To Let, Or Not to Let The Impact of Subleasing on Co-op Buildings

To Let, Or Not to Let

Even though subletting is often frowned upon by boards and sometimes forbidden outright, that doesn't stop shareholders all over the city from renting out their co-ops. Shareholders may sublet as a means of making money on an apartment that's not their primary residence, or as a way to avoid paying maintenance on an apartment they won't be occupying for an extended period, perhaps because of work or travel. Sometimes even a building's sponsor will rent out unsold units as a way of generating extra income.

But with these renters come a whole slew of related issues. Are people who sublet in a co-op bound by the same rules and regulations as the shareholders of a building? What about subletters grandfathered in as rent-controlled tenants when the building converted to a co-op? Are they equally responsible for contributing to the building's upkeep? Do they represent a liability for shareholders trying to negotiate favorable loan terms from a lender, since too many sublets in a building may be viewed negatively by lending institutions?

How Common Is It?

For most co-op buildings, the idea of subletting individual shareholder's apartments just doesn't sit well. Certainly many restrictions are placed on those people who do sublet, and sometimes the practice is restricted altogether. Restrictions vary, depending on where the building is located, who lives there and even on what the market is doing.

"During the last bad real estate market, many shareholders could not sell their apartments without suffering a loss in equity," says Robert Harwood, chief operating officer of Century Management. "And many boards realized that they had to accommodate their constituents by letting them sublet."

These days, however, the market is healthier in the city, so boards tend to make it difficult by setting restrictions on sublet situations. Such restrictions include prohibiting people from subletting more than a certain length of time and charging them substantial sublet fees, according to Harwood.

Dan Wurtzel, chief operating officer of Cooper Square Realty, agrees.

"The most restrictive co-ops do not permit sublets or only in the event the shareholder incurs employment, medical or personal hardship," he says. "Less restrictive co-ops will permit shareholder sublets with limits on the number of consecutive years the apartment can be sublet."

Although the building's managing agent might offer recommendations, the decision on whether or not to sublet ultimately rests with the board, which will decide whether subletting is permitted and set the rules, fees and other guidelines that govern such policies.

Even if the shareholder's proprietary lease has no specific language about subleasing, the board can impose house rules at will, according to Stephen Elbaz, president of Esquire Management Corporation based in Brooklyn, a company that has over 20 years experience in managing co-ops and condos.

"The majority of buildings have language in the offering plan, lease, or bylaws regarding sublets," he says.

You're Caught - Now What?

If a shareholder ignores the house rules and subleases to another party anyway, the board may commence action against the shareholder and take steps to terminate their proprietary lease. The board may even fine the shareholder - as well as require that the co-op be reimbursed for any legal fees, according to Elbaz.

"Theoretically, it becomes a legal problem between the co-op and the shareholder," says Harwood. "The co-ops would probably bring a legal action against the shareholder, although it is not unthinkable that the board could commence an action against the sublet tenant, as well."

"If a shareholder illegally sublets their apartment, the apartment corporation will commence an action against the shareholder for violating the terms of the proprietary lease," explains Wurtzel. "The co-op corporation will seek to terminate the shareholder's proprietary lease if the subtenant does not vacate the apartment. If the subtenant does not vacate the apartment and the co-op corporation is successful in terminating the proprietary lease and taking ownership of the shares allocated to the apartment, it may then begin eviction proceedings against the subtenant."

It's important to note, however, that in New York City it is almost impossible for immediate eviction to occur. The process takes time. By the time the board has an attorney commence the holdover action, several months may pass. The process may take even longer if the subtenant is seen by the court as an innocent victim who was not made aware of the building's sublet policy by their "landlord," the shareholder.

Why Subletting is Frowned - or Smiled - Upon

Although they are in the minority, some positive opinions about subleasing do exist. For instance, a potential buyer who thinks he might be relocated for a year or two abroad can rest easier knowing that they can sublease their apartment while they are away. Or you might be interested to know that if the real estate market takes a nosedive, you could rent out your unit, buy somewhere else, and sell the unit when the market turns up again.

Additionally, says Wurtzel, a co-op building can generate income with the sublet fees and actually make more money for maintenance. Sublet fees come in different forms such as a percentage of maintenance, a percentage of the rent paid by the subtenant, a per-share charge, a flat rate charge, or a combination.

Jeff Bookman of Somerset Investors in Great Neck is not worried about the subtenant not caring for the place as if they owned it, and has a simple argument to back that up: "If you have a tenant paying $6,000 or $7,000 a month for an apartment, then that's likely a quality tenant."

And legal subletters must abide by the rules and regulations laid out in their sublease agreement, say the experts - and those are generally the same as the rules governing the fully-vested shareholders. Subtenants are subject to the house rules of the building, as well as the lease drawn up by the shareholder or sponsor, and by the shareholder's proprietary lease.

