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Deals & DealmakersResidential

Why sell one co-op when you can sell the building?

By Douglas Heller, partner, Herrick, Feinstein LLP

Co-operative shareholders in New York have noticed, as have the rest of us, that prices for new condominium projects are incredibly high, and their ownership interests in buildings converted from rentals years ago are far less.

There are obvious reasons for this. brownstonesx

Some buildings, which may have been converted to cooperatives during the 1960s, 1970s or 1980s, are actually 60, 75 or even well over 100 years old.

The location of these co-operative apartment buildings might be excellent, but the assessments could be rapidly increasing as many parts of the buildings wear out. Old buildings also may lack the amenities and apartment configurations of new luxury buildings.

The co-operative and its shareholders may not be wealthy, and cannot consider major building improvements that would increase values.

Unlike conversions today, which are typically to condominium ownership, these older conversions often occurred with little or no money available to make repairs, and in fact, the building may have owed the sponsor money and required substantial work at the time of the conversion.

Also, no one may have been aware or placed a value on any unused development rights which came with the building.

As a result, it may have taken the co-operative years to reach financial equilibrium, and even today, the building could have major maintenance issues.

A number of co-operative boards have been analyzing the situation and some lucky boards might find that their building has substantial unused development rights that could be highly marketable.

In certain situations, boards have discovered that if a well-located building with unused development rights could be sold for redevelopment, the shareholders would each receive substantially more money than could be obtained by individual sales in the ordinary course.

Even converting the building to a condominium, or just adopting condominium rules, or selling the development rights themselves, might not compare to the value obtainable by selling the entire building.

Co-operatives that seriously look into a sale need sophisticated tax advice as soon as possible.

It might be that simply cancelling the proprietary leases, liquidating the corporation and selling the building will end up seeming more like a major gift to Uncle Sam than a benefit to the shareholders.

Instead, the board may be advised that the best way to handle the matter is for all shareholders to sell their shares with the proprietary leases to one party in a coordinated effort, and let the purchaser deal with the tax issues.

This could make for interesting negotiations with a potential purchaser.

The major problem would be how to get all the shareholders to agree to sell simultaneously.  Many will be willing to move, but others might not be interested regardless of the price.  The building will need to reach a consensus if everyone is to work together, and this could take time.

It is important that a board try to avoid panic that might ensue if a majority of shareholders who are given an attractive offer sell on their own, leaving a developer in control and running a building housing a minority of shareholders the developer wishes would go away.

A controlling developer is not going to want to act in the best interest of shareholders it would like to remove, and while many developers would probably not want to be in that position, others could see this as an opportunity to work to buy out the minority for less than a fair price.

It is probably most beneficial for everyone concerned if the board coordinates the sale so that the process can be coordinated and everyone is treated as fairly as possible.

That way the maximum aggregate price is likely to be obtained, and hopefully most of the shareholders will be satisfied with the result.

There are numerous issues that may come up in the course of the process involving such matters as closing logistics and relocations among other concerns.

To determine whether a sale is worthwhile, the board will need expert advice from brokers, attorneys, accountants and others.

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