Q&A: Unfair Allocations

By Kenneth Jacobs, Esq.

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Q Our 20-floor co-op consists of two small buildings. The building went co-op in 1982 and the sponsor/owner converted from oil to gas, removed the boiler at his expense, and converted the basement space into a 1,200-square-foot-duplex apartment without adjusting the shares. This meant that the new apartment had the same allocation of shares as an 800-square-foot apartment. Another duplex apartment with garden space in the building was sold to a friend of the owner for a mere 14 shares—for approximately 1,500 square feet. By comparison, second floor residents with 800-square-foot apartments have 12 shares and third and fourth floor residents have 10 shares. I understand that sunlight and views can affect share allocation but these are pretty much the same in all the apartments. The only variance is the amount of space and floor location in the two duplex units.

These unequal shares have the larger apartments paying significantly less maintenance in proportion to their space than the other smaller apartments. I have mentioned this to the board but so far they’ve ignored the issue. What pressure can be put on the board to correct this unfair situation? Who can be called upon to fairly assess and change the allocations? Any advice would be most appreciated.

—Manhattan Shareholder

A According to Kenneth R. Jacobs, an attorney at Smith, Buss & Jacobs, LLP, with offices in Yonkers and in Manhattan, “In order to be considered a valid cooperative corporation under the Internal Revenue Service Code, the number of shares allocated to each apartment must bear a “reasonable relationship” to the relative value of each apartment to the property at the time of the conversion, when shares are issued and paid for. To satisfy that requirement most cooperative offering plans include a “letter of reasonable relationship” in which an expert gives his opinion that the test is satisfied. The test of “reasonableness” gives the person making the allocations wide leeway.

“The only time this test is applied is when shares are issued, either at the time of the initial conversion or is additional shares are ever issued in the future (e.g. when non-residential space is converted into residential space and offered). While you may have been able to deal with an unfair allocation as part of the initial conversion, at this point (23 years later) you have little recourse to correct the problem. Also, as you noted, it will also be hard to convince other shareholders to absorb the additional costs that a reallocation would bring to them.

“You also mentioned that the sponsor converted basement space into an apartment for sale after the conversion. If the basement space was previously common area belonging to the cooperative, the proceeds of that sale should have gone to the cooperative rather than the sponsor. However, the statute of limitations for pursuing the sponsor appears to have expired long ago, unless you can show circumstances that prevented your from uncovering it before now.”

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