It depends on your comfort level. The reason why you get an inspector when purchasing a coop or a condo is to try to determine, not only the current physical condition of the unit but also the general condition of the building’s structure, mechanical systems and common area. Problems with any of which, could potentially lead to future increases in monthly common charges/maintenance or assessments. These issues may not come up when reviewing the minutes of the board (if a cooperative) and may not be in the offering plan if not the initial offering from the building’s sponsor. Even then, you never know. If you decide to forego an inspection, assume a worst case scenario when contemplating to buy a unit. Even then, you can never anticipate everything.
I recently represented a couple at a closing of the purchase of a cooperative apartment. My clients are legally married but have different last names. The attorney, representing the Cooperative Corporation who was issuing the new proprietary lease and stock certificate (evidencing ownership of the apartment) presented the stock certificate for review and the proprietary lease for signature. Upon review, the documents indicated that title was being taken by my clients as “Joint Tenants with the Rights of Survivorship”. I requested that ownership to the apartment be taken as “Tenants-By-The-Entirety”. Both forms of title, upon the death of an owner, provide the surviving owner the absolute right to receive title to the entire apartment. The coop attorney was annoyed that I was requesting that he make this change. After unsuccessfully bluffing that there was a “recent change in the law” he questioned the significance of a married couple taking title to a coop apartment as Tenants-By-The-Entirety rather than Joint Tenants with the Rights of Survivorship.
Under a Tenancy-By-The-Entirety, married spouses (and who remain married) are viewed as a single person each owning an undivided 100% ownership (and a right of survivorship) that cannot be diminished by the other tenant or a creditor. What this means is while a creditor of one Tenant-By-The Entirety can obtain a lien on that spouse’s interest in the apartment, the lien will only survive if that particular spouse is the surviving spouse. If the debtor/tenant dies prior to his or her spouse, the creditor’s interest in the apartment is extinguished and the surviving spouse takes the apartment free of all liens. Married couples who take title as “Tenants-By-the-Entirety” prevent creditors from reaching, attaching and possibly selling the joint marital property. Similarly, New York cases have held that a receiver in bankruptcy cannot reach or sever ownership when it is by the entirety.
A Joint Tenancy with the Right of Survivorship is subject to actions of the Bankruptcy Court, the possible attachment and sale of a joint tenant’s interest. A joint tenant can transfer their ownership interest without the other tenant’s consent, which may interfere with any estate planning in place.
Tenants-By-the-Entirety who divorce automatically change their ownership to Tenants In Common.
Joint Tenants with the Rights of Survivorship who wish to change title in an apartment to a Tenancy-By-the-Entirety may have to get permission of the Coop and any lender using the apartment as collateral.
Thought this was a very interesting article in the Real Deal.
An issue came up on a recent transaction and I thought it was appropriate to repost this quick tip originally published 6/24/2007.
Soon after entering into a contract for the sale of a cooperative apartment, order a payoff letter for the underlying loan being secured by the stock certificate and proprietary lease. By ordering a payoff letter, the lender holding your stock certificate and proprietary lease as collateral for the loan will start to the search; assign an attorney to receive the documents who will deliver them to the closing. Upon locating the stock certificate and proprietary lease the lender will send it to this law firm who will hold it until closing. Although the payoff letter can be ordered and updated on relatively short notice, locating the stock and lease may take some time. Ordering the payoff letter early assures the Seller that the stock certificate and proprietary lease will have them when needed. Ordering a payoff letter late in the transaction, may cause delays in closing while the bank locates these documents which will be needed in order to close. Be aware, sometimes lenders may lose your stock certificate and proprietary lease. The lender will issue an affidavit attesting to the misplacement of the stock and lease and indemnify the Seller and the managing agent from any liability resulting from the loss.
TAX INCREASE #1 – 20 PERCENT CAPITAL GAIN TAX IN 2011
On January 1, 2011, the capital gain tax reduction that was signed into law by President Bush under the Tax Increase Prevention
and Reconciliation Act will “sunset.” The tax rate will revert from the current 15 percent rate back to the former 20 percent capital
gain tax rate that was in effect prior to 2003.
