sponsor owns 50% of co-op

Not such a simple answer.

How many units in total?

Banks may not want to lend in such an instance, is there a preferred lender? Do you need a loan?

Tighter regulations on lending may pose problems for those who need financing. However, most lending is done on a case by case basis so there are exceptions.

Wow. Sponsor owns 50% of the shares in a coop, in 2014? It's a serious question. I agree, it's not such a simple answer, but my gut tells me there will be all kinds of problems with this. Does not have a seat on the board? I don't know about that. How can any entity or individual have rights to 50% of anything and not have an impact on positively or negatively. 85 Eighth Ave is a good example of these issues. The board and sponsor have been suing each other for years over common elements (I believe a garage) and the maintenance has take a huge hit (increase) because of that, subsequently making lending very difficult. The sponsor has enough of a controlling interest, to make things very difficult for the owners. I don't know the entire story, however.

Personally, I'd never buy in a building where the sponsor owns more than a handful of units or 10%, etc. Maybe I would consider a condo conversion of sort i.e. pre-war rental condo under new ownership (that type of sponsor) who plans to convert units to bring to the market and sell as tenants vacate. That's ok, as there is a clear plan in place, but buying into a "co-op" thats likely been established for years (converted in 80's or 90's) and the ownership percentage hasn't changed since? No way.

It was converted in 1989 and it has 45 units. Maintenance is very low, as is the flip tax, so those don't seem like such red flags. No assessments currently.

We will be taking out a mortgage, but assuming the bank approves the building, do you think that is still an issue? I was told by the broker that the board has 5 seats on it and the sponsor is not on the board. Are there other questions that I should be asking to see if the building is negatively impacted by the sponsor?

We are first-time buyers, so any advice is greatly appreciated. Thank you!

Also, as the long-time tenants are dying, the sponsor is renovating and selling at market rate. So the number he owns is decreasing.

There's a difference between owning 50% of the units and 50% of the voting shares (but it's probably small). Risks:
1) Even with a near majority of shares, the sponsor could get himself on the board relatively easily and would have a significant way to block actions not beneficial to him.
2) If the sponsor runs into financial trouble (quite possible, as he may already be in a negative cash flow position, if rents received are below maintenance expenses) and becomes delinquent in paying his share of the maintenance, the current owners will have to ante up a significant sum to keep up with the building's expenses until the units are sold off to maintenance-paying owners.

I lived in a building where the sponsor owned 30% of the apartments along with the garage and laundry room. After the housing crash, banks refused to give any mortgages although the building's finances were rock solid. The Board now arranges to have Fannie Mae go over the finances of the building each fall and give their approval in a formal document. When potential buyers forward that document to the mortgage companies, they had no problems getting a mortgage.

So even if we are able to determine that there have been no issues with the sponsor to date, is this still a "stay-away" situation? FYI, we plan to live in the apartment for about 5 years and then sell.

Aaron2, you're right. I said 50% of shares and OP said 50% of units. This can be both good and bad for the OP and should be looked into. The OP needs to find out exactly which of units the sponsor owns. If the sponsor owns 22-25 units and they are larger than the others, the sponsors share allocation might actually be greater than 50%, therefore still give him/her the controlling interest in the coop regardless if they act as a "board member." Am I correct?

If you're thinking 5 years only, it doesn't sound like the right option. Considering the plan might be to convert units as they become vacant (tenant passes), then you should be thinking 10-15 or more years for you to realize the full value. I imagine you trying to buy this unit slightly discounted perhaps? If you're paying market prices then I don't know. In 5 years, the sponsor would be lucky to convert 2 apartments total so I don't see the overall share allocation changing enough.

We'd be paying market prices (unfortunately). Thank you for all the advice so far!

Sponsor owns 50.4% for 21 apartments (and pays the maintenance for those)

Got it. Next question should be how many shares were issue for the entire corporation when it was created and how many does the sponsor maintain? Its definitely good to know how many "units" the sponsor owns, but he/she might still have control of 60% of the voting stock and even if he/she sells an apartment and goes below the 50% threshold, he/she may still have majority control. I could be wrong, so look into it.

david & GOLIATH ~ capice?

Eek...capice. Broker says sponsor ownership is actually currently 49%. Been told there are no issues or lawsuits against building or sponsor.

You have to get in cheap for the reality that the buyer market is limited due to less banks who will loan to it and that many buyers will be scared off (even if you aren't). This is all so you account for getting out cheap when you sell because the buyer market is limited.

What buildings are you referring to?

782 wea

Nah: To your question: yes. Anybody with a significant number of shares can limit board desires in those cases when a shareholder vote is required. The building I'm in has a shareholder who owns about 15% of the total shares. He's on the board, and a good corporate citizen, but it's always in the back of my mind.

As to the general value of the investment, with a 5-year horizon it sounds riskier, specifically: people who look to buy in the building will have 2 choices: 1) buy a sponsor unit that they can renovate to their own taste, 2) buy a renovated unit that they like or will re-renovate. In a relatively small building there are rarely going to be a wide variety of choices simultaneously, and it's likely that most of the choices will be sponsor units.

As a seller, you will want to recoup your cost of the renovation, which means that it will have to 1) conform to the buyer's taste (which you cannot control or determine), 2) be accurately priced between the full-renovation cost and the re-renovaton costs, or 3) be covered by the increased value that an apartment acquires by being a space in a desirable building in a desirable neighborhood in a desirable city (which you can hope for, but can't fully control).

In general, buyers will have the choice of buying and renovating to their taste, or buying your taste, for what will be near-equivalent prices. Really, no renovation increases in value over time, except at the moment of initial completion (taking a wreck and making it habitable) -- so, do you think that prices will increase enough over 5 years for you to recoup the cost of the renovation? If you're putting $5k in, probably. If you're putting $250k in, maybe not.

perhaps the sponsor should sell some of his unsold shares so one entity no longer has disproportionate amount for banks comfort level?

Check out how many apartments the sponsor has sold in the past few years and how many of his apartments he can't sell due to the rental status of the tenants. I live in a building where the sponsor held 20% of the apartments giving him enough clout to control various items up for vote. It became very difficult to approve renovations and repairs that would result in an assessment or maintenance increase.

Check the latest amendment to the offering plan to see how many shares the sponsor still owns, and for which apartments. Sounds as if you've already done that.

The sponsor sold two apartments in 2012, three in 2011, with none between then and 2004. There're rental listings for a couple in 2008 and 2010. So, the pattern is, the sponsor's now selling apartments as they become vacant. Meanwhile the co-op's been able to re-fi its mortgage, buyers have been getting share loans, and shareholders have been able to re-fi.

I wouldn't worry about the 50% if you think it's a good time to buy and the apartment is otherwise what you want. Almost every co-op conversion started out with a lot unsold, with the sponsor not blocking improvements that add to value. Twenty-odd years ago mine was less than 50% sold and is now 83% sold. In another 20 years it'll be close to 100%, with the sponsor renting to a few stray centenarians.

Oh, and the sponsor has two seats out of seven on the board, and couldn't throw his weight around if he wanted to.

NWT:

1. look at 211 West 232nd Street Owners v Jennifer Realty 98 NY2d 144, 152-153
2. Coop Sponsors whose control blocks hurt the Coop can be forced to sell some of their apartments

Thank you all!