Conversions to Condos and Co-Ops

It's not uncommon for rental buildings to be converted to condominiums or co-ops; in fact, most of the older buildings that are condominium or co-op developments started out as rentals. These conversions tend to follow market trends; for instance, long periods of low interest rates tend to encourage people to purchase homes instead of rent. Also, as neighborhood dynamics change and single family homes become scarce, new condos coming onto the market can sell at a tidy profit. But conversions from rentals to condos or co-ops require serveral important steps.

Converting to a Condo or Co-op: Basics

Frequently the first sign that a building's owner is considering a conversion is a series of improvements to the building such as new windows, new kitchens and bathrooms, redecorated common space (corridors, lobby). The sponsor of the conversion (usually but not necessarily the owner) will contact all the tenants and give them the opportunity to purchase their own units, usually for a good price. If enough tenants decide to take the sponsor up on the offer, the conversion can go through. Although there is a fairly low minimum number, sponsors like to get as high a percentage of tenants to buy in as possible, because it means more money to pay for upkeep and keep maintenance fees down.

Example: Conversions in New York

In New York City and some of its outlying suburbs, many rental apartment buildings are subject to rent regulation laws that prohibit landlords from raising rents beyond a certain percentage. Buildings constructed before 1974 are subject to rent stabilization, which allows only small increases each time the lease is renewed (every year or every two years). Buildings constructed before 1974 may be protected under rent control laws that further restrict the amount of rental increases. Rent-controlled and rent-stabilized tenants have a legal right to have their leases renewed as long as they are paying their rent on time and as long as the apartment is their primary residence. If a rental building is converted to a condominium or co-op, these tenants are still allowed to stay in their apartments.

Clearly for a building seeking a conversion from rental to co-op, it would be important to convince a reasonably high percentage of tenants to buy in. Otherwise, the renters would continue to pay their artificially low rents (they do not have to pay monthly maintenance fees) while shareholders would have to pick up more of the common costs. Since it only requires 15 percent of the current tenants to approve a co-op conversion, this could leave the sponsor of the conversion (often the landlord) with carrying 85 percent of its units as rentals. (In most cases, apartment house owners will wait until they have a much higher percentage before they proceed with a co-op conversion.)

Not surprisingly, many tenants in rent-controlled units choose to remain renters because it costs less than buying. For elderly tenants in particular, who have no need for the equity of an owned residence, continuing to rent may make sense.

Rent-controlled apartments are deregulated as soon as the tenant moves out, but rent-stabilized apartments remain stabilized no matter how often they change hands. Some apartment owners have tried to "warehouse" apartments by not renting stabilized apartments as they become available. The fewer apartments rented when the co-op conversion takes place, the fewer renters the building will have to carry. The practice of warehousing apartments is illegal.

Also illegal is trying to force renters to leave by curtailing services to them or by harassing them. Many co-op boards enact strict regulations in the hope of driving away renters. Some of these restrictions, such as no-pets clauses, may be imposed with the idea that renters with pets would rather leave than give up their companions. While co-op boards have a great deal of latitude when enacting rules or guidelines, those guidelines cannot be unduly unfair or onerous to the renters.

Converting a Property to Condos or Co-ops? Get a Free Legal Evaluation Today

If you are planning to convert a property from a rental to a condominium, there are several legal considerations you should make first -- especially if you have long-term tenants. Time is money, while seemingly minor mistakes can result in costly lawsuits or worse, so it makes sense to cover your bases and consult with an attorney before getting started. Best of all, there are real estate attorneys available for a free legal evaluation.

Next Steps

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