TAX INCREASE #2 – 3.8 PERCENT MEDICARE TAX IN 2013
Beginning in 2013, the national health care reform legislation that became law in March, 2010, imposes a new 3.8 percent tax on certain investment income. The new tax will apply to single filers with incomes over $200,000 and married taxpayers with incomes over $250,000. Under the law, the investment tax provisions in Chapter 2A of the Internal Revenue Code are placed under the heading “Unearned Income Medicare Contribution.”
In general, this new Medicare tax will apply to investment income that is subject to income tax, which includes capital gains. Pursuant
to IRC Section 1402 (C)(1)(A)(iii), the investment income to which this new tax applies includes “net gain” (to the extent
taken into account in computing taxable income) attributed to the disposition of property that qualifies as a capital asset under Section 1221 (capital gains), as well as gains on other property that are considered part of ordinary income. Also of relevance for rental property owners, this new tax applies to a real estate investor’s rental income if they have income above the $200,000/$250,000 income thresholds.
The net effect of both capital gain tax increases is a new 23.8 percent tax rate for higher earners—the highest rate for long-term
capital gains since 1997. The Joint Committee on Taxation estimates the new
Medicare tax on investments will cost taxpayers
over $30 billion annually. Additionally, the modified adjusted gross income threshold at which this Medicare tax will apply will
not be indexed for inflation, which means an increasing number of taxpayers will be snared by this tax provision.
Overall, the economic impact of these tax increases will be felt by the very investors who help promote long-term
economic growth. In 2007, taxpayers with incomes greater than $200,000 reported 47 percent of all interest income, 60 percent of
all dividends and an amazing 84 percent of all capital gains.
THE COMING TAX INCREASES – A COMPARISON
Current January 2013
Conventional Short-Term 35.0% 43.4%
Conventional Long-Term 15.0% 23.8%
AMT Short-Term 28.0% 31.8%
AMT Long-Term 15.0% 23.8%
A SOLUTION AND WAY TO DEFER TAXES – 1031 EXCHANGES
Since 1921, 1031 tax deferred exchanges have been a proven tax saving strategy that helps real estate investors improve their
investment position through the ability to not recognize Federal or state capital gain taxes. See the attached bulletin from Horizon Land Services.
I deal with a number of coop apartment owners, boards, managing agents and one of the major causes of conflict is a lack of cooperation, communication and a feeling of being powerless by the owners of cooperative apartments.
I have encountered coop boards who give the impression they are reside in an “ivory tower”, are untouchable, whose actions are not to be questioned. This paired with the failure of the board to listen to their constituents, understandably results in frustration, tension, conflict and ultimately lawsuits.
Alternatively, some apartment owners maintain an underlying agenda to instigate conflict with board members and other apartment owners. Commonly the apartment owner who likes to go to “war” is a long time apartment owner or board member who wishes it was like the old days. This is especially prevalent where there is a drastic change in board membership or the composite of apartment ownership in the building. Old timers got used to a sense of power when serving on the board or where the former board members were weak. A new sheriff is in town where recently elected board members are in control of their responsibilities and surroundings.
In both of the above situations, it is the perceived lack of control and power that are fostered by a lack of communication between the parties. Can’t we all just get along???
I came across the attached article which mentioned a free (yes free) mediation service between apartment owners or apartment owners and coop board members. I think the concept is great. I have counciled and mediated parties who are in conflict and the fact I am the attorney representing one of the parties has sometimes been a hinderance to the process (regardless of the existence of impartiality). The use of an unattached experienced mediator will greatly assist in communication and dispute resolution. The increase in communication would lead to less conflict, avoided lawsuits and reduced legal fees. Did I mention they are free?
I would encourage angry owners and board members alike to take advantage of this service.
I would interested in hearing from anyone who has used the Safe Horizon Mediation Service in the past and how it has helped (or hurt) their particular conflict.
See the below link I found for more information located on the Brick Underground website.
Visit: www.lavenderlawblog.com for more information.
I am posting the following article found in The Cooperator on line magazine. The article written by a real estate broker may give readers a little insight on what co-op boards might consider in accepting or denying a prospective purchaser of a cooperative apartment. It is my experience that the more successful real estate salespeople take the time to assist buyers in preparing applications to be submitted for consideration to co-op boards and tutor potential purchasers on what to expect as part of a board interview.
