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How to Keep A Lid on Sublets

The Challenge

The co-op building at 111 Third Avenue had too many sublets. Of the 124 shareholder-owned units (the sponsor owns 31 of the total 155), 32 were sublet. The co-op was reaching the point at which banks would be reluctant to lend on the property at all. The board needed to take action to control the situation. While the co-op had the usual rules regarding sublets, it needed to do more without jeopardizing the value of ownership in the building. With the input of the co-op attorney and the manager, the board considered raising the annual sublet fee from one month’s maintenance to two, and it explored other alternatives to discourage subletting while not making it impossible to sublet.

The Solution

The board decided to establish a “sublet pool.” They would cap the number of allowed sublets at 31 (25 percent of the owned units). They added a $500 sublet application fee (in addition to the managing agent’s fee), payable to the co-op. They would rank each sublet order in the pool from 1 (most recent shareholder in the pool) to 31 (oldest allowed sublet). Anyone in a position higher than 31 would not have the option to sublet that year. Each year, the board would notify subletting shareholders of their positions on the list. It set a future date for longtime subletting shareholders to come off the list (two years out to give them time to decide to hold or possibly sell their units).

The Lesson

While subletting is a recognized need for many co-op shareholders, it is not a given right. Boards have the ability to approve or deny sublets with no explanation. They are there to protect all owners from the dangers of undesirable people living in the building, and from the negative effect excessive subletting will have on values in the building.

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