Should our co-op board let my neighbor turn their apartment into an LLC?
Q: The executor of the estate for one of the units in our co-op building has asked the board for permission to convert the apartment to an LLC. Is an individual apartment in a co-op allowed to become an LLC, and if so, how will this affect the shareholders of the other units?
While your neighbor is indeed allowed (legally, at least) to convert ownership of their shares into an LLC, your board may want to be wary of agreeing to this arrangement, say our experts.
"There is no legal prohibition against an LLC being the owner of cooperative shares," says Jeffrey S. Reich, a real estate attorney with Schwartz, Sladkus, Reich, Greenberg, Atlas LLP. "However, most co-op boards would not look favorably on a request to transfer shares into the names of such an entity."
This is because having a shareholder own an apartment as an LLC could lead to potential abuses to the building's subleasing rules, as well as the possibility of the owner "selling or assigning interests in the LLC," says Reich, leaving a shell entity — rather than a single, culpable person — responsible for ongoing financial obligations to the building.
While these kinds of issues can be avoided by a carefully written ownership agreement during the changeover, Reich says "there remains general disfavor to LLC ownership [in co-ops] to this day." In other words, you and the board should think carefully, and consult a lawyer, before granting this request.
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