Top Dozen Reasons for Co-op Board Rejections
(And How to Avoid Them)
By Carol E. Levy
Before even beginning the hunt for that perfect co-op, the prospective buyer should be familiar with all the possible ways one’s application might be rejected. That familiarity will enable one to focus on the appropriate buildings as well as to make the necessary adjustments so that rejection will not occur. It is also essential that one choose a broker who not only knows the criteria and delicate nature of the co-op boards to which one might apply, but is also capable of creating a fail-safe board package that will be one’s passport to a new home. Since boards never reveal the reasons for rejecting a buyer, one must rely upon an experienced broker who understands the delicate nature of purchase applications and the variety of unpublicized reasons why rejections occur. Boards never specifically state reasons for rejecting a buyer, for by doing so, it could open itself to a lawsuit for discrimination. Here are a dozen of the most common reasons why prospective buyers are rejected by co-op boards.
A prospective buyer needs sufficient assets following a closing. Boards focus on the amount of liquid assets one has, and many of the premier buildings require one to have two to four times the value of the purchased apartment after closing. Other building boards may insist that one have two to three years of maintenance and mortgage payments in the bank. And, again, that should be the amount after all closing costs have been paid. A knowledgeable broker will not only be aware of each building’s requirements, but will also keep abreast of those changing variables, for when new boards are elected every year, they often change the criteria for new buyers.
If a buyer’s income is too low, that buyer may be rejected. The rule of thumb is that co-op boards generally want a buyer to be able to devote 25 percent of one’s earnings to the payment of mortgage and maintenance. If those payments for one or more properties exceed more than 25 percent of one’s gross annual income, one may very well be turned down.
2. Job History
Most co-op boards will ask to view not only a prospective buyer’s earnings from employment, but all of one’s job history. They will want a buyer who has demonstrated job stability, rather than someone who hops from job to job. It is not uncommon for prospective buyers who had sufficient assets to be turned down by boards simply because they changed jobs every few years.
3. Bad Credit
Although a prospective buyer may have a good income and plentiful assets, if that buyer has a poor credit history, including a negative track record of paying current maintenance fees or rent, then that prospective buyer will likely be a candidate for the board’s rejection. A good broker will examine a client’s financial history to make sure that there are no red flags that will invite a board’s rejection.
Some boards are entirely amenable to having pied-a-terres. Others make decisions on a case-by-case basis. Still others do not allow them at all. If one is looking for a pied-a-terre, make sure that the broker has a clear understanding of the rules of prospective buildings.
Even if a building will consider the sale of an apartment as a pied-a-terre, the board may reject a part-time tenant who they feel might be spending too little time in the apartment. In such cases, the board may be concerned that the apartment could potentially be used as a hotel for friends and family. I know of a couple who attempted to purchase a small one-bedroom pied-a-terre; but because the couple had three teenage children, the board worried that the apartment was too small for a family of that size, and the children might use it for parties in their parents’ absence. If the couple had been represented by a knowledgeable broker, they would not have had to waste time applying to a building that would ultimately reject them.
If one requires a guarantor, then one’s broker should make sure that all prospective buildings are guarantor friendly. And since so many buildings annually change rules and bylaws, one’s broker must be up-to-date on those changes. Even in buildings that permit guarantors, one should qualify the guarantor, for boards will require a couple years of tax returns as well as verification of income and assets.
6. Life Style
While many co-ops accept those who have high public profiles, there are others who do not want any undo attention brought to their buildings. There are still other buildings that do not want those who will disturb the peace, quiet and security of its shareholders. They may, for example, not sell to a paparazzi prone rock star who is known for a flamboyant lifestyle and hosting large, highly publicized parties into the wee hours.
7. Home Work
Most boards will not object to tenants working in their homes, as long as their occupations do not involve a revolving door of client traffic. A writer, for example, is acceptable, but a psychotherapist will most likely be rejected.
8. Failure to Fulfill Additional Requirements
Even after receiving a comprehensive board package from a purchaser, a board may require additional documentation for clarification or a preconditioned escrow deposit, or a change in one’s mortgage product, prior to even granting an interview. If the buyer is unable or unwilling to accede to the supplementary demands, then the board will likely reject that buyer.
A fairly common requirement by boards is asking for one to three years of maintenance in escrow. If a board feels that a prospective buyer does not have sufficiently strong financials, the board may decide to approve a purchase, but only if the buyer agrees to the board’s demand to put maintenance into an escrow account. After a tenant has a history of meeting financial responsibilities, the escrow account will be dissolved and the funds returned. If a purchaser does not agree to the maintenance escrow, that individual will be rejected.
