Over the last several years the co-op’s sublet policy has undergone quite a few changes. Sublet fees have been raised several times.  Shareholders now give up amenities like parking and storage while they sublet, and drop to the bottom of amenity waiting lists if they sublet for more than two years.  At one point the Board passed a rule that would have limited subletting a given apartment to only two or three out of every seven years, but that rule was quickly reversed.

Arguments For/Against Restricting Subletting

Several reasons are typically cited in favor of restricting subletting :

• Many believe that long-term owner-occupiers make better neighbors (they have more incentive to take good care of their apartments and our common spaces, to build relationships with their neighbors, etc.).
• Banks consider owner-occupancy levels when making loans (both loans to the co-op as a whole and loans to individuals buying or refinancing an apartment) and prefer high owner-occupancy.
• Sublet fees provide additional income to the co-op, offsetting the need for higher maintenance charges generally.
• Making subletting less attractive than selling (when a shareholder moves away) can help increase flip tax revenues.
• Reviewing and approving sublet applications takes time away from Management’s and the Board’s other duties.

But there can be problems with being too restrictive:

• While there are some shareholders without a mortgage who earn a tidy profit from subletting their apartments, many who bought in recent years with a mortgage would lose money if subletting at market rates under the current sublet policy.
• Onerous sublet policies can therefore be a hardship for shareholders (and scare away potential buyers) who may have every intention of living here long term, but need flexibility if their circumstances change.  For example, shareholders may be temporarily assigned by their employer to another city for a year or two, or might need to move out temporarily to take care of an ailing or disabled family member.
• The more punishing the policy, the more likely less-scrupulous shareholders are to circumvent the policy altogether and sublet illegally.  Management has done a pretty good job of rooting out illegal sublets in recent years, but we don’t want to create strong incentives to break the rules.
• While some subtenants are transient, there are many examples in recent years of shareholders who originally arrived as subtenants, and grew to love the community enough to buy an apartment here.  At least one former subtenant currently serves on the Board and the author of this post is a former subtenant as well.  If no apartments were available to rent, those shareholders might never have been introduced to our community.

Room for Improvement

Few shareholders seem to have serious objections to the amenity-related consequences of subletting.  And while a handful believe that allowing indefinite subletting is problematic, so long as the volume of sublets doesn’t get so high as to unduly burden the Board or Management, or threaten owner-occupancy requirements of lenders, we think it should be left alone.  That leaves the sublet fee as the main lever available for tinkering.

Currently the fee is structured as:

• 100% of maintenance for the first two years of subletting (i.e., a shareholder pays double maintenance for the privilege of subletting)
• 112.5% of maintenance for years 3-4, and
• 125% of maintenance for years 5+.

A year or two ago the Board passed a rule change that would have jumped the fee to 200% for years 3+, but in the face of significant shareholder dissent, they reversed the change before it went into effect.  There are still shareholders advocating for significant increases in the sublet fee, primarily because they want to increase sublet fee revenue, but also because some seem to resent the fact that there are shareholders who profit from subletting.  These advocates point out that past fee increases did not result in fewer shareholders subletting. We argue, however, that at some point the fee reaches a point of diminishing returns, where the arguments against restrictions on subletting (see above) start to overwhelm the additional revenue wrung out of subletting shareholders.  Also, it starts to take on a more punitive and less rational character.

The Proposal

We therefore suggest a sublet fee schedule with a longer, more gradual slope.  The goal would be to increase overall sublet fee/flip tax revenue by raising the fees substantially on long-term subletters, while making the policy look less scary to potential buyers and easing the burden on those who intend to come back to the community.

We do not have access to detailed data regarding recent or current sublets, so these numbers are merely suggestions, but the basic idea would be to have a sublet fee that started around 70% of maintenance and increased about 15% for each subsequent sublet term, topping out somewhere around 250% of maintenance.   The fee would NOT “reset” with gaps in subletting, but would apply to each additional sublet term that a shareholder initiated during the duration of his or her ownership of an apartment.  Name changes and intra-family transactions that are exempt from flip taxes would be treated as a continuation of the same ownership, and sublet history would follow the shareholder in a swap (the same way that first/second-sale flip tax status follows the shareholder).

To accommodate transition to the new scale:

• For shareholders who are currently subletting at the time the new policy is enacted, fees would stay the same for the remainder of their current sublet term, and increase for their next sublet term to the next step up on the new scale (e.g., those currently at 100% or 112.5% would go to 115%, and those currently at 125% would go to 130% for the next term), and increase an additional 15% each term thereafter.
• For shareholders who previously sublet their apartments but are not subletting at the time the new policy is enacted, fees for their next sublet term would be equal to the greater of 85% of maintenance or the next step on the regular scale above the last sublet fee they paid (e.g., if they last paid 50%, they would pay 85%; if they last paid 112.5%, they would pay 115%), and increase 15% each term thereafter.

Do you think this is a good or bad idea?  Why?  Please leave your thoughts in the comments below.