Reacting to Sponsor Default Take Swift Action to Avert Disaster

tarting in the mid '70s and continuing through the latter part of the '80s, New York City was engulfed in the co-

oping craze. As prices spiralled upward, owners of residential property were cashing in by converting buildings from rentals to co-ops.

However, many of the conversions that took place in Brooklyn and Queens in the mid-'80s were effectuated by Johnny come lately's who, to get in on the feeding frenzy, were buying residential properties at high prices, pledging their unsold shares to local lenders, and trying to pyramid their holdings into the proverbial pot of gold.

By 1990, the bottom had dropped out of the real estate market and sponsors who had purchased properties for exorbitant prices and had leveraged their holdings through pledges to local lenders, were beginning to default. The inability to sell apartments, coupled with the negative cash flow resulting from apartments where rent-stabilized and rent-controlled tenants were paying less than the sponsor's maintenance and debt service, brought down many a sponsor's house of cards.

The Sponsor-Co-op Relationship


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  • The sponsor's duty was to sell all of the apartments containing the proprietary lease to the apartment and shares of the corp included. Unsold units cannot occur if the sponsor had issued option-to-purchase leases for those customers who could not or did not get a proprietary lease. In other words, unsold apartments such as vacant or occupied by rent stabilized or controlled tenants would have been sold if the option-to-purchase leases were issued thus relieving the sponsor from owning such units. There would be no rent stabilized nor controlled tenants in each apartment and each of them would have been non-shareholder tenants other than shareholder tenants in the co-op building. This is aside from subtenants or under-tenants under either shareholder tenant or non-shareholder tenants renting their unit partially such as one or more bedrooms inside a co-op apartment. Furthermore, how can a default notice alerting the arrears be sent to the sponsor's lender when the lender is his cousin whom he gave money to, to be the corp's mortgagee? How is the sponsor's "lender" going to remit payment in the default when all of the money used to lend was coming from the sponsor? If the sponsor defaults in this case, what then? The sponsor goes to bank for a loan on behalf of the corp and leave it in debt with the bank paid for by the shareholder tenants? The sponsor may default for a new (and cheaper) mortgage at the auction to buy back the units for other purpose or agendas.