hard to believe we are talking again about coop boards' power to reject price as too low

if New York Times front pages it, ‘we’ are talking about it
I will confess to a dropped jaw on seeing tha main article in this past Sunday’s New York Times Real Estate section: Board to Buyer: Nah. Not at That Price. Seriously. Again?? Reporter Michelle Higgins found 4 lawyers, a seller, a buyer, two agents, and (of course!) The Miller to talk about a horse that I had hoped had been long ago left for dead: the power of coop boards to reject a buyer solely on the basis that the board thinks the price is ‘too low’. (The seller, buyer and one of the agents all spoke about one specific deal in Hudson Heights; one of the lawyers is also a board member.) I guess this is a ‘problem’, at least for that noe lawyer’s clients. that other lawyer’s fellow coop board members, that the musician buyer and musician seller (and his agent). I’ve been (uncharacteristically?) emphatic that I don’t think this is a problem a board should concern itself with, but before we reprise that emphatic stuff, let’s see how Higgins teed up The Problem.

whose problem is it, anyway?
I am going to try to be scrupulously fair, by quoting all the people who weigh in on this silly topic, so that they put the best spin on their (sometimes) silly positions. That first lawyer addresses it from several perspectives:

“In the last month,” said Aaron Shmulewitz, a real estate lawyer, “I must have had 5 to 10 questions about that from various boards that have turned down or have contemplated turning down purchases for price, as well as various purchasers who contacted us for being turned down.” .

“I don’t know if prices have gone down, or if boards are expecting the price to go up,” he added. But the incidence of board rejections because of low sales prices has been “markedly increasing.”

The disappointed seller got the story straight from the horse’s mouth (to persist in equine figures if human speech):

[that seller spoke] with two board members and the building’s sponsor, who all confirmed that price had been a deciding factor. “It’s a business problem,” she said. “It’s not good business for them to sell apartments for a low price.”

Another lawyer has written a New York Law Journal piece on this, which I remember having seen reference to, but not having ready (it is behind a paywall, as I recall). Her contribution to the Times yesterday:

“a board’s price-based rejection of an apartment transfer is much more likely to be protected and insulated from challenge in 2012,” said Eva Talel …. “I think courts began to feel a greater comfort level in addressing the issue of the scope of the board’s business judgment to deal with what is a legitimate concern for buildings,” she said. “If prices are not sustained at a certain level, then it would likely have a negative impact on the values of other apartments.”

The lawyer / board member

said sales price had not been an issue there until earlier this year. “Suddenly, there were three or four apartments that came up, all of which were significantly lower than where the apartments had been previously selling for,” he said.

But rather than flat-out rejecting applicants who otherwise would have passed muster with the board, he said, “we actually took a chance and raised the issue with the broker and individuals and said, ‘Listen, before we say no to this application, we want you to know it’s because of this, and if you wanted to submit a different contract price, very likely no would be yes.’ And people did in fact come back.”

That’s the sum total of Team Turn ‘Em Down. But among the people who spoke out against this (heaven forfend) so-called solution to a “markedly increasing” problem, these two quotes from Team Get Out Of The Way stood out:

“The irony,” Mr. Miller said, is that “by being too aggressive in policing transfers of property in your co-op, you can actually make it worse.” When apartment deals are repeatedly turned down because the board wants a higher price, the properties end up lingering on the market. The inference, he pointed out, “is they are overpriced when they’re not.”


“This always says something to me about the board in the building,” said Ms. Cole, the broker who represented Mr. Bergeron, the trumpet player, “and it sends a really bad message. Now, when working with a buyer, I say: ‘By the way, just know there was a board turndown here with a cash buyer, and they pulled the rug out from everyone. So buyer beware.’ ”

Having given them their own words, let me sum up, emphatically but not unfairly: the articulation of Attorney Talel (“[i]f prices are not sustained at a certain level, then it would likely have a negative impact on the values of other apartments”) is a fundamental mis-reading of how The Market works and is a ridiculous (!) attempt to claim ‘power’ a coop board lacks; that it is also ineffective to accomplish its stated goal is a less important but also fatal flaw.

this horse has been beaten before
The Daily News ran a similar article 6 months ago, New York Magazine did it a year ago, and The Real Deal flogged a Habitats magazine piece about this more than 3 years ago. After each media outburst, I dutifully made an extended argument (the one summed up in the prior paragraph) likening the powerful coop boards to old King Canute on the beach. Go back and read my April 1, "price floors": the staggering stupidity of some coop boards, my October 26, 2011, NY Mag goes there: do coop boards reject prices as ‘too low’?, and my June 19, 2009, power of a coop board to reject a deal as "too low"??.

I am once again going to use that big block from June 2009:

coop boards protect value like Canute protected beaches

Having been a coop board president in a small Manhattan loft building for ten years, I can’t think of any other ‘reason’ for the board to reject a deal because of price than that articulated by the sighing lawyer: the board absolutely has "an obligation to protect the property value for the rest of the people." My considered judgment is that the solution (rejecting a shareholder’s application to sell and get out because remaining shareholders will be struck with a bad comp) has nothing to do with the purported problem (fear that units will be worth less after the sale than before it); even putting aside for the moment the harm the board would do to one specific shareholder and the risk that other shareholders will be left dealing with a fellow shareholder who may be financially strapped (after all, is selling at a ‘distress’ price) and will be emotionally pissed.


For a board to insist that market value contracts will not be approved actually says this about units in the building: they have no value because they are unsaleable; any price that is low enough for The Market to accept is too low for us to approve.

to take one more shot at it….

  • boards don’t set values; only buyers and sellers set values
  • a  (truly market) sale that remaining shareholders view as a bad comp is a manifestation of the market as it existed for that unit at that time
  • a board that thinks that when it rejects a sale as too low it is actually protecting remaining shareholder value is, in fact, publicly stating that there is no current market value for units for sale

I am surprised that some of the smart people quoted in the New York Times disagree with me about something that I consider to be obvious and true. And if that writing lawyer is right about how courts approach this, I am surprised that a judge would not agree with me. But, having thought about it a good deal from the perspective of seller, buyer and coop board (3 roles I have had), I see no merit in the (naive) belief that coop boards can correct market values by rejecting arm’s length deals and I view it unwise and imprudent, even if boards have that ability under the law.

Read the string of posts for more words, driving to the same end point.

there are board actions that increase value, just not this one
If boards really want to increase the value of units, they can spend money on improvements that will increase value (common areas, for example), increase the reserve fund, or refinance or pay down the mortgage; they can also adopt policies that make it easier for shareholders to sell (eliminating restrictions on open houses, for example). If boards want to avoid market sales that are deemed to be bad news for shareholders, they can work with distressed sellers to, for example, permit a sublease on better terms for the owner.

© Sandy Mattingly 2012

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