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Should our co-op be worried about a new sponsor hassling our tenants?

By Virginia K. Smith  | June 20, 2016 - 1:59PM

I'm on the board of a co-op where the sponsor still owns more than 30 percent of the shares associated with rent-regulated units. He's near retirement, and looking for an investor to buy his shares. Should the board be concerned about a Steve Croman-type investor buying him out, and making life miserable for our longtime non-shareholder residents? Is this a real risk or do these predatory landlords tend to go after easier targets, where they wouldn't have to fight for control of a board?

While a new sponsor may well want to get rid of some of your building's rent-stabilized tenants, truly predatory investors aren't likely to be too interested in a co-op building, say our experts.

"Guys like Croman don't like to pay retail price [e.g. the cost of unsold shares]," says Jeff Reich, an attorney with Schwarz Sladkus Reich Greenberg Atlas LLP. "They prefer to buy entire rent-stabilized buildings. And in a co-op or condo, they can't bring 'owner use' eviction cases, which makes it less appealing."

"In some ways, a sponsor in a co-op is more limited than a landlord who owns a building," concurs Sam Himmelstein, a lawyer who represents residential and commercial tenants and tenant associations (fyi, he's a Brick sponsor). "They don't run the building, so they can't, for example, make sure the doorman is spying on tenants, they can't install cameras outside the doors, they can't cut off the building's services."

Instead, says Himmelstein, unscrupulous sponsors will sometimes stop paying the maintenance on blocks of rent-stabilized apartments, which lands the tenants in housing court. "In that case, the board has to sue the sponsor, who's the proprietary tenant, but they also name the rent-stabilized tenant as the 'under-tenant' in the case," he explains. This means that through no fault of their own, the tenants could end up in court (and on the tenant blacklist), and could eventually decide it's easier to just leave. (Harassment through the legal system is a common tactic for ousting stabilized renters.) 

The more likely, scenario, however, is that a new sponsor will look to get stabilized tenants out via buyouts. "Very often a mass purchase like that is going to be followed by buyout offers, and the sponsor might start investigating which tenants are more vulnerable," says Himmelstein. "It's similar to what would happen in a regular rental building, but the sponsor doesn't have all the same weapons at their disposal as a typical landlord or building owner."

"Given the price of most co-op investment packages, any purchaser would likely have a strong financial incentive to attempt to vacat as many unsold apartments as possible," notes Reich. And your board's level of concern is admirable, if unusual, as board members more frequently encourage sponsors to empty stabilized apartments and fill them with higher-paying residents.

In any case, the bottom line here is that while a new sponsor is very likely to try to give your building's stabilized tenants the boot, it's unlikely that a truly nightmarish investor would have much interest in your building. But whoever ends up buying the sponsor's shares, there's not a whole lot that the board can do about it.

"Boards have no say whatsoever in who buys the block of units, and no say over what the sponsor does with unsold shares," says Reich. "The board could try to help the tenants with court testimony, affidavits, etc., but their fiduciary responsibility is to the sponsor, and not the tenants."

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