Tenants Have Real Power In Building Conversions

In today's real estate market, converting an apartment building to cooperative ("co-op") or condominium ownership can be a lucrative strategy.

Nevertheless, as profitable conversions may be, they aren't for the faint of heart. Anyone who wants to convert an apartment building to either co-ops or condominiums has to deal with strong protections for tenants in the Martin Act, which governs conversions of occupied buildings, as well as a myriad of other New York City and State tenant protection laws and regulations.

If you are considering converting a building you own, or you are investing in a conversion project, here are some things to watch out for.

If You Want to Evict Tenants, You Need Most of Them on Your Side

Far less common, but technically available as an option for developers is the "eviction plan". The sponsor of a co-op or condominium conversion can evict rental tenants in a conversion, only if more than half of the existing tenants agree to purchase their units.

This means that the optics and messaging surrounding your project can be just as important as the finances and construction plans. If the tenants don't believe in your project, feel like they are being treated unfairly, or simply don't believe the economics of purchasing work for them, you may not be able to move forward as planned.

Of note, senior citizens and disabled individuals do not count towards the 51 percent requirement and can only be evicted if they breach their leases.

Even if you do get enough tenants to purchase, the process of evicting the non-purchasing tenants will be long and likely hard fought. It is for these reasons that eviction plans are rarely used.

Tenants Have Substantial Rights under Non-Eviction Plans

In a "non-eviction plan," tenants have the option to purchase their apartment in accordance with the Offering Plan, or to remain as tenants after the conversion. Vacant units can be sold to outsiders, but generally speaking, bona fide tenants in occupancy on the date an Offering Plan is declared effective become non-purchasing tenants who vest to rights similar to (and in some respect better than) rent stabilized tenants.

In a non-eviction plan, the sponsor must honor the terms of the tenant's lease if it does not expire prior to the Offering Plan being declared effective. Market tenants whose leases expire prior to effectiveness can be evicted. If the apartment was rent-controlled or rent-stabilized prior to conversion, they remain subject to rent regulation irrespective of the terms of the Offering Plan. In addition, tenants cannot be forced to follow the new rules of the co-op or condominium association, unless those rules were also included in their lease agreements. So, for instance, if a board elects to restrict smoking in a building after a conversion, the tenants are exempt from that new rule.

Some building owners choose to address the impact of existing tenancies by offering buyouts, or other incentives to tenants to leave voluntarily. While this can sometimes be a helpful strategy, owners are not required to offer incentives, and tenants are not required to accept them. Managing your inventory of market units can also be a critical strategic component of any conversion since market tenants do not have a right to a renewal lease unless that lease expires after the Offering Plan is declared effective.

Whatever You Do, Proceed Carefully and Deliberately

When it comes to conversions, it is imperative that you plan both the conversion and the renovations and improvements that generally go hand-in-hand with a conversion very carefully. The improvements that are so critical to your creation of the right aesthetics and amenities to foster and generate sales are also the most likely to inconvenience your tenants and cause them to band together to oppose you. They therefore must be managed for more carefully in an occupied building, with increased sensitivity to safety issues, code compliance and tenant protection to avoid city and state agencies enforcement by may slow your project down. Remember, this is a long game. Be prepared for the full process to take time, and rely on experienced professionals such as Rosenberg & Estis whenever you can.