As the number of condominium products grows, there’s mounting pressure among condo boards to operate their buildings efficiently and to maintain the character of their residences in the best interests of unit owners. Increasingly condos are trying to exert more control over resales, imposing conditions for granting waivers and even implementing new policies—behaving very much like their co-op cousins.
Two types of buyers purchase condominiums: (1) investors who want neither restrictions on their rights to lease or sell nor limits on what they can do in the apartment, like smoke or have a pet or have guests stay over when owners are not in residence; and (2) end users who reside in the space who don’t mind some rules that will prevent a revolving door of short term subtenant neighbors with barking dogs.
For the most part condo buyers seek flexibility. They lack an appetite for financial disclosure. They don’t want to be subjected to the authority of a co-op board. Often they seek to purchase in the name of a corporation, trust or LLC. They don’t want to live with restrictive policies that limit high financing or subletting, and prohibit pied-a-terre, co-purchasing, parents buying for children, occupancy by non-family members and the number and size of pets.
Unlike the co-op which has the absolute right to accept or reject a purchaser, the condo board must issue a written waiver of the right of first refusal, which means that if the purchaser were to be rejected, the condo board would have to have available funds to purchase the unit from the seller at the exact contract price and terms. According to most condo bylaws, this extreme measure typically also requires a 2/3’s vote by condo owners.
It’s a rare occurrence for sure, and has never happened in my personal book of business of more than 35 years. I’ve heard of one instance when the condo board purchased a unit whose price was below market and then proceeded to sell at a profit. In the case of buyers who show insufficient financials, especially among foreign and corporate buyers, some boards have been imposing conditions for the waiver, requiring that the buyer either identify a third party guarantor or put money in escrow. More frequently when the condo board has concerns about a particular buyer, the board asks for more and more information, causing delay followed by delay, until the buyer ultimately walks away from the deal unwilling to challenge the condo board with costly and time consuming litigation. It’s interesting to note that while a co-op can sue a shareholder who is delinquent on maintenance payments and also start eviction proceedings, the condo board who wants to boot out a unit owner for failing to pay common charges doesn’t have the same options because unlike the co-op which is governed by the proprietary lease, the condo is deeded real property.
INDIVIDUAL VERSUS COMMUNITY
All agree that the board approval process for a sale in a co-op is invasive and daunting. Over the years, the condo board package has taken pages from the co-op book. In the 80s when there weren’t very many condo apartments, preparing a board package for a sale or sublet in a condo was more of a relaxed formality. Today, condo boards are asking buyers and even renters to complete lengthy applications and submit financial statements with full supporting verification, documented employment history, personal and business reference letters, bank references, landlord references and tax returns. Some even require personal interviews.
Taking the lead from co-ops, some condos are imposing flip taxes as an alternative to raising common charges or assessing owners. More accurately described as transfer fees upon a sale, “flip taxes” originated in the 1980s when a wave of rental buildings were converting to co-ops, and insiders were enticed to buy at discounted prices and then “flip” or resell the apartment at significantly higher prices; these first flip taxes were a percentage of the profit the seller achieved, some as high as 15% of the profit. Today’s flip taxes are less of a measure against windfall profits and meant more to generate additional revenue for building operations, and are usually set as a percentage of the gross purchase price. When a condo requires buyers to make a capital contribution of 1-2% of the purchase price, the building’s bylaws should reflect the imposition of such a fee.
Increasingly, more and more condos are acting like co-ops. They want more control over who is living in the building. How does a board handle a buyer with a criminal background? Who can say what price is below market? Is it bad practice to be able to vet your neighbors or have rules in place for subleasing apartments? Is there value in imposing transfer fees? Attorneys advise that many condo bylaws need updating so that new policies can’t be challenged by new buyers. If certain new privileges are exerted by the condo board, like imposing conditions for waivers, it’s important that these gain the vote of unit owners and become part of the condo bylaws to avoid legal challenges. New policies presented in the best interests of the condo community, however, cannot be at the expense of individual rights, and therein lies the conundrum. The trend of condos acting like co-ops will continue, and the conversation will probably get complicated if unreasonable restraints on the sale of real property are imposed and community rights are pitted against those of the individual.
