How 100 Sponsor Units Sold Across 28 Buildings in One Day

When a group of real estate investors decided to purchase a hundred sponsor-owned apartments spread across 28 different co-op and condo buildings — and close the entire deal in a single day — the legal challenges were unlike anything a typical real estate transaction demands. Andrew Freedland, partner at Herrick Feinstein, was the attorney who made it happen, and the lessons from that deal extend far beyond one extraordinary closing. In this episode, Freedland unpacks how large-scale sponsor transactions actually work, what boards can expect when ownership of unsold shares suddenly changes hands, and why the arrival of a new investor isn't necessarily bad news. Whether your building has one sponsor unit or fifty, understanding how these deals come together — and what they mean for everyone else in the building — is knowledge worth having. Habitat's Carol Ott conducts the interview. 

The business of running a building is demanding work that requires making endless decisions — some that can quickly lead your board into a quagmire of legal difficulties. Legal Talk interviews New York's leading co-op/condo attorneys to find solutions, and get some guidance, on these challenges.  For more co-op and condo insights, sign up to receive Habitat's free newsletters or become a Habitat subscriber today!

Transcript

Carol Ott: Holders of unsold shares in a co-op are a unique breed. Like other co-op shareholders, they pay maintenance, but they have a ton of rights. The ordinary co-op shareholder doesn't have. They also collect less money than they owe each month because the apartments they own are usually rent stabilized or controlled.

On the face of it, an odd investment.

Sponsor Spot: At the Folson Group. Our mission is to help boards make smart decisions every day. From end-to-end property management searches and construction project management to cost optimization, we help boards achieve sustainable savings on time projects and long-term performance that speaks for itself. 

Carol Ott: I'm Carol Ott with Habitat Magazine, and my guest today is Andrew Freedland, partner at Herrick Feinstein.

Thanks for joining me, Andrew. 

Andrew Freedland: Thanks so much, Carol, for having me. 

Carol Ott: So you have worked with boards in buildings that have a large sponsor presence. From the co-ops perspective, what kind of issues does this cause? 

Andrew Freedland: So from a co-ops, from a co-op perspective obviously a board would rather not have unsold shares in their building.

Holders of unsold shares, as you touched upon, have special rights, which in many cases are not favorable to the. Co-op itself. Those rights include the ability to rent their units without obtaining board approval. In many cases, the ability to sell their units without obtaining board approval. And in many cases the ability to renovate their units, without obtaining board approval and, not complying with many of the requirements that other shareholders would be required to comply with 

Carol Ott: if they sell their unit to not another holder of unsold shares, but to somebody who would become an actual shareholder. The board doesn't have a right to approve or disapprove. 

Andrew Freedland: That is correct. So on that particular transfer.

The purchaser has decided that they want to live in the apartment, but because the holder of unsold share currently owns the apartment, it is generally not subject to board approval. 

Carol Ott: Alright. I just do wanna ask you about security. So if you have, for instance, if you're in a large building and you have a holder of unsold shares that has a, significant block, you as a board.

May or May I guess you won't know necessarily the people coming in and coming out and if they're moving out or moving in. I would think that's pretty, pretty stabilizing and can be of concern. 

Andrew Freedland: It certainly can be of concern and it is something to be concerned about. In many cases in my representation of boards, I've been successful in talking to sponsors and explaining to them the concerns that boards have about who is coming in and come and going out of the building.

And in many cases, despite the fact that board approval's not permitted with respect to rentals, we, we get information from them. Concerning who, the, who, the who the tenant will be. So we can be assured of who that person is. Now obviously we don't have the right to approve or deny, but at least we know who it is and we know who's coming in, who's going out.

We can make sure the doormen are alerted if it's a doorman building and things of that type. 

Carol Ott: But the board can't insist upon that. That's. Worked out through conversation, is that correct? 

