Sponsor Problems? Recognize Current Conflicts

The numerous, rapid conversions of the 1980s resulted in many cases of sponsor default in the early ‘90s. But as the number of building conversions slowed in the ‘90s, it seems that potential conflict between shareholders and the sponsor may have disappeared as well. Today however, though no longer as abundant, problems still occur, and shareholders and board members alike need to be aware of difficulties they may face when sharing the building with a sponsor.

The General Business Law (GBL) and the Attorney General’s regulations under the Martin Act (Article 23-A of the General Business Law) govern conversions. The Martin Act applies to the sale of all types of cooperatively owned real estate. This includes the sale of co-op shares, condo units or interest in homeowners’ associations. The law requires that a complete description of these kinds of real estate interests be fully disclosed in the offering plan. No advertising or sales may take place until the Attorney General accepts the offering plan for filing. Before accepting a plan for filing, the office reviews the offering plan and other supporting documents submitted by the sponsor in order to determine whether the sponsor has complied with tenant protection laws and whether the plan appears to disclose all of the information required by laws and regulations issued.

When the plan is accepted, the Attorney General indicates only that the sponsor appears to have complied with the law—responsibility for full compliance lies with the sponsor. It is here that problems arise when the sponsor does not fully comply, and shareholders should keep a watchful eye out for sponsor negligence when it comes to control of the board, fulfilling obligations in the offering plan, and so on.

Completing the Conversion and Keeping Promises

Richard Nardi, an attorney with Manhattan-based Corbin, Silverman & Sanservino LLP, feels that one of the biggest issues between sponsors and board members is making sure sponsors keep promises made in the offering plan. This is especially true when a sponsor stops selling shares, even though the offering plan indicated that the shares would be sold, and not simply held by the sponsor. "When a building converts and the sponsor still owns apartments and rents them out instead of selling, it becomes a problem," says Nardi. "There are still some who don’t want to sell, though I think this has decreased dramatically."

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3 Comments

  • What can be done when sponsor holds 20 percent and hasnt sold apts for 2 years even though tenants have moved out.
  • I am a coop owner in a 90 unit bldg in Bay Ridge, Broolkyn. The tenants own 51% of the shares. The offering plan was Mar 1986. The sponsor seems set to hold the 49%. The coop manager claims that the market is not thre right now. I believe the sponsor is wharehousing. I knew that some people have tried to sell but the "Board" has voted down the purchaser. What can I do?
  • Sponsor has majority share (approx. 65%) of 200 unit Westchester, NY apt complex that went co-op in May, 1989. Sponsor controls Board and rents out unsold units at market rents. Shareholders are unable to sell their units at market prices or to obtain financing. What can be done to remedy this?