Home | Business News | Browse by Publication | A | Appraisal Journal

The appraisal of occupied cooperative apartments in New York City. (Features).

Article Excerpt
Abstract

Of the 320,000 rental apartments converted to cooperative ownership over the past 20 years, approximately 77% were under a non-eviction plan. Under such a plan, tenants who were protected by the highly restrictive rent stabilization laws at the time of conversion remain protected for as long as they choose to remain in occupancy. The proper valuation of this property type requires an understanding of the complexities of New York City's rent stabilization guidelines, as well as knowledge of the nuances of the cooperative apartment market. This article explores the two methods of estimating the market value of these occupied blocks.

**********

Over the past 20 years, more than 320,000 rental units have been converted to cooperative or condominium ownership in New York City. (1) Approximately 77% of these units were converted under a non-eviction plan. Under a non-eviction plan, the tenants in occupancy prior to the conversion are legally entitled to renew their leases, if they were protected by some form of rent control at the time of conversion. The motivation of the conversion plan is clear. With tenants enjoying a significant leasehold advantage in their apartments as a function of New York City's highly restrictive rent control laws, cooperative conversion gives the sponsor of the cooperative plan (the lessor) the ability to immediately cash out of the investment. The lessor can then place an underlying mortgage on the building and sell any vacant units on the open market rather than rent them at the prescribed, regulated rent. Although the bulk of the conversion activity took place during the mid 1980s, many lessors find themselves still holding large blocks of occupied units. The valuation of these blocks poses particular challenges for even the most experienced appraiser.

As the vast majority of buildings were converted to cooperative rather than condominium ownership, and since co-op apartments in New York City out-number condominiums by nearly 6 to 1, this discussion focuses on the valuation of a block of occupied, rent stabilized cooperative units. To truly understand the liability (from the lessor's perspective) of having a co-op unit occupied by a tenant protected by some form of rent control, an overview of these complex regulations is warranted.

Rent Stabilization and Rent Control

There are two types of rent control in New York City: rent control and rent stabilization. Rent control is the older and more restrictive of the two. Dating back to 1947 rent control was a means of protecting tenants from the severe housing shortage following WWII. For a unit to be rent controlled, the building must have been constructed prior to 1947. In addition, the tenant must have been in continuous occupancy prior to July 1, 1971. (2) The rent is a function of the maximum base rent (MBR) system, which is a function of the initial filing when the law went into effect. A rent controlled apartment rents for a fraction of market rent, typically generating insufficient rent for even basic building services. Due to the significant leasehold advantage created by the rent control guidelines, apartments seldom turn over (inmost cases only upon the tenant's demise). There were 52,562 rent controlled apartments in New York City as of 1999, (3) the most recent year for which such statistics were reported. As very few rent controlled apartments exist in converted cooperative buildings, a focus on rent-stabilized units is warranted.

Rent stabilization is the more common of the two forms of rent control, regulating approximately 1.02 million units in New York City (as of 1999), or about 48% of New York City's entire housing stock. (4) Rent stabilization affects all apartments in buildings with six or more units constructed between February 1, 1947 and December 31, 1973. Buildings constructed after this time may be rent stabilized if they are receiving tax benefits. Rental increases are set by the Rent Guidelines Board for either one or two- year leases at the tenant's choice. (These increases are currently 4% for a one-year lease and 6% for a two-year lease.) However, the Rent Regulation Reform Act of 1997 provided greater opportunity for landlords to realize an upside in rent stabilized units, with a 20% increase permitted upon turnover of...