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All of the tenants in my building just received a red herring notice, informing us that our rental building is going to be converted to condos. What should we do now?
Thanks to the new rent laws, you and your fellow tenants are in a better position to negotiate for insider pricing to purchase your apartments, says Sam Himmelstein, a lawyer at Himmelstein, McConnell, Gribben, Donoghue & Joseph, who represents residential and commercial tenants, and tenant associations.
First, some history: In the 1980s and 90s, it was far more common for rent-stabilized apartment buildings to go co-op or condo. The majority of these conversions took place under a non-eviction plan, which required 15 percent of a building’s apartments to be sold in order for the conversion to get approved. Landlords could include vacant apartments and apartments occupied by tenants but purchased by outsiders in that 15 percent.
“Even under that rule, landlords would negotiate with tenants because they wanted to sell as many units as they could,” Himmelstein says. “When we represented the tenants, we would tell the sponsor and their lawyers that if they lowered their asking price by a certain amount, we’d guarantee a certain number of tenants would buy. We negotiated not only for price, but also for repairs, control of the board, and other provisions.”
This insider pricing allowed tenants to purchase their apartments for well below market value; some ultimately ended up flipping the apartments and making a profit.
Then vacancy deregulation came along. Under these laws, landlords had new ways of removing apartments from rent stabilization and renting them at market rate, and therefore less reason to convert buildings.
“Co-op and condo conversions dropped off dramatically,” Himmelstein says. “When landlords did convert, they stopped negotiating for insider pricing because they often had 20 to 40 percent or more of the apartments at market-rate already and could sell them very easily.”
Now, under the recently passed rent reform legislation, eviction plans (plans where tenants who were not seniors or disabled could be evicted if they didn’t purchase) have been eliminated completely, and landlords who want to convert their buildings must get 51 percent of the tenants in occupancy to agree to purchase their apartments in order for the plan to go through. Furthermore, no one can be evicted for deciding not to purchase their apartment.
This might mean a return to negotiating a discounted price for tenants.
If you receive a red herring notice—that is, a preliminary draft of a plan to convert the building—you should organize a tenant association with your neighbors and retain a law firm knowledgeable in condo conversions.
“Landlords can’t negotiate during the red herring stage, but tenants can organize, hire an attorney to review the conversion plan, and hire an engineer to determine whether the building is in the shape being represented by the landlord in the red herring,” Himmelstein says.
This is an opportunity for tenants to get inspections of areas of the building that are ordinarily off-limits, and point out ways the landlord’s conversion plan may be inaccurate or deficient.
If the Attorney General approves the plan, it enters the next stage. A new document called the black book, which represents the beginning of the sales process, is issued to tenants, who are given 90 days to purchase their apartments.
“We typically have tenants sign a no-buy pledge, and commit to each other not to purchase their apartments unless released from the pledge by a majority of tenants,” Himmelstein says. “This allows us to negotiate as a group and get prices lowered.”
Note that the 90-day period can be extended, so you don’t have to rush the negotiation. Once the landlord gets the requisite number of purchasers, the conversion will be approved and the building will go condo—but for those stabilized tenants who don’t want to buy, they can continue to rent.
In a nutshell, Himmelstein says, “Don’t panic, organize, retain counsel, act as a group. If there is any opportunity to get prices lowered, it will happen because of group purchasing power, and your ability to withhold that. The new 51 percent rule means the landlord needs you more than they used to.”
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Sam Himmelstein, Esq. represents NYC tenants and tenant associations in disputes over evictions, rent increases, rental conversions, rent stabilization law, lease buyouts, and many other issues. He is a partner at Himmelstein, McConnell, Gribben, Donoghue & Joseph in Manhattan. To submit a question for this column, click here. To ask about a legal consultation, email Sam or call (212) 349-3000.