**DISCLAIMER** I am not an attorney and this is my opinion based on experience in the field of Property Management. For legal opinion on this and other related matters, it is in any person or Board’s interest to seek independent legal counsel.
In this video, Mark Levine of Excel Bradshaw Management Group tackles the issue of a Cooperative Board’s ability to not approve a sale due to the purchase price that they are presented with. This is a tricky situation, but one that requires diligence on the Board’s part to ensure that the decision they are making is based on market value and not on perceived value.
Before we get into the answer and noting how a Board can avoid running into an issue of wrongly turning down a sale for the purchase price, it is worth going over the protected classes in NYC and noting which factors are not to be considered when making a decision to allow a prospective purchaser pass through the board application process.
Presently in NYC, the protected classes (and these are groups of people who cannot be discriminated against or prevented from obtaining housing based on these factors) are: Age, Alien Status, Children (or childless state), Country of National Origin, Creed, Disability, Gender (including gender identity), Lawful Occupation, Marital Status, Military Status, Partnership Status, Race, Religion or Sexual Orientation.
Now that we have the factors that can’t be considered out of the way, we can talk about what can go into a decision to deny an applicant by a Cooperative Board. Financial instability is, of course, one of the main factors for not permitting a sale to go through. If the prospective purchaser is not able to carry the apartment’s mortgage + maintenance + other expenses, the Cooperative could be placing itself at risk for a default on maintenance and potentially creating a future of legal issues.
There is one other area that should be considered as well; purchase price. Some buildings will try and set an absolute floor, whereby they will alert all Shareholders that they will not accept any sales below a certain amount. This amount could be a per share amount, per square foot amount or if most apartments in the building are similar, they could create an absolute price. This will work only if the Board’s requirements are in line with the present market value of these apartments.
We have run into these situations before where a Board will deny based on a purchase price and the ruling is challenged by the outgoing Shareholder. To counteract this and to also avoid possible legal between the shareholder and the Board, we have taken the step to be proactive. We have advised our Boards that it is in their best interests to hire an independent appraiser to come into the apartment and work up a full appraisal on behalf of the Board so that they can get a sense of the real world market value of the apartment.
An example of how this will work out in the Board’s benefit is an apartment that is under contract for $200k and they feel that the apartment is worth $250k. An appraisal is ordered for the Board and it is actually shown to be $250k. We can then bring that back to the Shareholder to show that we have these findings and we can work it out with the Shareholder and prospective purchaser to raise their contracted price or they can back out of the sale as is if they both cannot meet the new parameters.
Although this approach sounds like the ideal solution, it can have the opposite effect as well, so Boards should be careful and use judgement when they are ordering these appraisals. The flip-side of the equation is that an apartment has the possibility of appraising for lower than the stated contractual price and in that case, the argument that the apartment was selling for below the market value would be thrown out in the courts should a sale be denied based on those factors and then challenged.
Cooperative Board of Directors have to be realistic when dealing with the sales within the building and this is a great tool that could be used on a case by case basis to ensure that the units in the building are being sold at market value and are helping to preserve the comps in the building. Of course, like any other issue in a Cooperative, a little leeway will have the be given from time to time and each board, while trying to preserve their value, should also be using common sense to not hamper the transactions in their building.