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Conversions to Condos and Co-Ops

It's common for rental buildings to get converted to condominiums or co-ops. Many older buildings that are condominium or co-op developments started as rentals. These condo conversions tend to follow market trends. For instance, long periods of low interest rates encourage people to buy 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 condominium units or co-op apartments require several vital steps.

Converting to a Condo or Co-op: Basics

The first sign that a building's owner is considering a multifamily conversion is a series of improvements to the building, such as:

  • New windows
  • New kitchens and bathrooms
  • Tedecorated common space (corridors, lobbies)

The conversion sponsor (usually but not necessarily the owner) will contact all the tenants. They will allow tenants to buy their units, usually for a good price. If enough tenants decide to become homebuyers, 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. Higher sales during the conversion process means:

  • More money to pay for upkeep and keep maintenance fees down
  • More unit owners to support the new co-op building or condominium conversion
  • Less conflict between new homeowners and tenant occupancy in dwelling units facing eviction

Example: Conversions in New York State and Manhattan

Many rental apartment buildings in New York City (NYC) and some outlying suburbs are subject to rent regulation laws. These laws prohibit landlords from raising rents beyond a certain percentage per year.

Buildings constructed before 1974 are subject to rent stabilization, which allows only small increases each time a tenant renews the lease. Rent control laws 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:

  1. They are not violating their lease agreements
  2. They are paying their rent on time
  3. The apartment is their primary home

If a rental building gets converted to a condominium or co-op, these tenants can still stay in their apartments.

Pre-Conversion Considerations

A new development that seeks conversion to co-op or condominium ownership will typically encourage maximum homeownership. That means the developer will try to convince a high percentage of tenants to buy in. Otherwise, existing renters would continue to pay rents that might be below market value. Also, tenants would not have to pay monthly maintenance fees at others' expense. Co-op shareholders or owners of condo units would have to pick up more of the common costs. Owners of rental apartments will also have to continue to pay off property taxes on unconverted units. For these reasons, apartment owners will wait until they have a much higher conversion percentage before they proceed.

Not surprisingly, many tenants in rent-controlled units remain renters because renting costs less than buying. For elderly tenants, in particular, who do not need the equity of an owned home, continuing to rent makes sense. Similarly, disabled or affordable housing residents often can't afford a change of circumstances.

Rent Control vs. Rent Stabilization

States vary on how they interpret differences between rent control and rent stabilization. In some places, there is no difference. In other places, the distinction is very important. In New York, rent-controlled apartments are "deregulated" when 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 vacant stabilized apartments. 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, as units deliberately kept empty can harm the housing market.

Landlords can't force renters to leave by:

  • Limiting or stopping services
  • Harassing them
  • Making their lives difficult on purpose

Many co-op boards and condo HOA board members enact strict bylaws or regulations to drive away renters. Some of these restrictions might purposefully target tenants. For example, no-pets clauses may get imposed to force out tenants with pets. Renters with pets might leave rather than give up their companions. Boards have a great deal of flexibility when enacting rules. But rules cannot be unfair, discriminatory, or illegal.

Converting a Property to Condos or Co-ops? Talk to a Real Estate Lawyer

If you plan to convert a property from a rental to a condominium, there are several legal issues to consider. This is especially true if you have long-term tenants in rent-controlled markets. Time is money, while seemingly minor mistakes can result in costly lawsuits. It makes sense to cover your bases and consult an attorney before starting. Best of all, some real estate attorneys offer free legal consultations.

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