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Coming And Going

I get calls all the time from apartment owners complaining that the sponsor is still in control – 10, 20, even 30 years after the building has been converted. Here are a few recent examples.

  • A  199-unit Bronx co-op where the sponsor still holds 51% of the shares 25 years after the fact, which led to a dispute over its ability to vote for a majority of the board at the just past annual meeting.
  • A 400-unit West Village apartment complex that was converted 6 years ago, where the sponsor and its sympathizers manage to control the board, making it virtually impossible for anyone else to get on.
  • A 147-unit building in Forest Hills converted 30 years back where the sponsor and its loyalists continue to hold sway.
  • Sometimes the harm is self inflicted, like the investment banker who plunked down  his bonus for a $2.5 million condo in a new development, where scarcely any apartments had been sold, virtually guaranteeing: 1) the sponsor would be around for awhile (assuming it doesn’t default first), and 2) the value of the apartment would decline due to inventory overhang.

 

How can this happen, this is New York is the next question.  Here are a few ways.

1.  The sponsor won’t sell. This is a strategy that’s harder to pull off given that several recent decisions say it has to sell under certain circumstances. But that hasn’t stopped sponsors in Gramercy Park, Tribeca, and all over the city from holding on, which is why before you buy into an established building with a lot of unsold apartments, you’d better find out why the sponsor is still there.

2.  The sponsor can’t sell.  That’s the situation in that building on Morris Avenue in the Bronx, a neighborhood where it’s tough to attract buyers, especially in this market and the sponsor voluntarily agreed going forward to let resident owners elect a majority of directors.

3.  Even if the sponsor holds a majority, it’s required after 5 years to give up board control, only it really isn’t, because lots of buildings’ bylaws allow even minority sponsors to vote their shares for a majority of sympathetic board members.

4.  And once such an alliance has been forged, it’s hard to break because in some buildings so long as the sponsor owns any shares the bylaws can’t be amended without its consent, which makes it practically impossible to impose term limits

5.  Apart from dominating the board, lots of times sponsors can control financial expenditures, and other decisions for years, and by virtue of their status are exempt from most of the rules regarding sales, leasing, and renovating that you have to live by.

If you’re already in a top heavy building, it may be too late to do anything other than sue or  sell, which likely will be difficult because banks in this market are reluctant to lend where sponsors own too many apartments.

But refusing to come can be as bad as refusing to go.  And that’s what happens lots of times in buildings where the sponsor only holds a minority stake, and has bigger fish to fry and doesn’t want to get enmeshed in internal board politics so it breaks the ties that bind, like the crown broke with the colonists. Too much independence can cause problems. Here’s how:

1. A group of shareholders at a building in Rego Park who wanted to seek the support of the sponsor to amend the bylaws to limit terms couldn’t even figure out who or where he was.

2. Like it or not, most sponsors know more than the average board member cause real estate is their business, so they can be good to have around.

3. If the sponsor doesn’t show up at the annual meeting, there may not be a quorum necessary to hold elections.

4. Most important, sponsors often come with a noblesse oblige objectivity so they can break the deadlock between warring directors, even restore function to dysfunctional boards

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