Dear tenant: Maybe we’re converting to condos?

Renters across the city could soon become guinea pigs for landlords contemplating a condominium conversion.

A new memo from the New York Attorney General’s Real Estate Finance Bureau declares that landlords can now solicit interest and potential pricing for condo conversion projects at buildings which are currently occupied by renters, something they were previously barred from doing.

Developers could already submit so-called “test the market” applications for many condo conversion projects they weren’t yet sure they they wanted to pursue in earnest. Those applications, called CPS-1s, allow developers to distribute basic plans and pricing on a potential project in order to gauge demand. They could not, however, obtain something like a CPS-1 for buildings that were already occupied by renters—until now.

Under the new mechanism (called CPS-11), landlords can distribute these preliminary plans to both current tenants and outside buyers. Market-rate renters will be able to make reservation agreements for the right to buy their apartments once an official offering plan has been submitted for AG approval.

(Download the AG memo on TRData)

The AG’s move is likely to lead to a flurry of new “test the market” applications citywide, said Shaun Pappas, an attorney at Starr Associates, which has an extremely active condo offering plan practice.

“Because most of these rental buildings [that would be candidates for conversion] have a market-rate tenant base, there is a significant interest in the conversion process and creating sellable assets,” he said. Landlords pondering a rehab, he added, will be able to measure that interest before making the decision to transition the building to condos—a process that can take years.

Under the new rule, only current tenants in market-rate units will be allowed to reserve their apartments before an official offering plan is — outside buyers and rent-regulated tenants in the building are not given this option and rent-regulated units cannot be advertised. Excluding rent-regulated tenants from the rule is likely due to those tenants already having a 90-day first dibs period anyway, once the final plan is accepted, Pappas said.  Additionally, rent-regulated tenants are entitled to lease renewals, even if their landlord has moved forward with the conversion of market-rate units in the building, meaning their apartments cannot really be considered sellable in the first place.

But Pappas also mentioned that rent-regulated tenants are probably part of why landlords were never allowed to go condo-pamphleteering through the halls of their own buildings in the first place.

“I think because historically most rental buildings contained rent-regulated or stabilized tenants they [government] were wary of an uproar,” Pappas said. “Testing the market was historically frowned upon because it’s non-binding, and you’re stirring up a pot when you’re not necessarily planning on moving forward with it.”

Condo conversions of occupied rental buildings can lead to messy disputes. Two years ago, Macklowe Properties and CIM Group sued the former owner of 737 Park for allegedly not disclosing special lease agreements that allowed tenants at three occupied units to stay indefinitely. Despite these kinds of risks, condo conversions have become a top option for ambitious developers in a time where available development sites are scarce, even if it means dancing the tango with rent-regulated tenants. Typically, rent-regulated tenants have to be bought out when their landlord wants them out, although one does not have to look hard to see other “stir the pot” situations of a more nefarious persuasion.