Many New York City co-ops have garages leased to the sponsor dating back to the co-op’s conversion. Though these garages, described by one judge as "a veritable gold-mine," throw off riches mostly to the sponsor, a little-known federal statute gives co-ops the right to reclaim the benefit of garage ownership–namely, the high rents the garages generate–and an important recent decision of a federal appeals court has just made it easier to do.
Congress enacted the Condominium and Cooperative Conversion Protection and Abuse Relief Act (the "Abuse Act") in 1980 to combat abusive practices in the wave of co-op and condo conversions that washed over the late 1970s. These abuses were, for the most part, variations on this theme: At the time of conversion, sponsors typically control the board because they usually own a majority of the co-op’s shares until enough units are sold to tip the scales. It is not unusual for the board of a new co-op to contain a majority of directors designated by the sponsor. This sponsor-controlled board then "negotiates" a long-term lease–commonly 50 or 100 years–with the sponsor for control of the income-producing properties attached to the building, such as a garage, laundry room, health club facilities, and retail stores.
It should come as no surprise that when the sponsor negotiates with itself, the primary beneficiary is the sponsor, who agrees to pay the co-op a low, invariably well-below-market rental, and who may then sublet these spaces at the market rate, keeping the profits. The sponsor’s motivation is not only real but substantial: In our parking-starved city, parking garages often generate annual rentals exceeding $5,000 or more per legal space.
When Congress passed the Abuse Act, it aimed to level this playing field by creating a mechanism by which shareholders could re-capture some of the income these rental properties generated. The Abuse Act granted shareholders a two-year window in which to terminate "without penalty" any lease entered into after October 8, 1980 that concerns "property serving the condominium or cooperative unit owners" and which "was entered into while [the co-op or condo] association was controlled by the [sponsor] through special developer control or because the [sponsor] held a majority of votes."
Recapturing the Flag