guarantor (Fannie Mae) continued to pay maintenance
until the apartments were sold to new investors in the late 1990s.
This was especially important to our co-op because the sponsor
defaulted as well! The rent on the rent-controlled apartments
didn't even come close to covering their share of operating expenses,
so the shortfall would have come out of the pockets of our
shareholders if it weren't for Fannie Mae.
CONS: A true "Holder of Unsold Shares" requires no Board approval
to sell, sublet, or renovate the unit. The subletting issue is
usually the worst problem, since an investor can essentially
turn the apartment into a rental unit and there's nothing you
can do about it.
A sticky question remains unresolved: what happens if the shares
are sold to an investor *not* designated by the sponsor? Is that
follow-up investor *also* a Holder of Unsold Shares with the
right to bypass the Board on sale/sublet/renovations? For years,
guidelines from the Attorney General's office said that such a
person had no special rights, but this was overturned in 2005
in Kralik v. 239 E 79. Under Kralik, until a shareholder lives
in the apartment (for even a day), *any* investor is a Holder
of Unsold Shares.
Kralik was decided by New York's highest court (the Court of Appeals)
and remains the official standard. In 2007, however, the judge in
Sassi-Lehner v. Charlton Tenants Corp. ruled that the Offering Plan
was the "crucial cooperative document." This meant that only an
investor specifically designated by the sponsor -- typically with
a guarantor in place -- was a Holder of Unsold Shares. This makes
sense, as the co-op receives the benefit of a guarantor in exchange
for giving up its Board approval rights.
This is a messy issue and it may not have a definitive answer
any time soon. For the moment, it's probably best to assume
that any investor whatsoever will have special rights that are
not beneficial to the co-op.
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Always better when you have resident owners. Sublets tend not to have a real interest in the building: how it looks, what's going on, etc. Having a higher percentage of resident owners is better for mortgage-seekers, too, I believe.
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