Andrew Freedland: It is. It really depends on the sponsor, but yes, it's something that's typically worked out by conversation, by our appealing to them and saying, we understand we don't have the way to approve, but we would like this information, many as sponsors.

They're managing many units. They usually own far more than one unit, and they're moving people in, moving people out. And if you have, 50, a hundred or maybe hundreds of units, you may be dealing with multiple vacancies every single month. And you're not necessarily going back to the board saying, this is the person who's moving in.

Conveying that information to them can be. Can be valuable as far as the board's concerned. And that's what our normal our normal goal is to get that info. 

Carol Ott: I wanna segue over to the people who are the holders of Unsold shares. 

Andrew Freedland: Sure. 

Carol Ott: Because it's a, an odd market to me anyway. And you recently closed a large transaction involving a hundred sponsor owned departments.

Who were the buyers and what were the complications? 

Andrew Freedland: I can't tell you who the buyers were but they were, it was a group of real estate investors who typically buy unsold units and many people who, invest in that area have other investments that they use to offset, in many cases, losses that they are incurring as a result of the ownership of unsold shares.

Carol Ott: So I'm just gonna jump in. I'm assuming if there are losses, which there would be, if you've got a rent stabilized or rent control tenant, these holders of unsold shares, or for instance, this group that you recently worked with, they're not getting a bank loan to do this, are they? 

Andrew Freedland: In the particular matter that I had, there was no bank load.

It was in all cash closing. Yeah. But could you obtain financing? Maybe I think you would need somebody who was, very well healed, which obviously if you're not obtaining a bank loan, you're st, you're obviously well healed. But if you were if you were obtaining financing, there would probably be some personal guarantees involved with it.

Carol Ott: Yeah I would guess so. For the holders that own, for instance, this block of apartments. 

Do they have their own managing agent or how does this work? So 

Andrew Freedland: when you own large blocks of shares, typically you will retain the services of your own managing agent just because, for whoever the owner is, whether it's, one individual or a group of individuals or entity, it's very difficult.

To manage that, that that size of, of a portfolio. Some of the smaller holders, maybe if you only own three or five units, which I've seen on rare occasion they may just do it themselves. But if you do have a large block, you're probably gonna have your own managing agent who your tenants communicate with directly, and then that managing agent decides.

How they're going to proceed. Is this a, is the matter that's being brought to my attention, something that I need to go back to co-op building management on? Or is this something that I need to address directly or maybe it's something that I need to investigate and then decide? So, a share, excuse me, not a shareholder.

One of your tenants calls you and says there's no heat in my apartment. You may send over one of your service people to go look at it and figure out, is this something that I need to deal with, or is this a building issue? Or you may call the building and say, is there something wrong with the he?

And then, decide how to proceed from there. 

Carol Ott: But from the board's perspective, they can assume that if they're, that, if one of these renters, for instance, doesn't have heat, they're calling either their landlord or their managing agent. They're not calling the super of the building or the managing agent of the building.

Andrew Freedland: That's the way it really should be as to whether it really works that way is another story. A tenant in an apartment, they know who the management company is for the building, and they may in many cases just go ahead and say I'm gonna call the building manager. I'm not calling my manager. In theory, the way it should work is the tenant of a sponsor or whoever the unit is, should be going to either their landlord.

Or their landlord's managing agent who then makes the decision as to whether they're gonna go to the next level up. 

Carol Ott: For the closing that you recently did, how complicated was that? Was that in one building or two buildings or what? 

Andrew Freedland: We did a hundred units across 28 different buildings. One of the, one of the more complicated transactions just because of the number of buildings involved.

Carol Ott: And did, was there a board representative at each closing or 

Andrew Freedland: In our particular case, we were able to because of, my. Because of my relationship with many of the managing agents we were able to obtain closing documents from them and agree to certain escrow instructions, and so therefore, we had documents and we could close the transaction all simultaneously.

