The Real Deal New York

Co-op owners feel rental squeeze

Shareholders ask boards to extend expiring rental allowances

February 01, 2012
By Tracey Samuelson

When legal recruiter Annie Sud got engaged in 2009, she quickly realized that her 500-square-foot Chelsea co-op was too small for her and her fiancé, so the couple rented a larger apartment together. But in the depths of the real estate downturn, Sud couldn’t find a buyer willing to match what she’d paid for her co-op only two years earlier. And when she approached the board for permission to rent out the unit, the answer was no: The building had already reached the maximum number of units it allows to be rented at any given time.

Sud had no choice but to keep the apartment on the market, sitting empty, while she paid $3,000 for her mortgage each month. It finally sold in October 2011 for less than the purchase price.

“Had I been able to rent it out and cover [the] mortgage, I would have held on to it,” Sud said.

Nearly all New York City co-ops restrict shareholders’ ability to rent out their apartments, with some prohibiting the practice entirely and others limiting rentals to one or two years at a time.

Thanks to these restrictions, many Manhattan homeowners — like Sud — are now facing the prospect of selling their apartments at less-than-ideal prices. Many opted to rent out their apartments during the worst troughs of the financial crisis, rather than sell in a down market. Now, however, they have exhausted their buildings’ rental limits.

Surprisingly, many co-op boards are reacting to shareholders’ dilemma by bending normally strict rules.

“Financial pressures have resulted in pressure on boards to reconsider their policies,” said Bruce Cholst, a partner at the law firm of Rosen Livingston & Cholst in Manhattan, who has recently fielded inquiries from numerous co-op boards about updating their rules.

 

Inventory uptick

For the first several years of the financial crisis, buyers complained about the lack of quality inventory on the market. Many New York City homeowners delayed selling their apartments and instead became “inadvertent or accidental landlords,” said Halstead Property senior vice president Richard Hamilton.

Now, more co-ops are hitting the market. In the fourth quarter of 2011, the number of co-ops on the market in Manhattan rose 4.1 percent to 3,839, up from 3,687 in the same period of 2010, according to a quarterly market report from Prudential Douglas Elliman. The uptick is especially noticeable for less expensive apartments, such as studios and one-bedrooms, brokers said.

The inventory increase is giving home-seekers more apartments to choose from. But for sellers, it means more competition from other owners, who may be willing to accept a lower-than-hoped-for price in order to sell quickly. In 2011’s fourth-quarter, the median sales price for Manhattan co-ops dropped 7.1 percent year-on-year to $636,407 — its lowest point in two years.

These realities have not gone unnoticed by co-op boards.

“[Boards] don’t want to reduce the value of apartments in the building by forcing people to sell in a down market,” said Emanuel Edwards, director of management at the Manhattan brokerage and management company Argo Real Estate.

In response, a number of co-op boards are modifying normally rigid subletting policies, industry experts said.

Many co-ops limit the number of years shareholders can sublet their apartments — two of every five years, for example, and only after they’ve lived in the building a certain period of time. The reason, explained Core senior vice president Lawrence Rich, is that co-op residents often don’t want transient neighbors. Boards, he said, “want to know who’s in the building.”

Banks also view buildings with high owner occupancy as more stable and therefore more worthy of investment. Most banks, as well as Fannie Mae, typically require 70 percent of apartments to be owner-occupied for financing, according to Hamilton.

But an increasing number of co-op boards are willing to work with shareholders on subletting issues if they provide documentation or bank statements that prove their financial hardship, Edwards said.

Most co-ops don’t want to publicize rule changes. But in the past year, sources pointed to a Chelsea co-op that started allowing shareholders to sublet their apartments for up to five years, instead of the previous maximum of three; an Upper East Side co-op that scrapped a ban on subletting for residents who demonstrated financial hardship; and a Queens co-op that raised the ceiling on the number of units in the building permitted to be sublet at the same time from 20 to 35 percent.

Other boards haven’t inked formal changes to their subletting policies, but are allowing some leniency on a case-by-case basis. That way, they can “leave it to the board’s discretion,” Edwards said.

Another motivating factor for boards to change their rules is that some owners will rent their apartments, regardless of whether they’re allowed to or not. Sud admitted that she rented her co-op without the board’s knowledge for two summers, but only charged her tenants $1,200 a month — well below market rate — because she felt her tenants could be discovered and evicted at any time.

 

Still no picnic

Just because some boards are willing to adjust the rules doesn’t mean they’ll make subletting easy.

A luxury building in Sutton Place recently agreed — after a month of deliberating — to let a couple rent out their apartment for a year, after the husband was transferred to London for business, according to Rich, who represented the couple in their search for a tenant. But the board insisted that potential subletters go through the same thorough financial vetting as potential buyers.

“The process was so difficult, the couple decided to go to London and leave the apartment empty,” explained Rich, who declined to identify the building.

And co-op shareholders also shouldn’t expect boards to continue their subletting-friendly policies once the market improves. In fact, some experts are already seeing boards returning to their stricter ways.

“In very difficult times, some co-ops loosen their standards,” said Aaron Shmulewitz, a partner at Belkin Burden Wenig & Goldman and head of the co-op and condo practice at the Manhattan law firm. “But as the market improves, or as the perception is that the market has improved, board members say, ‘We don’t have to feel sorry for [shareholders] who can’t sell their apartments anymore.’”

 

  • Penelope

    That is a time for REBNY to do something.

    While all Coops are self governed. REBNY is politically connected.

    –There is a lack of rental apartments.
    –Co-op sellers that want to hold and not lose money should be able to rent for a while. It is not fair that a board can dictate in this economy.

  • N

    I live in Lafayette Park, a coop townhouse neighborhood designed by Mies van der Rohe in downtown Detroit.

    We also have a fairly restrictive rule that limits the subletting of our townhouses. I believe that our policy has greatly benefitted our community. In the current real estate meltdown, Lafayette Park has not (to my knowledge) had a single foreclosed unit. This is due to a number of factors. One is the fairly low selling price to begin with, then there is a required 10 or 15% down payment which means that every owner has an equity cushion should prices decline at a time when they might need to sell. Also, prospective buyers (and the occasional renter) are vetted by the board for financial stability.

    Our being a true neighborhood of owners (rather than transients) who have a vested interest in maintaining and improving our community over the long term has served us well and we continue to attract an educated, diverse, and involved group of residents.

    Many condo developments in metro Detroit have lost their sense of community and much of their value because many owners have opted to rent out their units with little oversight by their boards.

    If you’re interested, here’s a short video tour of Lafayette Park.
    http://www.youtube.com/watch?v=OROh-5c92Ag