"As long as subtenants sign a rider with the sublease indicating they will comply with the co-op's house rules," says Wurtzel, they should not be any more of a concern than any other resident in the building. "A board may commence an action against a sponsor to terminate the proprietary lease for a particular apartment if a subtenant of a sponsor becomes a problem," Wurtzel continues. "The sponsor would then start an action against their own tenant."

Elbaz agrees, to a point. "In theory, [subtenants] are bound by the same rules as shareholders, but [in the event of a problem or violation] the board would reprimand the shareholder - with whom they have a contractual agreement - and the shareholder would in turn deal with the subtenant."

In cases of extreme negligence or flagrant violation of house rules and regulations, says Elbaz, "The co-op can commence a lawsuit against the owner of the apartment, which is the shareholder, or a sponsor shareholder. The cooperative would need strong grounds - like non payment without cause, anti-social behavior, etcetera - in order to convince a court to evict all occupants of the unit."

There is room for disagreement though. "Co-ops do not want a transient building," says Wurtzel. "Constant moves in and out of the building create wear and tear on the common areas and are demanding on the staff. Also, shareholders and subtenants have different interest in the building and conflicts can arise."

Harwood concurs. "In general, there is a mindset amongst owners that they care more about a building than a renter would," he says. "Renters are transient while owners have a long-term commitment to their home."

"A co-op with many sublet tenants may not be as attractive to buyers," he adds. "And many lenders frown upon sublet tenants in co-op buildings and will often look to restrict the number of them in buildings that they are planning to offer financing to."

According to Elbaz, "Banks are more reluctant to provide individual mortgage loans in buildings with high numbers of sublets, but it depends on the percentage." Banks tend to look less favorably upon a building if a large percentage is not owner-occupied, says Elbaz, and for some, even 20 percent subtenancy is too much.

"Lenders have their individual criteria for resident shareholders within a building," adds Wurtzel. "If a building's percentage of resident shareholders is less than the lender's criteria, it may result in a higher rate - or prohibit that lender from writing mortgages in the building. Generally, lenders prefer at least a 50 percent threshold for resident shareholders."

Other negative opinions, according to Elbaz, include: shareholders who live outside of the building are rarely available to serve on the board; shareholders who rent may be more interested in short-term profits than in long-term appreciation; the default rate is higher with non-resident shareholders; and boards like to know who the neighbors are, which is an almost impossible feat when a building has many sublets.

Nuts and Bolts

What about rent-controlled tenants who are grandfathered in when the building is converted into a co-op - when their rent never goes up despite inflation? Aren't vested shareholders subsidizing the renters' living space with their maintenance fees?

"Yes, in a way they are," replies Harwood. "However, one who purchases in a co-op building that has many such renters should certainly look at the maintenance structure before they buy and use this as part of their determining factor for making a decision to buy in that building."

Elbaz disagrees. "A rent-controlled or rent-stabilized tenant pays rent to a shareholder (usually a sponsor), and that shareholder pays maintenance to the cooperative," he argues. "The fact that the rent-stabilized or rent-controlled rent is more or less than maintenance is irrelevant to the cooperative."

Can a board do anything about a sponsor's decision to rent units instead of selling them? After the much-publicized case of 511 West 232 Street Owners Corp. v. Jennifer Realty Corp. in 2002, the answer is yes. In a nutshell, the Jennifer Realty case set the precedent that the sponsor of an existing residential building has an obligation to complete the offering plan by selling all of the unsold apartments within a reasonable time after they are available for sale. The part about what constitutes a "reasonable time" is often the source of much debate, but if the sponsor of your building is hanging on to unsold units and using them to generate rental income to the extent that it's harming the viability of the co-op, then board and shareholders are well within their rights to take legal action.

That said, however, "Sponsors generally enjoy more liberal rights on renting apartments than individual shareholders," says Harwood. "Most sponsors are not subject to any rules on allowable terms for subletting, and certainly not subject to any sublet fees."

Even so, subtenants of sponsors are still subject to the same house rules as everyone else and the sponsor is generally responsible for making sure their tenants adhere to these rules. It's up to the board and shareholders to decide on how the potential costs stack up against the benefits of allowing subletting, and to choose which policy is best for their building community.

Domini Hedderman is a former property manager and frequent contributor to The Cooperator.

Related Articles

CooperatorEvents Expo New York Returns - In Person - to a NEW LOCATION!

CooperatorEvents Expo New York Returns - In Person - to a NEW LOCATION!

The Must-Attend Event is Back - at the Javits Center!

Board Style & Management

Board Style & Management

Hands-on vs. Hands-off

Term Limits for Board Members:

Term Limits for Board Members:

A Breath of Fresh Air or a Lack of Oxygen?

 

Comments

  • Can co op refuse me, (a shoareholder) taking a home equity loan against my own space? I have no mortgage and worth 2 million and need a half million. what reason?