Shareholders of a C Corp owning an apartment building won't contribute to mandatory repairs

[dleung65]

What is the name of your state? New York City, NY

I am a shareholder in a corp. owning a mixed use apartment building with 13 rental apts and a storefront. I own approx 35%, another owner owns about the same and several more owners own in the range of 5-10 %. We have found out that major repairs are needed to the gas lines in the building which may cost up to 100k. The city has imposed a mandatory inspection of gas lines by June. I am willing to contribute my share, but no one else is. The possible ramifications are a $10,000 penalty for not having it inspected(we would surely fail), and possibly even a total building shutdown due to a lack of certification by a master plumber.
What are my options? Nobody else wants to contribute. I was told even to open a line of credit or any other funding options would require cooperation by all owners, which I may not get. They only care about the rental income and none of the expenses. My last resort was to personally cover the expense and just create a loan to the corporation, but I was worried that I may not get it all back due to some unforeseen circumstance. What options do I have to force contributions or even penalize the other owners? Don't ask me why I can't get cooperation. I don't know either!
TIA!

 

[LdiJ]

What is the name of your state? New York City, NY

I am a shareholder in a corp. owning a mixed use apartment building with 13 rental apts and a storefront. I own approx 35%, another owner owns about the same and several more owners own in the range of 5-10 %. We have found out that major repairs are needed to the gas lines in the building which may cost up to 100k. The city has imposed a mandatory inspection of gas lines by June. I am willing to contribute my share, but no one else is. The possible ramifications are a $10,000 penalty for not having it inspected(we would surely fail), and possibly even a total building shutdown due to a lack of certification by a master plumber.
What are my options? Nobody else wants to contribute. I was told even to open a line of credit or any other funding options would require cooperation by all owners, which I may not get. They only care about the rental income and none of the expenses. My last resort was to personally cover the expense and just create a loan to the corporation, but I was worried that I may not get it all back due to some unforeseen circumstance. What options do I have to force contributions or even penalize the other owners? Don't ask me why I can't get cooperation. I don't know either!
TIA!

Well, with a C-Corp dividends shouldn't have been issued to the shareholders unless the profits of the C-Corp allowed for dividends to be issued.

I would think, that in this case, that such a huge repair issue would not allow for any dividends to be issued for however long it takes to recoup the amount of the repair.

 

[Taxing Matters]

What are my options? Nobody else wants to contribute.

Did you create a shareholder agreement when setting up the corporation? One of the things commonly addressed in a well written shareholder agreement is the requirement for mandatory contributions by the shareholders in certain situations, like the situation here where the city mandates certain work to the property. That could potentially also be included in the corporate charter/bylaws. I hope you had a good business attorney assist you in writing up the various corporate documents. Without reading those documents I cannot tell you what options you may have. I suggest that you take those documents to a corporate law attorney for advice.

Your basic problem is that you only own 35% of the shares of the corporation. That by itself doesn't allow you to do much of anything regarding corporate affairs. Generally you need the vote of at least more than 50% of the shares to require the corporation to do something, and certain things like amending corporate documents to require mandatory contributions, may require a higher level of vote (e.g. two thirds or whatever). So you may need to get at least one other shareholder, and maybe several of them, to get on board to fix the problem, whether by approving a corporate loan or by requiring mandatory contributions. You have not said whether you are an officer of the corporation and what powers you have, but before you take out any personal loan and commit the corporation to pay it you really need to see that corporate law attorney. The last thing you want is for the other shareholders to successfully get that loan declared invalid and leave you stuck owing the money without any obligation of the corporation to repay you.

Well, with a C-Corp dividends shouldn't have been issued to the shareholders unless the profits of the C-Corp allowed for dividends to be issued.

I would think, that in this case, that such a huge repair issue would not allow for any dividends to be issued for however long it takes to recoup the amount of the repair.

Dividends and distributions are generally a matter for the corporation's board. So again, the problem is that the OP doesn't control the board because he or she has just 35% of the shares. In any event, not distributing dividends doesn't solve the problem of raising the $100,000 needed to get this repair done in time for the city inspection.

One other note, the terms C-corporation and S-corporation are tax terms that specify how the entity is taxed under federal income tax law. Outside of tax law, this entity is either a corporation, LLC, LLP, etc. I'm assuming it's organized as a corporation, but if it's a LLC or something else that would be important to know. Outside of tax law, there is no distinction between C-corporation and S-corporation. All entities formed as corporations are subject to the same corporate law.

 

[adjusterjack]

I was worried that I may not get it all back due to some unforeseen circumstance.

Won't be unforeseen. I can foresee that the same people who won't contribute to the repairs, aren't going to give you back any money. Guaranteed.

What options do I have to force contributions

Beats me. An attorney could probably answer that question.

BTW, who are these people that you're in bed with? And why?

Partnering with people where you don't have any control (you don't) is always a bad idea.

There's an old saying: "He travels the fastest, who travels alone."