When an individual buys a single co-op unit, usually what they're gonna do is they're gonna go to the managing agent's office to close that and the managing agent. Cancels the old stock certificate issues. A new stock certificate cancels the old lease issues, a new lease in the name of the buyer. Same with the stock and the name of the buyer, the seller is canceled.

For us to do that 28 times for a hundred different closings would've probably taken us multiple days and it just wouldn't have been possible. But, in an escrow situation, we were able to close all 100 units in a single day. 

Carol Ott: So is there a market or a sub-market, how do people find out like this company that bought a hundred units, how do they find out there's a hundred units available?

Andrew Freedland: Yeah, there are brokers who specialize in selling unsold share. And so there are brokers and they're known in the area. Um. The same way you would find out about other commercial, other commercial transactions In many ways, obviously they're residential units, but it's really more of a commercial transaction.

It's not, an individual's not coming in and buying a hundred unsold units. 

Carol Ott: Is this a very robust market for unsold shares or a market that is, has diminishing apartments? 

Andrew Freedland: There's certainly diminishing apartments in many cases, especially with co-ops. The co-op, co-op conversions.

People aren't really doing co-op conversions anymore. The preferred ownership is a condominium this day and age, so you don't really see co-op conversions anymore. So the co-op boom that was in the seventies and eighties, those units, they're diminishing and they will continue to diminish over time.

There are unsold units and condos as well, and actually ahead of our a hundred units. Some of them were condo units. But there's certainly fewer and fewer because as as people move out or as they pass away, in many cases, the owner of the unit goes ahead and decides I'm gonna sell this unit.

We fix it up, sell it, and now it's no longer an unsold unit. 

Carol Ott: In a condominium, because most of the condominiums are, were are more recent vintage. They're newly constructed. It's not like an apartment building. There's not very many converted to condominium. So if a developer has built this condominium and, has 30 apartments that have not been sold, are those, is that go, is that part of this market?

Andrew Freedland: It is part of the market, but it's not quite the same because usually in a new condominium, you're not faced with rent-stabilized tenants in the units. If you are a brand new construction condominium, what you've just finished and you know it has a hundred units and then at the end of the day you have 30 and you're, you're interested in selling the block to one buyer and just getting rid of your interest in that building.

You're not going to have to sell it at the discount that you need to sell when you have a stabilized tenant because the unit can be sold to somebody for individual occupancy. 

Carol Ott: Oh, and that is a question. So these buyers of unsold shares, they are buying these apartments at a discount. Is that correct? 

Andrew Freedland: In most cases, when you have a unit with stabilized or rent control tenants, they are buying it a substantial discount because you cannot get that tenant out.

Carol Ott: What is this? What, when you say substantial, is that 50%, 80%? Do you ever, is there a, 

Andrew Freedland: it really depends on the unit. It depends on a lot of factors, but it's certainly nowhere near fair market. You may be looking at. 50% or more. 

Carol Ott: I see. So finally, I wanna know should boards view these investors as adversaries, as necessary evils or as potential partners?

Andrew Freedland: I think the answer is all three. They're the sponsors. If you have unsold units, if you have sponsor units in your building. Generally speaking, there's nothing you can do about it. They're there and you need to deal with them, because it's a reality. I think, working with them is certainly to the benefit of the board.

They have certain rights that others don't have. And as upsetting as that is in many cases to boards, and I'm sympathetic to that. Many of the boards I represent, they say, oh, I wish I could get rid of the holder of unsold share. I wish I could get rid of them too. Sometimes it's, they have rights that you just don't want to, have in the building.

They're there and there's little you can do about it. They're slowly gonna sell their units off. You can encourage them to sell their units off as they become vacant. But the best thing you can do while they're there, work with them, let them know that you wanna be their partner and you understand these are their rights, but what can you do to help me?

Can you give me some information on your tenants? Let me know that you've vetted them. And what have you. 

Carol Ott: Okay. Very good advice. Thank you so much, Andrew. 

Andrew Freedland: Thanks so much.