Sponsor-Dominated Building
I’m looking at a one bedroom in a big (58 unit) PLG coop that is still just over 50% sponsor owned. There was good advice on coops in this thread: http://bstoner.wpengine.com/forum/archives/2008/11/evaluating_cond.php And one thing people cautioned against was buying into a building that is more than a certain percent owner-occupied. This is definitely not very…
I’m looking at a one bedroom in a big (58 unit) PLG coop that is still just over 50% sponsor owned.
There was good advice on coops in this thread:
http://bstoner.wpengine.com/forum/archives/2008/11/evaluating_cond.php
And one thing people cautioned against was buying into a building that is more than a certain percent owner-occupied. This is definitely not very owner occupied, but the price reflects that.
We’re good on the mortgage front (though it would be hard to sell the place if no buyer can get a mortgage) but I’m wondering if there are other concerns I should be taking into account in a sponsor dominated building like this?
There are a lot of variables on the financial health of a co-op. If reserve is good, underlying mortgage is reasonable, there aren’t many assessments, and the infrastructure has been maintained and upgraded as needed, then you’re probably good to go. I don’t think that many sponsor-owned units is unreasonable, esp. in an area like PLG where it’s been traditionally hard to attract buyers vs. renters. But please do your due diligence and if you don’t feel comfortable, walk away.
I’m in a similar situation, currently buying into a building that is less than 50% owner in PLG/Flatbush area.
Yes, there are some issues that can come up like the above people have posted, but as I plan on living there for awhile I feel I’m getting a great deal right now. The sponsors had three banks lined up that would finance in the building and I’ve locked in 4.5% interest.
I’ve looked over the financial’s and they appear inline.
I think a big question is who is the sponsor? Are they a small local group, or a large company with interests across the country? The building I’m buying into is the latter, and I’m sure that’s one reason they had 3 major banks lined up to consider mortgages.
Also a smaller worry about the sponsor not having the money to cover their end of maintenance costs.
Have you talked to people in the building? I took the time to ask people living in the building I’m buying into about general conditions and got, while not a glowing report, at least a positive report.
I bought into a building just like this nine years ago. (Sponsor 51%; shareholders 49%). He stacked the Board with his relatives and controlled every decision the co-op had to make while I was there. He also cleaned all the money out of the washers and dryers every week, though the co-op paid for gas, (common space) electric, and hot water. In other words, in many respects, he acted as if he were still the landlord. This had its good and bad points: he consistently voted against anything that would raise maintenance, since his old tenants’ rents were very low. But when he started to force those folks out, renovate, and charge above-market rents, we started to rumble.
After I left, the shareholders initiated a lawsuit to force the sponsor to sell his remaining units. (The law says that sponsors have to continue to sell units “in good faith” once they co-op a building within a specified period of time. I forget how much time, maybe five years. They also have to turn control of the Board over to the shareholders within a specified amount of time. Their lawsuit was covered in the New York Times.) They won, but I hear it was costly. To retaliate, he then dumped a lot of apartments in several buildings in the same neighborhood on the market at the same time at very low prices.
When I bought, the realtors in that neighborhood knew all about this sponsor; this was not his only building. They had arranged through the years for financing through Chase. I HAD to borrow from Chase to buy the place and they charged me .5% extra, 8.75% at the time. Subsequent buyers had to do the same (including the folks who bought my place a few years later).
That said, my overall experience in this building was positive. It was the beginning of the buy-and-reno period, the building was full of wrecks, and we helped each other out. I didn’t think about the extra half point on the mortgage because I was so relieved to just get in and get going. It became a really beautiful apartment.
I do wonder though if financing might be more difficult to obtain now in a situation like that than it was then. You should proceed, but carefully.
A couple things:
What is the reserve fund — likely to be low as the sponsor if the main contributor. You could be hit with either a big assessment or, more likley, neglected work to pay for in the future (like those buildings with sidewalk bridges for years on end).
What about the underlying mortgage on the building? Many lenders do not want anything less than 80% owner occupied. And if they do, cost is higher.
The worst thing is that the sponsor can do anything he wants with the unsold units. You are at his mercy. He could rent them all to college kids or make short-term rentals. And in this market (and it has only started the downturn), anything is possible.