By Robert Kroll
Here’s something co-op apartment dwellers never wanted to hear: if you are thinking of sub-letting your apartment long-term, you could be shooting yourself in the foot, financially.
Of course, if you’re out of work or still suffering from the lousy pandemic-created economy, bringing in rent for your West Village apartment may seem an attractive option. And, if done carefully, it can be carried out without causing much of a downside.
My dire comment is directed to those who have other options to keep body and soul together, or who are not struggling financially.
The problem is: if too many co-op owners in one building decide to sublet at the same time, that creates a perception of distress in the eyes of banks the next time you want to borrow money to refinance your apartment, or the co-op wants to borrow money for major repairs and maintenance.
Banks prefer to loan to owner-occupants and to buildings that are 100 percent owner-occupied. The same is true for single family homes. The banks express this preference by the interest rates and other loan terms they offer their borrowers. The larger the percentage of owner-occupants in a building, the lower the interest rate. When the building is above 25-50 percent tenant occupied, a bank might even refuse to loan money to finance an apartment purchase or refinance a unit.
One of the impacts of the pandemic during the past 20 months is that folks wanted to leave the densely populated NYC area and move to the boonies to reduce their risk of infection due to sheer population density. In our co-op building, two families took that option. Both decided to rent out their apartments. That motivated our co-op board to look at our “sublet policy” and consider the implications of two more sublets out of a total of nine apartments.
We realized immediately that we had no such thing as a formal sublet policy, and there began a heated and protracted email discussion of how to create one. As the discussion continued, one family applied for a loan to refinance their co-op share. The bank they applied to immediately sent out a voluminous questionnaire to the building manager (me), which contained numerous questions about this very topic. The questionnaire left no stone unturned. It was clear the bank was not distinguishing between sublets by the proposed borrowers or the other shareholders in the building. The bank wanted the whole sublet picture. To protect the innocent, I won’t elaborate on those details but will just say the loan was granted.
It may be time to look at your own sublet policy and sublet rate to see whether these could hinder a future sale of one of the apartments in the building, including yours, or affect borrowing terms. Interest rates affect housing values, and higher interest can mean lower value. Even if you are living in your apartment, if the building sublet rate is too high in the eyes of the bank, you may find it hard to find a buyer who can finance the purchase of your unit.
Here are the elements of a sublet policy that lays down the rules and covers many of the issues of this process.
Set a maximum number of units in the building that may be sublet at a given time.
How will you enforce that rule? That is, will you have to notify tenants and their owners that a lease renewal will not be permitted?
Set a minimum and maximum period for sublets.
Create a rule that will allow for a fair distribution of the sublet slots—there may be four slots open and six shareholders wanting one of them. This could be done based on seniority, ownership percentage, first-come first served, or a coin toss.
Decide whether the board has a say in whom any of these sublets are rented to, i.e., is board approval of a particular sublet candidate required as it is for a particular shareholder?
What criteria should the board apply to selecting or rejecting subletters? Does the board have a say in how much rent is charged?
Should the subletting apartment owner or tenant be required to use a particular form of lease, and should they be required to turn in a signed copy of the lease to the management?
Should the lease used for the sublet restrict sub-sub-letting? If not, should the board have a right to approve or reject such sub-sub-letters?
Should the board impose a subletting tax on the co-op shareholder and turn this practice into a revenue source? If so, how would such a tax be enforced and how and when would it be collected?
Will the co-op board consider allowing the subletter to renew his or her lease?
Should the subletting rules include exceptions for short-term use of apartments by family and friends? Should it distinguish between a guest who is staying while the owner is occupying the unit and a guest with full and exclusive control of the unit?
This list is only a sample of the many issues that could and should be covered in a subletting policy. The reader is urged to consult a lawyer for a complete list of such issues.
There are many downsides of subletting for owner-occupants in a building with sub-tenants on either side of them, or above and below. The tenant does not have the same stake in the building and its occupants. He or she will typically not remain as long in residence and not form lasting bonds with the long-term owner residents. Tenants are sometimes less concerned about the depreciation, defects, destruction, and deterioration of the building because they have no equity in the property and little or no obligation to repair or maintain. These are a few of the considerations.
Next month: what’s involved for the subletting owner who becomes a landlord.