power of a coop board to reject a deal as “too low”??

protecting shareholders from market value???
The Real Deal on-line June 16 flagged an interesting little item in a relatively obscure periodical that is mostly read (if at all) by Manhattan coop and condo boards, Habitat Magazine. With a tip of the hat toTRD and apologies to Carol Ott, the article is online here. It touches on the (undeniable) power of coop boards to approve or reject purchase applications, but in the specific context of whether the coop board can or should decide based on the contract price. This is one of those back-in-the-day topics, where Manhattan real estate veterans might regale (bore) newbies in (say) 2006 with stories about the Bad Old Days (early 1990s) when coop and condo prices in Manhattan were at best stinky and stagnant. Things go ’round and ’round….

Habitat found an actual Manhattan coop board president faced with an actual dilemma and a 7-member board split 3-3 (pending the president’s vote) on whether to approve or disapprove a purchase. In broad terms, there was a shareholder with a contract to sell, who had been trying for quite a while to sell, and who presented a contract for approval at a price that some board members felt was "too low". The board clearly has a fiduciary obligation to act to protect "shareholders", but that duty — simple to state — is not so easily applied.

the law is a ass
Apparently there is court precedent in the Bronx and Manhattan that is different from the court precedent in Queens and Brooklyn. A lawyer described the decision pertaining to Queens and Brooklyn as "to turn somebody down because his price is too low is an unreasonable interference with a shareholder’s ability to sell his apartment", while the one covering Manhattan and The Bronx "said that it’s not unreasonable because a board was within its rights in making decisions in the best interests of the building". As one sighing lawyer said, in turning on-the-one-hand-on-the-other-hand to the other hand: "you do have an obligation to protect the property value for the rest of the people." Neither decision is controlling (they must have been by low level courts), but I am less interested in the legality per se than in the stupidity.

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.

In the case of the president about to cast a deciding vote, the shareholder had been in the marketplace for quite a while and found exactly one buyer, at the best price the seller could negotiate. Whether the board wanted to keep it secret or not, that contract price was the value for that coop at that time (if it was really worth more, someone else would have paid more, no?). A board who decides that this is a bad comp and wants to protect other shareholders would reject the deal not to protect value, but to protect a secret: the secret that one unit was worth ‘only’ $X. In a world in which information was available (e.g., if an appraiser — such as the one probably involved — knew the deal had been rejected), the lending community (at least) would use that deal in assessing value (in this case, probably as a ceiling).

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.

So I think that the best argument in favor a board rejecting a deal on the basis of price is that they think that other shareholders benefit from keeping this arm’s-length transaction a secret. So I think that this (best) argument is stupid.

practical consequences
As noted, a board rejection will likely render units in this coop illiquid until The Market shifts. But at that point the utility of a ‘bad comp’ is limited by the then-current (improved) market conditions. But what else will happen if the board rejects that deal?

One shareholder is very definitely screwed — nothing conjectural about that. And — if that shareholder is less financially responsible than the rejected buyer — the coop may be screwed as well, if that shareholder can’t afford the maintenance, or can’t contribute to an assessment for needed building improvements. Not to mention that the social fabric of the building may be at risk from a severely screwed shareholder’s interaction with the board and other shareholders.

If the board approves the sale, they trade one shareholder for another and they acknowledge (not set, acknowledge) that The Market value of their coops has declined. People may not be happy with the facts, but they at least know that if they need to sell, the board will not interfere with The Market. Isn’t that likely to be a happier building than one in which people feel locked in, perhaps desperate?

If the lower court decision taking the contrary view were readily available I would be curious enough to read it, but I cannot imagine that there is any better ‘analysis’ than is presented here. The only conceivable reason for a board to reject a deal because the price is ‘too low’ is to protect other shareholders from the facts in the marketplace, notwithstanding the actual (potentially huge) harm done to one shareholder and the potential harm to the coop from losing the opportunity to trade a weak shareholder for a stronger shareholder.

I don’t mean to pick on coop boards, just on stupid coop boards. I have talked before about coop board authority, and public commentary or analysis of that authority, so this post joins a list. (By the way, that actual Manhattan coop board president in the Habitat article faced with an actual dilemma and a 7-member board split 3-3 [pending the president’s vote] on whether to approve or disapprove the purchase did the right thing: that board voted 4-3 to approve the deal.)  See my other posts about coop boards:

Nov 21, 2008: picking on coop boards but in need of editing (NY Post) (about a crappy NY Post article and coop boards tightening standards in a changed market)
March 16, 2008: coop boards behaving badly / 32 Gramercy Park South edition (about a coop board lawsuit over a shareholder’s holiday decorations)
May 29, 2007: advantages to the much-maligned coop ownership, vs. condos (about one advantage of coops compered to condos — the ability of aboard to deal with misbehaving owners)
Feb 9, 2007: coop boards behaving badly / can you imagine? (about ways in which some coop boards do bad things, sometimes)

then, vs. now
Back in the day, this low-price-dilemma was last an interesting topic but in a very different world. (In my loft coop, shareholders who bought in the late 1980s were under water for 5 to 7 years; in which time there were few transactions, but there were some.) That was a world in which coop prices were still (largely) secrets — known only to those in the know and not publicly available anywhere. The power of a negative comp probably had more of a bogeyman aspect, and boards could more legitimately think about keeping secrets. But those days are long gone….

The Market is The Market, is The Market. Coop boards have no positive effect on market value, but they can make units unsaleable (or, to reduce the actual value of unit) by rejecting deals for reasons having nothing to do with the financial qualifications of the buyer. If they want to increase shareholder value, they should run a tight building and not do things that have little benefit but make it more difficult to sell (such as making open houses difficult or impossible, or preventing shareholders in dire financial circumstances from sub-letting, or discriminating against buyers who are … different). End of rant. Resume normal Manhattan Loft Guy reading….