Nov 12, 2013

Holders of Unsold Shares in a Coop

In many coop offering plans there is a special class of shareholders called Holders of Unsold Shares who have rights and privileges not enjoyed by the ordinary tenant-shareholder. The more unsold shares there are in a co-op, the less clout the other tenant-shareholders have. If the coop has a majority of unsold shares it is difficult to obtain financing since the coop is less than 50% owner occupied.

Q: What are Unsold shares? What is a Holder of unsold shares?

A: "Unsold shares are any shares not subscribed to and fully paid for prior to closing. At or prior to closing, unsold shares must be acquired by the sponsor or financially responsible individuals produced by the sponsor. A holder of unsold shares is the sponsor or any individual designated to hold unsold shares by the sponsor. Such shares shall cease to be unsold shares when purchased by a purchaser for occupancy.

The key word in this definition is "designated". When a sponsor holds on to unsold shares after the closing he or she may, thereafter, transfer those shares to others, not necessarily to "holders of unsold shares". If he or she designates the grantee of these shares as a "holder of unsold shares" then that individual or entity" becomes a holder of unsold shares.
Holders of Unsold Shares are not required to submit their prospective purchasers to the board for its approval, nor are they bound by the board's sublet restrictions. Holders of Unsold Shares are allowed to sublet their units at market rates in perpetuity. They're also exempt from paying sublet fees, alteration fees, transfer fees and flip taxes which may be imposed on the typical tenant-shareholder.

These are shares of stock in a cooperative housing corporation which are allocated to apartments that have never been purchased for residential use. Once the apartment is acquired as a residence, the shares allocated to it cease to be Unsold Shares and its owner is not entitled to Holder of Unsold Shares status.
I recently listed two sponsor apartments in a coop in Morningside Heights. Both were purchased by an investor that will retain the sponsor rights and privileges as long as the purchaser (holder of unsold shares) designated by sponsor never occupies the apartment.

The New York State Attorney General has taken the position that an Owner of Unsold Shares does not necessarily qualify as a Holder of Unsold Shares, and that to become a Holder of Unsold Shares, an Owner of Unsold shares must meet the following five requirements:

1. Obtain a designation as Holder of Unsold Shares from the sponsor. Subsequent transferees of the sponsor can not obtain the designation from their immediate seller, it must be procured from the original sponsor. Under the regulations, the sponsor may only designate financially responsible persons as Holders.

2. Obtain a written guarantee of payment by the sponsor to the co-op of all financial obligations of the Holder of Unsold Shares. This provision of financial security is the quid pro quo for allowing an investor to enjoy the privileges and immunities described above indefinitely.

3. Adhere to the escrow and trust fund provisions of the General Business Law.

4. Register with the Department of State as a broker-dealer.

 5. File regular updating amendments to the Offering Plan.


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