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Unsold Shares in NYC Co-ops: What Buyers, Sellers, and Boards Need to Know

What Are Unsold Shares in a Co-op?

    In a New York City cooperative (co-op), each apartment is allocated a number of shares in the cooperative corporation. When a building converts from rental to cooperative ownership, the sponsor, typically the developer or original landlord, often retains ownership of some of these shares, especially those tied to units that were not sold during the initial offering.

 

    Unsold shares retain their status as long as the sponsor, or a purchaser using the unit solely for investment purposes, continues to hold the shares without using the unit for owner occupancy, which, in some cases, includes occupancy by family members.

 

Why Do Unsold Shares Matter?

    1. Special Rights of Unsold Shareholders:

    

    The benefits associated with unsold shares vary by building, but sponsors often enjoy special privileges under the co-op’s offering plan and proprietary lease. These may include:

 

• • Exemption from board approval when selling or leasing the unit.

 

• • Freedom to lease the apartment without restrictions typically imposed on regular shareholders, although the apartment remains subject to the limitations on short-term rentals under Local Law 18.

 

• • The right to renovate or improve the unit without prior board consent.

 

• • Preferential treatment in financial obligations, including exemptions or reductions in flip taxes, transfer fees, and certain assessments.

 

    2. Impact on the Building and Other Shareholders:

 

    Unsold shares can have a significant impact on the financial and operational health of a co-op:

 

• • A high percentage of sponsor-owned units can result in fewer owner-occupants, which may make the building ineligible for traditional financing from lenders.

 

• • Renters in sponsor units may be less invested in the upkeep or governance of the building.

 

• • Exemptions from assessments or fees granted to unsold shareholders may increase the financial burden on the remaining shareholders.

 

Legal Protections and Common Disputes

 

    Holders of unsold shares are generally protected by the co-op’s governing documents and offering plan. However, disputes frequently arise when:

 

• The co-op board challenges the sponsor’s leasing rights or alleges abuse of those rights.

 

• Shareholders claim the sponsor is not contributing fairly to building expenses.

 

• The board seeks to regain control or limit the sponsor’s influence, especially when units remain unsold long after the initial conversion.

 

    Courts typically enforce the sponsor’s rights as long as they are clearly outlined in the governing documents. However, vague or outdated language can create ambiguity and grounds for litigation.

 

How to Confirm Whether Co-op Shares Are Unsold Shares

 

    Investors seeking to acquire unsold shares in a NYC co-op should take the following steps before closing:

 

1. Request a legal opinion from the co-op’s counsel confirming that the shares are unsold shares as defined in the offering plan.

 

2. Include a seller’s representation in the purchase contract affirming that the shares qualify as unsold shares and consider making the unsold-share status a contingency of the closing.

 

3. Carefully review the co-op’s offering plan, proprietary lease, and bylaws, particularly the provisions relating to unsold shares and their loss of status.

 

   For example, in Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp., the court ruled that unsold-share rights remained intact even when an individual related to the owner of an LLC occupied the apartment. The court clarified that only bona fide occupancy by a natural-person family member, as opposed to individuals connected to LLCs or corporations, would strip a unit of its unsold share status. Bellstell 7 Park Ave. LLC v. Seven Park Ave. Corp., 66 Misc. 3d 710, 116 N.Y.S.3d 547 (N.Y. Sup. Ct. 2019), aff'd, 190 A.D.3d 632, 141 N.Y.S.3d 43 (2021).

Considerations for Buyers and Sellers

 

    If you are buying a co-op apartment, ask:

 

• What percentage of the building is still sponsor-owned?
• Are there any active disputes or litigation involving the sponsor?
• Will the building’s owner-to-renter ratio impact your ability to obtain financing?

 

    If you are a seller, board member, or managing agent, consider:

 

• How unsold shares may affect unit marketability.
• Whether the sponsor’s actions are creating disruption or liability.
• Whether the duration of sponsor ownership raises concerns or calls for governance changes.

 

Can the Co-op Board Do Anything About Unsold Shares?

 

    While co-op boards generally cannot force a sponsor to sell unsold shares, they can take strategic steps to protect the co-op’s interests:

 

• Enforce payment of maintenance and assessments against the sponsor.

 

• Apply house rules and building policies to sponsor tenants, within legal limits.

 

• Amend governing documents to restrict or redefine future unsold-share rights, though changes may not retroactively affect current sponsors and often require a supermajority vote.

 

Final Thoughts: Seek Legal Guidance

 

    Unsold shares in NYC co-ops present complex legal and financial considerations. Whether you are purchasing a unit with investment intentions, managing a building with lingering sponsor control, or navigating sponsor-related disputes, it’s critical to understand the implications of unsold shares under New York law.