Last December as the year was coming to a close, the New York Times characterized 2011 as “The Year of the Turndown.” In addition, the reporter acknowledged that it was becoming more common for co-op boards to grant provisional consent to buyers, requiring that significant sums of money be held in escrow to ensure that monthly charges would be paid on time. This year, co-op board rejections and conditional approvals have not diminished; in fact, they are on the rise.
Although it’s nearly impossible to quantify the number of board rejections, brokers can spot the snubs when properties come “BOM”—Back on Market. Only sometimes, however, and then only anecdotally within our own companies, do we overhear when boards request that buyers meet certain conditions before their purchase applications can be approved.
Few turndowns make the headlines. Unless the denied is a celebrity, of course, and then it’s newsworthy. Like when Nixon was rebuffed by a Fifth Avenue cooperative after he resigned as President. Or when the San Remo said no to Madonna. Or in 2005 when the Dakota declined to interview Antonio Banderas and Melanie Griffith. Or very recently when Sheik Hamad bin Jassim bin Al Thani from oil rich Qatar was rejected at 907 Fifth Avenue, it was easy to understand why someone with two wives and fifteen children, a ministerial entourage and diplomatic immunity might not be welcome. Some board turndowns can be baffling, however, and all cause anguish, embarrassment and financial hardship for buyers, sellers and their agents alike. The broker’s role in assembling the required documents for the board and in managing the expectations for both principals is critical.
The boiler plate language of the contract states that the “sale is subject to the unconditional consent of the Corporation,” which means that if the board stipulates any conditions then the buyers can either agree to the provisions, renegotiate with the seller because of the conditions, or walk away and take back their 10% deposit. The Board might ask the buyer to finance less than the amount specified in the contract, or to not finance at all, or to provide a third party guarantee for the maintenance, or to deposit several years of maintenance with the co-op in escrow for an undetermined amount of time. Recently, one Park Avenue board asked a candidate to post into escrow a staggering 10 years’ worth of maintenance fees for five years for the privilege of purchasing in that building—an amount exceeding $350,000.
The “business judgment rule” for co-ops gives board members great latitude as long as they act within the bounds of authority provided by the co-op’s by-laws and proprietary lease and as long as their decisions are not discriminatory. In New York City, Fair Housing Laws protect twelve specific categories including age, citizenship, familial status, handicap, marital status, national origin, occupation, religion and sexual orientation. If discrimination is proven, individual board members can be held personally liable. When they reject a candidate, they are not required to give reasons, nor are they required to interview the applicant. In fact, when a board intends to reject a purchaser, the interview never happens. Although the New York City Council has tried numerous times to enact legislation requiring boards to disclose reasons for a turndown, it is unlikely to be passed any time soon.
Board turndowns and conditional approvals are a particular phenomenon in Manhattan where cooperatives still make up approximately 70% percent of real property ownership. This year, with nearly every deal I handled, whether I represented the buyer or the seller, I began a conversation early on in the process about provisional consent and the possibility that the board might request maintenance in escrow. When my Park Avenue seller accepted a bid from a divorcee who’s only income source was a trust fund plus alimony that would expire in eleven years, we asked for a side letter to the contract in which she agreed to put up to two years of maintenance in escrow to be held up to two years should the board require that as a condition to her approval. Similarly, we have side letters for my West End Avenue and Central Park West deals that are in contract with financial professionals where their bonus money is substantial but out of favor with co-op boards because of market volatility. On a deal where I represent the buyers of an east side one bedroom whose board does not permit guarantors, where father and son are co-purchasing an apartment where the son will reside, the co-op’s Managing Agent emailed last week to ask whether they would consider putting a year of maintenance in escrow. I encouraged the buyers to look beyond the short term of wounded pride to the long term, and then succeeded in getting the seller to split this amount with the buyers.
Throughout Manhattan, in every size category and every price range, co-op boards are stepping up their scrutiny of candidates— checking and rechecking that financial statements add up and are sufficient and verifying personal references with searches on Facebook and Google for anything that might undermine social acceptability. With the board package, the purchaser has one chance to make a first impression; second chances are rare. It’s up to the real estate professional to guide buyers and sellers through this new normal.