Pretending to Be a Coop: Confessions of a Condominium
I used to study the violin when I was a teenager. Home alone in the summer practicing it could get boring, so I would imagine walking onstage to the roar of applause as guest concert master at the Moscow Philharmonic, and having to stand and then sit again three times just to calm the ecstatic audience eager to hear my prodigal vibrato and legendary bowing. Of course, I never quite made it out of the back of the second violin section of high school orchestra, but it was fun to pretend.
Condominium Associations in New York City today also like to pretend. They like to pretend they are coops, replete with the awe inspiring ability to require lengthy board applications, financial documents, reference letters and, most recently, a favorite of the coop process: the maintenance escrow. Unfortunately for the condominium seeking to emulate their neighbor coop building, its by-laws rarely permit such requirements.
Let’s take a minute to review. A coop typically has a right of approval of a purchase transaction. That is, if a coop shareholder wants to sell their apartment, the prospective buyer must submit a full application to the board of directors who have the right to approve or reject the application, so long as they don’t violate fair housing laws and applicable coop by-laws. Condominiums, on the other hand, typically have a right of first refusal of a purchase transaction. Unlike a right of approval, the condominium board has two options if a unit owner wants to sell: (1) exercise its right of first refusal, and buy the condominium on the same terms and conditions the unit owner proposes to sell to a third party, or (2) waive their right of first refusal (by issuing what is commonly referred to as the “waiver”), thus stepping aside and letting the owner sell to the buyer. Condominiums almost never exercise this right of first refusal, and the whole process is generally considered to be superfluous waste of time and money.
Unlike a condominium, a coop has the right to approve or reject a proposed transaction, or to approve a prospective buyer conditionally. For example, if the financials of a buyer are borderline, it might require the prospective purchaser to fund an escrow account of one to two years of maintenance payments to be held by coop management to ensure the new shareholder pays its monthly maintenance obligation.
But recently condominium associations facing financial issues stemming from unit owners going into arrears on monthly common charge payments, have begun to try to impose similar escrow “conditions” on the issuance of the waiver. For example, non-US buyers or entity purchasers, like an LLC or a corporation, are often suspect by the board, who reason that an LLC is merely a “shell” created for the purpose of acquiring the unit, or the non-US purchaser will be hard to track down to get monthly dues from. Condominium boards evaluating the waiver application package of such buyers offer to issue a waiver only if the buyer “funds” and escrow with one or two years of common charges in advance. I dealt with this issue recently when a managing agent called me about a prospective purchase in which I was representing the buying entity, an offshore LLC which was paying over a $1million cash for a unit in the building.
“The financials of the LLC only show enough money to make the purchase, how are they going to pay ongoing common charges?” asked the managing agent. “I don’t know,” was my immediate response.
“Well we can’t approve this without an escrow of 2 years of common charges,” was management’s equally quick retort. To which I responded, “unfortunately you don’t have that right.”
When confronted with this scenario by management, I remind them of their two choices: (1) buy the unit if you don’t like my buyer, or (2) step aside and let us do the deal. The by-laws of the condominium permit nothing else.
Of course the reality is the LLC paying over a $1million in cash for the unit is going to get funding from the same source that funded the acquisition, usually an individual who for tax or estate reasons is acquiring the real estate in an entity rather than individually. Someone who is putting up a million dollars is not going to risk a levy on the unit by the condominium board for unpaid common charges. But this is little comfort to a board worried about how to pay ongoing expenses of the association when unit owners don’t pay their monthly dues. And I understand the problem, and why they would like to impose an escrow condition on the issuance of a waiver. The only problem is, they have no right to treat the LLC or non-US buyer any differently than an individual.