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Co-op Conversions in New York

Posted on 5th Apr 2016

About 30 years ago, New York City experienced a boom in conversions of rental apartment buildings to co-operatives. Although conversions might not be taking place as frequently now as they did back then, there are any number of reasons why an owner of a building might want to sponsor a conversion. Many apartment buildings in New York City are rent stabilized. Thus, it is more difficult for owners to get a market rate of return. In addition, major capital improvements, which can contribute towards rent increases, can only be allocated over time. A co-op conversion can make sense under these types of circumstances because once the units are sold, there is an immediate infusion of cash.

The co-operative and condominium conversion handbook published by the Attorney General provides guidance. First, the sponsor must present a "preliminary prospectus," called the "Red Herring," which is described as "a proposed offering plan [made] to each tenant and to the Attorney General." The plan is then reviewed and accepted for filing, provided that all the material facts concerning the building have been adequately disclosed, and the Attorney General has made all the findings required by law.

Upon approval, the sponsor develops what is called a "Black Book," which is the final offering plan for a co-op that has been accepted for filing by the Attorney General's office. Conversion doesn't immediately follow, however. Rather, "[a] specified number of apartments must be purchased before the plan can be declared effective and the building actually converted." If the conversion doesn't go through, the building must continue to operate as a rental property.

Current occupants are given an opportunity to purchase their apartments at a discount, while outsiders are able to buy at market rates. Those renters who choose not to purchase might be able to continue renting, but that depends upon whether the sponsor chose an eviction plan or a non-eviction plan during the conversion process. 

An eviction plan enables sponsors to evict non-purchasing tenants, but this option can be pursued only if "51% of the bona fide tenants in occupancy" have signed written purchase agreements. Nevertheless, there are special protections in place to keep senior citizens and disabled persons from being evicted. If the number of tenants who agree to purchase their apartments is below the minimum required to put an eviction plan into effect, the plan is then changed to a non-eviction plan. Under a non-eviction plan, tenants may not be evicted for failure to buy their apartments. For such a plan to be declared effective, "at least 15% of the dwelling units must be sold to bona fide tenants or non-tenant purchasers who intend, or whose family members intend to occupy the unit when it becomes vacant."

Finally, it is illegal for a building owner to “warehouse” apartments by not renting them when they become vacant with the hope of having more market rate apartments available for the conversion. Suspicions of warehousing might be raised if more than 10% of apartments are unoccupied "for more than the five months preceding submission of the Red Herring."