Page 6 - NY Cooperator December 2020

6 THE COOPERATOR — DECEMBER 2020 COOPERATOR.COM Cooperator.comFrom Even before the arrival of COVID, the co-op and condominium markets in New York City were soft ening. Th e pandemic has only served to exacerbate the problem. Now, market forces are fl ying wild, with unexpected results everywhere you look. According to some reports, pric- es in prime neighborhoods in Manhattan are down as much as 30%. At the same time, home prices—especially for those with the former white elephant, a swimming pool—in the New York suburbs are soaring, and new condo units in the boroughs with private outdoor space are becoming more sought-aft er. Th e questions are: how long will these disruptions last; and what, if anything, can co-op owners and boards do to stabilize prices? What Sets Co-ops Apart? As most readers are aware, unlike a condominium, a co-op apartment is not real estate in the legal sense of the term; it’s ownership of shares in a cooperative corporation which owns real estate. Ownership of said shares entitles the shareholder to occupy an apartment unit within the cooperatively owned building, governed by a board of directors and what’s called a proprietary lease. As such, the co-op board has veto power over sales of shares and transfers of proprietary leases. Like real property, co-op units do of course carry a specifi c dollar value. And like real property, co-op values—and hence prices—fl uctuate with the market (when not constrained by bylaw provisions to the contrary). Th is begs the question: can a co-op’s board act as a buff er against falling prices in order to preserve the market value of other units? Can they realistically (and legally) decline a transfer based on a lower purchase price with an eye to protecting values throughout the building? Is It Legal? According to Julie Schechter, a partner at Armstrong Teasdale, a law fi rm based in New York, “Co-op boards are allowed to reject purchasers for any reason so long as it is not dis- criminatory. Th is includes the right to reject an application due to a low purchase price. A board’s concerns about the eff ect a low price might have on other apartment values is justifi ed; however, the board also has a responsibility to be fair to individual shareholders. To be fair to the shareholder selling the apartment, the board should try to determine the current market value of the apartment, and not simply decide based upon what the board believes the apart- ment is worth. Boards should be particularly cautious about rejecting an application due to a low purchase price in the current market, because the pandemic has had a signifi cant eff ect on apartment sales prices in 2020.” Can Co-op Boards Set Unit Prices? Fighting Market Forces in a Soft ening Market BY A.J. SIDRANSKY According to a recent press release, the Manhattan-based law fi rm of Schwartz Sladkus Reich Greenberg Atlas LLP (SSRGA) recently obtained the dismissal of a lawsuit brought against the board of a Brooklyn condominium by a group of unit owners. Th e owners sued on behalf of themselves and other unit owners in the building to prevent the board from mak- ing façade repairs required by Local Law 11 and assessing unit owners for the cost. SSRGA partners Debra M. Schoenberg and Steven D. Sladkus represented the board of Bridgeview Tower Condominium at 189 Bridge Street before Justice Kathryn E. Freed in New York State Supreme Court, New York County. Th e petitioners—which included representatives of Bridge View Tower LLC, the condo’s developer/sponsor—claimed that the work was unnecessary and overpriced, and that conducting the repairs during the COVID-19 pandemic increased costs and placed undue burden on them during an economic crisis. According to SSRGA’s release, “Th e Court agreed that the petition should be dismissed on multiple procedural grounds, including that the petition was not verifi ed, and failed to set forth a legal basis for petitioners’ standing to commence the proceeding in the fi rst place. On the merits, the Court agreed that the petition should be dismissed because the business judgment rule shielded from judicial review the board’s decision to proceed with the Local Law 11 work and its decision to impose the cost on unit owners through an assessment.” Th e release goes on to say that “Th e Court relied on evidence submitted by SSRGA demonstrating that the board acted in good faith in accordance with the condominium’s governing documents, because the building’s façade was visibly in need of repair, units were experiencing water leaks, and the façade repairs were mandated by the City of New York. Justice Freed held that because the petitioners failed to show that the board acted wrongfully or outside the scope of its authority so as to warrant judicial inquiry, the petitioners failed to show a likeli- hood of success on the merits and the entire lawsuit, therefore, should be dismissed. Th e board was awarded its costs and disbursements in defending the baseless action.” “We are pleased that the Court agreed with our arguments in this case,” Schoenberg said. “Th is decision demonstrates that condominium boards’ decisions on how to operate their buildings continue to be protected by the business judgment rule, so long as they do not self-deal or act in bad faith or some discriminatory manner. Baseless and unsubstantiated allega- tions by unit owners will not trump good faith business decisions.” n COOPERATOR.COM Court Rules in Favor of Brooklyn Condo Board Business Judgment Rule Protected Board, Say Attorneys BY COOPERATOR STAFF Schechter goes on to say, “Th e board should also consider the potential motivations a seller might have to agree to a lower price than what the board might otherwise feel is appropriate. Discounted sales happen for a variety of reasons; they oft en indicate an urgent situation on the part of the seller. Perhaps the sellers are scared to be in NYC during the pandemic. It could also be due to the seller’s fi nancial situation. With so many people losing their jobs in recent months, it is possible that the sellers can no longer aff ord to maintain their fi nancial obligations and need to sell immediately. Lastly, there is also the possibility that the value of the apartment has simply decreased due to the pandemic, and the \[lower\] off er may refl ect the current value of the apart- ment. Regardless, the board should do its due diligence before rejecting a purchase application solely for a question of price.” Mark Hakim, an attorney with Manhattan-based Schwartz Sladkus Reich Greenberg Atlas, off ers a similar view. “A co-op board cannot have a policy across the board of minimum sale prices. Prices, facts, and other items fl uctuate, and it wouldn’t be prudent. However, nothing stops a board from rejecting a sale predicated on an inadequate sale price from time to time. We always caution our boards to be mindful of the salient facts, which certainly include the current market conditions, the physical aspect of the unit, etc. Th e board’s discretion… would be gener- ally protected within the business judgment rule, and sale prices throughout the building would likely be considered a legitimate business concern for the board.” The View from the Field Joanna Mayfi eld Marks, a broker with Brown Harris Stevens in their Brooklyn offi ce, says, “I don’t know if it’s legally allowed to manipulate share prices, but I know it happens! It’s really helpful when the board or manager is honest about this so a buyer can potentially come up slightly in price, rather than losing their position, time, and money spent on an appraisal, loan application, and attorney retainer just because they’re off by what may be a truly negligible number. For example, consider a two-bedroom that may have traded at the low $1.5 million mark in a cooperative pre-COVID; the \[board\] may feel that that unit trading for $1.45 mil- lion—even in a down market—is a huge drop. Th at $1.5 million may have been a benchmark of value to the building. Th at said, I have proven to a co-op board in the recent past that a disagree- able price was warranted by other comps, property condition, days on the market, and the bank appraisal—and it revived the deal.” While market fl uctuations are diffi cult for anxious owners to absorb, particularly when they are selling their units, price drops are as normal as price increases in a free market. Overall, though, the practice of a board attempting to control price fl uctuations—even with the best of intentions—is probably ill-advised. n