Cooperation is Key The Role of the Involved Sponsor

Working together is something we all must do in one or many ways pretty much every day. But it’s a rule of thumb that’s easy to forget, given the varying pressures of a 21st century economy and the needs of businesses to profit, and of residents to have reasonably peaceful lives in their multi-family dwellings.

So when a building converts from being a rental property to a co-op or condo, and the former owner of the building retains financial interest in the property, objectives and attitudes can collide. As long as any unsold shares are owned by the former owner or so-called sponsor (he, she or it, in the case of a corporate developer), the sponsor has a place on the board. That means that said sponsor has an allotted number of votes to cast in board decisions that affect the building at large.

Partnering Temporarily

Most of the time sponsor/board/manager relations are smooth and trouble-free. But sometimes, a sponsor can become a problem for both management and the board, because the interests of the two parties seem to collide, or the sponsor takes an adversarial stance for one or another reason.

As with many things in life, education can provide a better footing for navigating such complex relations. Understanding the role of the sponsor, how the sponsor interacts and works with the board and management of a building, and how that relationship changes as the sponsor’s unsold shares are sold off, can give any resident a calmer temperament and sound arguments when issues with a sponsor arise.

In most cases, sponsors stay involved with a building because they must. They need to see their investment through to fruition, or in some cases, it may be more profitable for the sponsor to rent the units, rather than selling them all off as fast as possible.

“They feel they’re protecting their assets by staying involved,” says Dennis Greenstein, a partner with the Manhattan-based law firm of Seyfarth Shaw.

And while power doesn’t necessarily always corrupt, it might be a temptation for those that have it. Sponsors, therefore, may be reluctant to give up the management power which they hold. If they are making more money from their property by renting it, and if the required percentage of units in the building has been sold (so the sponsor is within the letter of the law by retaining those units it owns), profit margin dictates that the average sponsor will stay involved. Especially if the sponsor has an exemption, such as not needing board approval to sublet any of the units they own, there may be little reason for the sponsor to bow out.

There is no limit to how long a sponsor can stay involved (in terms of having an ownership) in a building. As long as the sponsor is paying common charges and other obligations, he or she can continue to own and rent the property. In New York State, converting a building requires filing an offering plan with the New York Attorney General. As long as the building is continuing to sell units, it must keep the offering plan current. Usually, 15 percent of the building’s units must be converted to private ownership for the plan to be considered effective. Under the Martin Act, the state law that governs cooperative conversions, for a housing co-op to be set up, a sponsor must sell either 51 percent of the units (known as an "eviction" plan) or 15 percent of the units, (a "non-eviction" plan).

In one prominent legal case, 511 West 232nd Owners Corporation vs. Jennifer Realty Company, the New York State of Appeals held that sponsors had to make a legally enforceable commitment in their offering plans to “create a fully viable cooperative.”

Resolving Differences

A sponsor’s role fits or clashes with the role of the board in various ways, depending partly upon how much of an interest the sponsor retains in the building. While a sponsor cannot personally overrule a board decision, he or she can have an extraordinary influence on that decision. If the sponsor has control of several seats on the board, to which representatives are appointed to do their bidding (rather than being primarily concerned with the interest of the building residents in general), the sponsor could thwart the legitimate efforts of the board members to effectively manage the building.

Often, the sponsor will not voluntarily relinquish any of the powers given to them, says Eric Zim, a partner with the Manhattan law firm of Horowitz & Zim.

“It could be a huge headache if the sponsor is not willing to cooperate,” Greenstein says. “It can be quite confrontational.”

For example, if a sponsor doesn’t like a planned board action such as a special assessment needed for building improvements, the sponsor could have his own board members vote against the move. Or, he or she could have them fail to show up for the meeting, thus preventing the board from having a quorum and doing any business.

Usually, the conflict is that the sponsor’s agenda is different than that of the rest of the board, says Gerard Picaso, owner of Gerard J. Picaso Inc., a property management firm. “Often, the sponsor is just an investor. He wants to get the tenants he has out and sell the apartments. He only changes if he can up the rent and make money with that property… But some sponsors are very fair, and want what’s best for the building,” he says.

Sometimes, there’s a time limit set on how long the sponsor can keep seats on the board, which is noted in the offering plan. But when the number of seats the sponsor has on the board depends upon the number of apartments he owns (which is usually how the power is delineated in the offering plan), and the rental business is good, there may be little reason for the sponsor to sell off the units and give up that board power.

Occasionally, a sponsor thinks he or she is exempt from following the rules of the building. But just because they are exempt from having their own tenants approved by the board before they can rent in the building doesn’t mean that they are above the community bylaws. Such an unyielding sponsor might contest abiding by building rules in making alterations to the apartments. Or, such a sponsor might be reluctant to approve redecorating common areas, because the expense will cost them and hurt their bottom line.

Right Not Might

And some sponsors may think they have more rights than they are afforded. It’s fairly common for sponsors to think they can use the building superintendent and other staff to do work on the sponsor’s apartments. But the super works for the co-op; it is the sponsor’s own obligation—not the co-op’s—to handle maintenance on his or her own apartments.

Such a major change as a building conversion may require the board touching base with the super about their duties, as well as firm reminders to the sponsor of his or her own responsibilities as an owner of rental units in the building.

“You have to re-educate the super. Any work he’s doing has to go into a logbook,” Picaso says.

Even though board members who hold sponsor-appointed seats technically represent the interests of the sponsor (in their own view or the view of the sponsor, not in the bylaws’ view), the entire board must be on the same page if it is to work properly. Just as when one or a few board members create their own power bloc within a board to pound through their agenda, when a sponsor tries to act unilaterally, without the consent of the other board members he or she doesn’t control, the ruling group is in for trouble.

“The concern sometimes, if you have an irresponsible sponsor, is transparency. They need to let non-sponsor-appointed board members know what’s going on, what’s happening in the building, and to participate in the decision-making,” Greenstein says. “It needs to be a cooperative relationship, and both sides need to view it that way.”

That’s why it’s important for sponsors, as well as board members and other residents not affiliated with sponsors, to be mindful of the needs and wishes of everybody in the building. This could mean giving a little ground, in the interest of creating a more peaceful community.

While sponsors generally are not required to have board approval for tenants in rental units they own, some boards might have legitimate concerns regarding the people who are renting or may in the future be renting those units. So, some sponsors might want to give a little in this area, and allow the board to review prospective tenants and register any concerns with the sponsor if they like, though of course, such concerns would be non-binding.

Such a caveat offered by the board regarding renters could be that they will be “in the character of the building,” and won’t create problems. They might request a copy of the renter’s application, to ensure that the prospective tenant won’t be anyone who would diminish the quality of the building. Sometimes, this agreement could be the way towards a smoother-running community.

Similarly, if there are problems with the behavior of any of the renters living in a sponsor’s apartments, board members should take a friendly, if not gingerly approach with the sponsor, to speak with them about the problems. If the sponsor is an unruly one who likes to go their own way in building matters, this could be tricky.

“Tread carefully in this area,” Zim says. “The board should reach out to the sponsor, if the sponsor has powers it could use, and try to get the sponsor to conduct themselves in a manner that’s helpful to themselves and the building.”    

Jonathan Barnes is a freelance writer and a regular contributor to The Cooperator.

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