Another example includes a purchaser who is unable to provide additional verification of projected income, which sometimes occurs when the buyer is self-employed. It may also occur when a buyer is simply unwilling to provide the requisite documentation for every asset. In both cases, a board may reject a buyer’s application.
9. Low Purchase Prices
If a shareholder attempts to sell a co-op apartment at a below market price in order to facilitate a rapidly executed deal, the board will object, as such proposed deals diminish the value of all the apartments in the building. For example, I have seen a desperate seller accept an offer on his apartment that was 20 percent below the true market value. The board, of course, rejected the buyer since a greatly reduced price per share would negatively impact the share values of all the owners.
As in so many of the previous cases, this one also requires that a buyer’s broker perform the necessary due diligence to learn which buildings are pet friendly. Even if a building permits dogs, a broker must learn if there are limitations on the number of dogs or breeds of dogs one might own. For example, numerous buildings do not permit more than two dogs per apartment and will not permit Pit Bulls, Mastiffs and Rotweillers. Still others will not permit dogs that weigh more than 50 pounds.
A board may reject a buyer, if that buyer has a profession or hobby that might entail making noise that will disturb other shareholders. For example, trumpet players, drummers, opera singers or tap dancers may all pose noise threats that will cause boards to reject their tenancy. And, if they are approved, their acceptance may be contingent upon sound-proofing their apartments, prior to taking possession.
12. A Poor Interview
A savvy broker will prepare a prospective buyer for the inevitable board interview. Not only should the buyer be on time for the interview and dress appropriately, but the buyer should not ask questions that might arouse concerns or suspicions on the part of even one board member. For example, one should never ask about subletting, or suggest that the building install a gym or a children’s playroom. Rather, one should simply answer all questions succinctly and politely with a pleasant demeanor. In fact, the less said the better. Once a purchaser has been accepted by the board, has closed on the apartment and moved in, a shareholder may make as many suggestions to or ask as many questions of the board as desired. Now having become an owner, that shareholder is an exclusive co-op “club member” with the power to have a voice and a vote.
Carol Levy is president of Carol E. Levy Real Estate in New York City (www.carolelevy.com) and specializes in representing buyers and sellers of high-end co-ops and condos.
As an attorney representing purchasers of cooperative apartments, it is my job to guide clients through the process of obtaining their new homes. One of the facets I am unable to assist people with is attending the required interview with the Cooperative Board. Each board is as different as the people who serve on them. A board typically will review the finances of a prospective purchaser to determine the ability to pay the costs and expenses associated with living in a cooperative building. The applicants are interviewed to determine if they are a “good fit” with the other occupants in the building. Purchasing an apartment in a cooperative building can be compared to living with roommates. If the apartment owners in a building do not get along conflict and discord are sure to result. An article I found in Habitat website linked below gives a little insight to what a board will or should review as part of the interview process.
I would be interested in hearing from people’s experiences interviewing with cooperative boards. All submissions will kept anonymous upon request. It is my hope that first time home buyers will read this post, the linked article and posted experiences and find the interview process less daunting.
The Council of New York Cooperatives & Condominiums is hosting a conference that I think is very informative for all potential or current coop board members.
Please see the brochure listing various workshops that I feel are very informative. I think it is well worth the money (no, I do not get a commission if you sign up).
I have worked with and listened to some of the attorneys speaking and they are some of the best and most knowledgeable in the field of cooperative and condominium law. It is located at Baruch College in NYC.
Click the link to register online for the conference.
Anyone who attends the conference, please contact me and let me know your thoughts on it.
The article linked below was emailed to me by a client of mine (Thanks Amanda). I thought it was interesting. It highlights one of the hurdles a purchaser of a cooperative apartment has to overcome in order to obtain financing. The composition of the building (percentage of owner/coop/investor owned apartments) is something we look at when performing our due diligence prior to entering into a contract of sale to purchase a coop apartment. This is information typically requested by a prospective lender as part of the underwriting process. They would get it from the Board or the managing agent. We want to make sure we are not wasting time and money.
Any questions or comments are greatly appreciated.
Visit: www.lavenderlawblog.com for more information