Buildings with dangerously few sales

A TRD review found a number of NYC buildings where sponsors are hoarding units — and preventing re-sales

Dec.December 01, 2013 07:00 AM
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Owning a co-op or condominium unit sometimes carries a caveat: You might not be able to sell it. A building sponsor’s refusal to sell units can make it difficult, or even impossible, for residents to unload — or even refinance — their homes at market rates.

The problem lies with the current mortgage lending market. According to Federal Housing Administration guidelines, condo buildings are required to be at least 50 percent occupied by owners in order to get FHA-backed loans. In addition, for condos and co-ops, no one investor can own 10 percent or more of the building.

Since most mortgage lenders follow the FHA guidelines, potential purchasers in buildings with a higher concentration of investors, or a higher percentage of sponsor holdings, are likely to be denied mortgages. A would-be buyer is then left with the option of an all-cash purchase — not always feasible — or seeking a mortgage lender who will go outside the guidelines, but charge a higher rate for doing so.

As a complicating factor, all-cash buyers are commonly drawn to high-end buildings, and high-end these buildings typically are not.

The net effect on current owners can range from a slight chill to a deep freeze. In a lawsuit filed in August, for example, 13 owners of condo units at the Empire in Nolita say that their building’s high sponsor concentration “effectively trap[s]” them in their current apartments.

The group sued in an effort to compel sponsor Katherine Chou of Chou Management to sell units at the 32-unit building at 259 Elizabeth Street, which was converted and declared effective in 1988. Chou owns “more than 37 percent of all units, with a declared intent not to sell,” the suit said.

Given Chou’s high percentage of holdings, few prospective buyers qualify for mortgage loans and the unit values have been diminished, according to the lawsuit.

“The guidelines and restrictions on loans in buildings with a high number of sponsor-owned units have a tremendous impact on the overall mortgage market,” the suit said.

In many cases, owners want to sell because they can no longer afford to live in their units or because the units are no longer adequate for their growing families, the suit stated. The unit owners were allegedly “lied to and defrauded” into believing that all of the apartments in the building would be sold.

Even while the residential market in New York City is strong, an examination of nearly 1,000 buildings showed there are dozens with dangerously few sales. The Real Deal reviewed a list of buildings that were at least 10 years old, with offering plans filed during the conversion boom between 1982 and 2003, and with remaining unsold units between 2011 and this fall. The information was provided to TRD by the New York Attorney General’s office through a Freedom of Information Law request.

Of the nearly 1,000 buildings, at least 75 buildings had less than 50 percent of their units sold. Among these, there are 13 buildings in which more than three-quarters of the units have gone unsold, far below the typical unit turnover seen in apartment buildings.

Admittedly, these are outliers: Most sponsors exit after developing or converting a building.

Problems arise, however, when the sponsor stays and manages rental operations without the consent of the new unit owners.

Residents are often wary to share their experience outside of a lawsuit, for fear of being blacklisted by lenders, said Arthur Weinstein, co-op lawyer and co-founder of the Council of New York Cooperatives & Condominiums, a membership organization for co-ops and condo board members.

For someone seeking financing for a unit at a building with low sales, banks will only offer an adjustable-rate mortgage instead of a coveted fixed-rate mortgage. People are quick to say “no” to an adjustable-rate mortgage because they’re riskier and involve unpredictable rate increases over time, according to Robbie Gendels, vice president and senior loan officer at the Washington, D.C.-based National Cooperative Bank.

The buyer can escape this risk altogether by paying for his home entirely in cash. But, as Gendels pointed out, all-cash buyers are often wealthy and not making purchases in low-sold buildings.

The buildings that TRD examined with a high percentage of unsold units are largely co-ops and are concentrated in Brooklyn, Queens and the Bronx, the review found. Labe Twerski, who heads up Daejan (NY) Limited, was the most recurring sponsor and/or principal for these types of buildings in those boroughs, according to information in the real estate finance database run by the AG’s office. Daejan controls the landlord Residential Management. Neither Twerski nor other officials at Daejan could be reached for comment.

In 2008, Daejan faced a suit over the Bronx co-op at 2215-75 Cruger Avenue, in which tenant-shareholders claimed it refinanced the building’s underlying mortgage without board approval and affixed signatures to legal documents not actually signed by duly elected board members.

Twerski, president of Residential Management, has had a checkered past, running up the third-most infractions of all Bronx landlords on the NYC Public Advocate’s Landlord Watchlist, with 644 since the list was launched in 2010. He has, however, cleaned up his act — as of the middle of last month he had 64 infractions.

One of the most glaring examples of low sales is 54 Bay 29th Street, a 31-unit, four-story co-op building in Bath Beach, Brooklyn, where only seven units have been sold since a 1988 conversion, according to city property records.

James Hagipetros, who serves as sponsor at the co-op with Nicholas Hagipetros, told TRD that sponsors opt not to sell in order “to decontrol rent-stabilized apartments. The city doesn’t regulate co-op buildings.” (After the original renter moves out, rent control and rent stabilization laws do not apply to a co-op.)

Another reason sponsors hold onto units is to hold out for the market to come back, renting their units out at market rates in the interim. This way, they dodge an owner’s income tax. When sponsors or others rent, they usually offset all of their expenses of holding the rental units against the rental income received. As a result, they usually only pay tax on the difference between their rental income and their costs, said attorney David Berkey, who represented residents of a Riverdale, Bronx co-op in a landmark 2002 case.

Some sponsors have turned their units into “mini-hotels or [even] brothels,” said lawyer James Samson of Samson Fink & Dubow. “If there never was an intention to sell, at the introduction of an offering plan, then it was a sham conversion,” he said.

“The rates are low, inventory is small — wouldn’t you think this would be a good time to sell?” Gendels added.

In the 2002 case of 511 West 232nd Owners Corp vs. Jennifer Realty, the court ruled that the sponsor had a contractual duty to sell apartments in a “timely” fashion. Since then, the AG’s office has required nearly all offering plans to contain a promise by the sponsor not to “control” the co-op for a specific amount of time. The timeframe is often five years from the first closing, or on the sale of 50 percent of the shares of stock offered for sale — whichever comes first.

Still, the AG’s definition of “control” doesn’t automatically prevent a sponsor from voting for board directors who are his or her friends.

The AG’s office, which does not actively track these situations, declined to comment for this article.

“We work to negotiate with the sponsor to sell units over time — five to 10 years, or while the building’s in a state in which banks will lend,” Berkey said. “But they rarely agree.”

Although the problem is less frequent in Manhattan and Staten Island, it still exists. Litigation is ongoing in the case of an Upper East Side co-op board against Frost Equities, which alleges the firm controls nearly 33 percent of the shares of 1160 Third Avenue 25 years after the conversion, as TRD reported last year.

Many cases result in settlement, Samson said.

The defendants in the Nolita case — including Chou and her husband, Robert Chou, the property manager — moved to have the complaint dismissed. Their response alleges that any claim of longstanding domination of the board by the Chous is “demonstrably false.”

Richard Resnik, the attorney representing the defendants, could not be reached for comment.

Despite buyers’ limited mortgage options under FHA guidelines, there is hope, Gendels said. At least once a week, a would-be borrower or real estate broker approaches her for a mortgage in a low-sold building, she said. National Cooperative Bank will sometimes lend in these situations on unfavorable terms.

“I can only do what I can,” Gendels noted. “If they really want the apartment — if their heart is set on it — then they’re going to go for it.”

Adam Pincus contributed to this report.

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