How can we cap and trade rental rights in my co-op (condo-ish) building?
October 24, 2010 9:08 AM   Subscribe

How do I begin to structure a cap-and-trade system for keeping my co-op apartment building's owner-occupancy rate high, while rewarding owners live here, and charging/"taxing" those who don't? Details inside.

My co-op apartment building's rules require every shareholder (apartment owner, essentially) to live in his/her unit for two years before renting it out, then rent the unit out for only two years, after which the owner may reoccupy, leave vacant, or sell the unit. The occupy-rent-occupy cycle continues at two year intervals. The goal is to keep owner-occupancy high for tax and loan-rate reasons, but I think there has to be a better way. (Especially in this economy, it's burdensome for owners to be tied to an apartment that won't sell or they're not permitted to rent out, especially if they have a job or school opportunity elsewhere.)

Does anyone know how to create a cap-and-trade system or other regulated market to allow long-occupying owners ("stayers") to profit from their decision to stay in their units, while charging those who prefer to rent their place out?

Recommendations of software that can do this, or articles that describe the nuts-and-bolts of setting up such a system, or your own cap-and-trade architecture all are welcome!

Here are additional details: The goal of the system would be to allow would-be-landlords ("renter-outers") to rent out their apartments prior to the two-year threshold, and for longer than the two-year limit (for a fee, which would be collected by the "stayers"), while still keeping owner-occupancy between 51% and 75%.

A complicating factor is that ideally, this regulated market would still allow shareholders to earn their right to rent out their places the traditional way--by staying two years, renting two years, etc.--if they preferred not "buy" the right to rent out.

Is this possible? How would my co-op's board begin to set up such a system?
posted by celilo to Law & Government (10 answers total) 1 user marked this as a favorite
 
Where do you live?

If you live in NYC I've never heard of such a thing and don't think it would fly.

In any event, you should speak with a real estate attorney familiar with the laws of your state, not random strangers on AskMe.
posted by dfriedman at 9:27 AM on October 24, 2010


Why make it that complicated? Why not just have a flat, annual fee that they can pay if they have not earned the right to rent by staying the 2 years?
posted by amberwb at 9:39 AM on October 24, 2010


I'm guessing you live in NYC as well. The way the current system works (you MUST stay in your apartment for 2 years before renting it) already discourages owners from renting their units out... thus keeping the owner occupancy high.

The whole point of buying a co-op is that you are buying into a corporation, not a travel club. If an owner buys the apartment but doesn't live there full time, they are still a 100% owner, and thus you will not have any problem with mortgages, etc.

I think you end up complicating matters if you try to change the current system, but that is just my thinking.

(I'm a Manhattan Real Estate Broker, FYI)
posted by darkgroove at 9:42 AM on October 24, 2010


You already have the cap here, so all you need is the trade. You need to create a market. You need to create and track a unit of trade: the owner-occupancy month (OOMs). Give current occupiers credit for up to two years of OOMs and give current landlords credit for the remaining time in their two year rental limit in OOMs. Then allow everyone to place bids to buy or sell OOMs (just like the stock market). Match buyers with sellers, make sure everyone gets paid and you are on your way. The cap, obviously, is that you cannot have a negative OOM balance. I'd imagine most people will want to buy and sell twelve OOMs at a time (in order to match up with year-long leases), but you probably don't need to regulate this.

The problem with this system is that you might end up with exactly 50% owner-occupancy (in fact, if you don't end up with 50% owner-occupancy, the price of OOMs should fall to more or less zero). There are a few ways you could up the owner-occupancy rate if this becomes an issue. One would be for the co-op itself to buy up OOMs on the market to keep the owner-occupancy rate as high as desired. This may not be an easy sell to co-op members, but from an economic point of view, this will raise the price of OOMs, thus just transferring money from landlords to occupiers. Another option would be to increase the minimum OOM balance, but that would change the traditional method.

In the short term, your owner-occupancy rate might even drop below 50% (this problem could also occur in your old system, of course) because you have granted everyone OOMs. You'll need to deal with it in one of the two ways outlined above.

How you do this will depend on the scale. For a small co-op, two spreadsheets would be fine: one to track OOM balances and one for the market (Google docs would be ideal because people could add their own bid/asks). For a larger co-op, you might need a web-based system.
posted by ssg at 9:43 AM on October 24, 2010 [3 favorites]


Response by poster: I'm in DC, not NYC.

Forgive me if I've confused you other AskMe readers by categorizing this as "law and government" (I figured that was closest to "governing systems"). I'm not asking if this is legal, I am asking if it's theoretically and logistically possible to structure a system that uses market forces to meet all the goals I've outlined, and if so, where to begin.

And according to my co-op's governing documents, as long as we amend our bylaws with a 2/3 vote to adopt the new system, we may innovate our own guidelines for regulating occupancy. Of course, that's as long as we don't discriminate against protected characteristics such as race, religion etc.

I understand that most folks have never heard of such a system; we're trying to innovate!
posted by celilo at 9:46 AM on October 24, 2010


(Minervous' husband answering here.)

