How to Execute a ‘Hostile Takeover’ of a New York City Co-op Building

Whenever you’re looking at bringing a development site to the market, there are several things that you always want to do to maximize the site’s value. They include investigating possession issues, having a zoning and massing study prepared, having an environmental report prepared, and looking for expansion possibilities to increase the land parcel or the density of the site. Generally, the larger the land parcel and the more buildable density you have, the greater the value of the site.

Typically, when you see that a co-op is adjacent to a development site, your first instinct should be to determine if there are any additional air rights that the co-op could sell. Rarely do buyers think beyond that. 

Recently, though, we implemented a strategy to increase the land parcel by orchestrating what we call a “hostile takeover” of a co-op corporation.

In New York City, we have co-operatives and condominiums. Most folks are familiar with condos but, if you are from outside New York, they may not be familiar with co-ops. Co-operatives are a form of ownership where you don’t actually own your apartment — you own shares in a corporation that owns the building, and that corporation gives you a proprietary lease giving you the right to occupy that particular apartment. When you want to sell your shares, the buyer of those shares gets stock in the co-operative corporation and the rights to occupy the apartment pursuant to that proprietary lease.

Co-ops typically have rules and regulations that are considered more restrictive than those in condo buildings. Co-ops can restrict when apartment renovations can be done, and can establish parameters which a buyer must fall within in order to be permitted to purchase shares. Those parameters sometimes include having a liquid net worth that’s at least a multiple of the apartment price, and the co-op board can reject a buyer for any reason or no reason. The restrictions on what you can do within a co-op has made the condominium form of ownership much more appealing and much more commonplace these days. In fact, many co-ops are considering converting their form of ownership to condominium.

Familiarity with these forms of ownership is much more prevalent within residential real estate brokerage circles. Residential brokers deal with co-op and condo boards daily. Commercial real estate brokers are generally less familiar with the ins and outs of these residential buildings. 

I am very familiar with both forms of ownership, and that has served me well over the years. I served as a co-op board president for about 22 years at 300 East 59th Street — the Landmark Owners Corporation. I also served as the condo board president at 45 Park Avenue and vice president at 737 Park Avenue for a combined 12 years, so I got to really understand the dynamics of both of these forms of ownership.

Co-ops can sometimes be a good form of ownership to become a candidate for inclusion in a development site, particularly if they are underbuilt and have unused development rights. They can provide tremendous development opportunities. But how do you get everybody in the co-op to agree to sell? Well, the fact is you don’t have to have everybody in the co-op agree to sell.

All you have to do is look at the bylaws of the co-op, which is essentially the rulebook of how the co-op corporation works. In many co-ops, if you get a supermajority of the shareholders to agree to sell, the corporation can force everyone to sell. That supermajority percentage is set by the bylaws — I’ve seen it as low as 60 percent and as high as 75 percent. If you get the votes, the corporation has to sell the building, the proprietary leases are canceled, and the building is vacated. 

We’re working on a development site right now, and there is a co-op that would effectively add about 40 percent of additional density to the development site if we could get that property vacant. The co-op board president is the sponsor who converted the building from rental to co-op and lives in the penthouse unit. He has no interest in selling or vacating. While the board president is normally the way into the board, in this case we had to go around the president.

Shareholders within the cooperative are not generally publicly recorded or available. However, if debt is obtained — which is collateralized by the shares and the proprietary lease — then the shareholder information is available. Most shareholders get loans, so we were able to find out many of the shareholders’ contact information. 

Given the size and condition of the building and the significant unused transferable development rights that that building had, the offers made to the shareholders were about three times what the apartments were worth if sold separately. A supermajority of shareholders are now in the process of forcing the co-op to sell the building. It’s going to be very interesting to see how this plays out — but so far, so good. I can’t wait until the deal closes. It’s probably going to be awhile, but I’ll keep you posted. 

Knowing what is in the bylaws of a co-op enables you to do some very creative real estate deals.

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.