Q&A: Purchasing Co-op Shares Under Holding Company

 

Q Our co-op has a prospective purchaser who refuses to buy the shares in his own  name. He wants the shares to be purchased by a holding company or limited  liability corporation (LLC) that was created specifically for that purpose. How  can a board approve the sale of shares to a corporation? We thought the whole  idea of co-ops was to keep apartments out of the hands of companies.  

—Skeptical of New Buyer  

 

 

A “While there is no current legal prohibition against an LLC or corporate  ownership of cooperative shares and a proprietary lease, there is clearly an  interest in the apartment corporation of controlling the occupancy of  apartments,” says attorney Eric M. Goidel, of the Manhattan-based law firm of Borah,  Goldstein, Altschuler, Nahins & Goidel PC. “The questioner may remember the fact that prior to the Federal Tax Reform Act of  1986, shares of an apartment corporation could only be held by individuals.  

 “Although corporate and LLC forms of ownership are now permissible, many  cooperatives still refuse such forms of ownership. Placing shares and a  proprietary lease under such forms of ownership may serve a useful purpose to  the individuals, who would otherwise be the shareholders, for estate planning,  Medicaid and other purposes. The problem with such forms of ownership is how can the apartment corporation  control who will actually live in the apartment? Control can be accomplished by  requiring the corporation or LLC to disclose the individuals who will reside in  the apartment, interview those individuals, and for an agreement to be entered into with the  corporation or LLC that occupancy is limited to those individuals.  

 “Additionally, boards will generally try and place limits or even an absolute  prohibition on the ability of the corporation or LLC to sublet. Another consideration is obtaining personal guarantees of the maintenance and  other obligations of the proprietary lessee, where the LLC or corporation is a  single asset entity created solely for the purpose of owning the shares  allocated to the apartment.  

 “Where the LLC or corporation is not a single purpose entity, it is possible for  the apartment to be affected by the claims of others such as creditors of the  entity or bankruptcy filings. It is therefore preferable that the entity be solely created for such purpose.  This matter should clearly be run past the apartment corporation’s attorneys for review and for the preparation of necessary documents. All costs  of review and document preparation should be borne by the shareholder making  the request.”  

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