The NYC co-op in which I'm a shareholder has a system in place that does part of what you are proposing. Each shareholder can rent for two years. Renting shareholders pay the co-op a fee for renting. We're now at or about the targeted owner-occupancy %, so in order to be fair to all shareholders who might want to rent, we have a rotating list for the right-to-rent: Those who have been renting the longest are at the top of the list, and when their current 2-year lease with subtenants runs out, they'll have to either move back in or sell (I think leaving it vacant is also an option). Then if anyone in the co-op not then renting wants to at that time, they can. And so on: the next person on the list with the longest-running lease can run out that 2-year lease term, but has to make a choice when it runs out. And so on: it's a rotating list that constantly changes as any 2-year lease runs out. This way the co-op maintains a stable owner-occupancy % rate while giving everyone a chance to rent if they want, while not forcing out those who are currently renting but putting a time limit on that rental right.

We put together this proposal and passed it at a co-op shareholders' meeting. As long as all shareholders agree to a system and amend their co-op proprietary lease to reflect it, it should work legally. If all current shareholders agree and the applicable legal docs are amended, then all future shareholders will be bound by it too.

You could also check the archive at the NY Times' Real Estate Q & A column; I've seen questions similar to this asked and answered there before.
posted by minervous at 9:56 AM on October 24, 2010 [1 favorite]


Response by poster: Thanks, ssg and minervous's husband! These are great starts.

Just a couple notes prompted by darkgroove and amberwb (notes that may be useful info for others trying to answer the question, or understand my co-ops motives):

-We won't want to simply charge folks who want to rent longer than 2 years or before the 2 year minimum occupancy for two reasons--first, the co-op association at large would collect that fee, while our desire it to have the "stayers" directly benefit from their staying. Second, we don't want to let everyone paying a fee to be exempt from the 2-year-rule; we want a limited number to pay and be exempt--whatever limited number still keeps our owner-occupancy above 50%. It seems a more-complex system would determine with greatest fairness who gets to be in that limited number.

-Owners who don't live here are an issue for two reasons. By DC property-tax law, under 50% owner-occupancy substantially increases our tax burden. And in our experience, banks that offer share-loans for co-ops (like a mortgage, but not identical) either charge higher rates or will not lend at all to individuals seeking share-loans for cooperatives with sub-50% (sometimes even sub-70%) owner occupancy.
posted by celilo at 10:05 AM on October 24, 2010


first, the co-op association at large would collect that fee, while our desire it to have the "stayers" directly benefit from their staying.

While the stayers won't benefit directly, they will benefit indirectly (their net fees paid to the co-op will be lower than the net fees paid by landlords).

Second, we don't want to let everyone paying a fee to be exempt from the 2-year-rule; we want a limited number to pay and be exempt--whatever limited number still keeps our owner-occupancy above 50%. It seems a more-complex system would determine with greatest fairness who gets to be in that limited number.

To put it more explicitly in economic terms, your problem is setting the right price so that owner-occupancy stays high enough. You can do this with a market or you can do it with a set-price. The net result can be the same. A set price has the advantage of being the same for everyone and much easier to administer, but it will have to be set a little high to make sure you don't drop below 50% owner-occupancy. It might be very difficult to guess the appropriate price, especially in the first year. However, if your co-op is small, this might be more desirable than a market system, which could suffer from a lack of liquidity (i.e. it will be hard to buy or sell because there won't be enough buyers and sellers at any particular time).

Alternately, it might be easier and simpler to use a bid-only system. Whenever anyone has a chunk of OOMs available, they simply take bids (as a traditional auction or eBay-style (bid your max, pay one increment higher than the second highest bidder)).
posted by ssg at 10:36 AM on October 24, 2010


For a cap-and-trade solution, it sounds like what you want is to have all owners (or owners > 2 yr) earn an annual allowance of trade-able rental month permits. Everyone earn a number equal to the total desired non-owner occupancy rate *12. Anyone who wants to rent has to seek out people who don't and buy theirs. Owners who rent more months than they can produce permits for pay some very high fee. Permits expire at the end of the year they're issued in. In theory this lets you get the OO rate you want without picking the right fee structure. It has downsides.

1) It is not very flexible; it essentially sets the OO rate. If fewer people want to use the permits than exist, their value become very small. It may be perfectly reasonable for someone to want to pay more and get a higher total amount of non-OO.
2) It requires a functional marketplace. That's hard and requires negotiating with your neighbors, which is an unpleasantness many people will want to avoid.
3) It is not stable enough for people who want to rent. It means that you don't *really* own the right to rent the place; your permit supplier could decide to give them to someone else, or just screw you.
4) On the other hand, if you make the permits permanent then the non-renting owners benefit exactly once; at the outset when they are auctioned. That auction may not produce very good pricing, and some people may hoard theirs indefinitely.

The main alternative is a non-OO tax, which requires you to get the incentive structure right and may be manipulated my the coop government.
posted by a robot made out of meat at 2:38 PM on October 24, 2010


It looks to me like you have conflicting goals. On the one hand, you want to be non-discriminatory as you make it easier to be a "renter-outer." On the other, you want to encourage owner occupancy to stay between 51% and 75%.

Recognizing that anything you do will require a vote to change the governing documents and that, probably, the interests of the majority of owners lie in keeping the property taxes down, why not institute a rule that simply says that if the owner-occupancy rate is below 51% there is no waiver of the two-year rule and that, to the extent that the occupancy rate would remain above 51% the renter-owner can pay a one-year license fee to extend beyond the two-year limit? The license fees would go to the co-op general budget, resulting in an overall lower assessment fee for all owners. To the extent that the owner-occupancy rate slips below 51%, there are simply no licenses to purchase.

No secondary markets, no lawsuits due to someone trying to corner the market or whatever,
posted by Old Geezer at 3:50 PM on October 24, 2010


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