 

[quincy]

Have you thought about selling your shares?

 

[Taxing Matters]

Partnering with people where you don't have any control (you don't) is always a bad idea.

Not always a bad idea. And sometimes a great idea. I've had clients who made a lot of money by partnering up with one or more others that they never could have done on their own But when you do it, you need to be sure you have a solid set of legal agreements in place to ensure that things run as smoothly as possible.

There's an old saying: "He travels the fastest, who travels alone."

An outdated saying. I'd travel a whole lot faster on a modern commercial jet packed in with hundreds of others than I ever could alone.

 

[Taxing Matters]

Have you thought about selling your shares?

That's one option, but likely not a very satisfactory one. It's often hard to sell a minority stake in a closely held corporation like this one. Anyone not related to the remaining shareholders is likely to take a pass. After doing their due diligence and discovering the gas line problem they'd have to be foolish to buy the shares unless, perhaps they get them so cheap that they'd still make out fine should they simply force liquidation of the corporation. So I think the prospects here of selling the shares to some outside party at anything close to their real value is very unlikely. Maybe one of the other shareholders would do it, though, but I'd bet the price offered would still be low.

 

[quincy]

That's one option, but likely not a very satisfactory one. It's often hard to sell a minority stake in a closely held corporation like this one. Anyone not related to the remaining shareholders is likely to take a pass. After doing their due diligence and discovering the gas line problem they'd have to be foolish to buy the shares unless, perhaps they get them so cheap that they'd still make out fine should they simply force liquidation of the corporation. So I think the prospects here of selling the shares to some outside party at anything close to their real value is very unlikely. Maybe one of the other shareholders would do it, though, but I'd bet the price offered would still be low.

Unload the shares to the other shareholders. Even at a loss, it could be better than taking on a $100,000 debt.

 

[Taxing Matters]

Unload the shares to the other shareholders. Even at a loss, it could be better than taking on a $100,000 debt.

If any are willing to do it at all, and at a price that is at least what the OP could get from simply forcing liquidation of the company then it may be worthwhile. It's certainly an option to consider, but may not be very satisfactory. I just don't see other shareholders offering much at all for the shares when they are unwilling to contribute to address the gas line problem.

 

[zddoodah]

What are my options?

Your options depend almost entirely on the governing documents of the corporation. It's also worth noting that you've only told us that you're a shareholder and did not say anything about also being a director and/or an officer. Just being a shareholder doesn't give you any right or authority to manage the corporation's affairs.

Nobody else wants to contribute.

Here's a question: Why is the corporation so poorly capitalized that it can't cover these sorts of repairs without an infusion of cash from the shareholders? Failure to keep a corporation adequately capitalized may result in shareholders being found liable for corporate debt.

What options do I have to force contributions or even penalize the other owners?

I can guarantee that, regardless of what the corporation's governing documents say, you won't have an option to "penalize the other owners."

They only care about the rental income and none of the expenses.

That's probably why they became shareholders of a corporation instead of partners of a partnership. Here's another question: Why has rental income been distributed to shareholders given that the corporation apparently lacks capital to pay for repairs?

 

[quincy]

If the corporation cannot afford to keep the property maintained as required, the corporation should sell the property to someone who is willing to invest in it.

I think it would be a mistake for dleung65 alone to take on the cost of the gas line repairs.

 

[dleung65]

Other things to consider. All the apartments are either rent controlled or stabilized, which means it's not very profitable. Which also means that the cheap shareholders don't believe in putting out much money since their income from the building isn't much. I'm in bed with these losers because I inherited it from my father, who recently passed. The other shareholders are all elderly and not much for believing in bylaws. Titles don't matter with old school owners. I need a solution soon, so selling is not an option. Especially in this climate of renters deferring their payments.

 

[quincy]

Other things to consider. All the apartments are either rent controlled or stabilized, which means it's not very profitable. Which also means that the cheap shareholders don't believe in putting out much money since their income from the building isn't much. I'm in bed with these losers because I inherited it from my father, who recently passed. The other shareholders are all elderly and not much for believing in bylaws. Titles don't matter with old school owners. I need a solution soon, so selling is not an option. Especially in this climate of renters deferring their payments.

Speak to a real estate lawyer in your area. You are either going to be pumping a lot of money into the apartment building through repairs and maintenance or through hefty fines.

It might be best for you to cut your losses now and sell the property at a discounted price, to take into consideration the needed gas line repairs.

 

[Taxing Matters]

Other things to consider. All the apartments are either rent controlled or stabilized, which means it's not very profitable. Which also means that the cheap shareholders don't believe in putting out much money since their income from the building isn't much.

Then perhaps you can get them to agree to sell the place. Surely the money from the sale could be put to much better use than running a barely profitable apartment building. Once sold, you can either then distribute the cash and liquidate the corporation so that you are all done with it or the corporation can invest it in something more profitable and easier to manage.

 

[quincy]

Is there a note on the property?