Tuesday, April 16, 2013

How Federal Tax Law is Changing the Fortunes of Co-op Shareholders

The New York Times reports on how a tax change has dramatically increased the value of some co-op shares:

Until 2007, a federal tax regulation known as the “80-20 rule” required that residential co-ops receive at least 80 percent of their gross income from their tenant-shareholders, and no more than 20 percent from other sources, like ground-floor rent for retail space. If they didn’t comply, buildings lost their legal status as co-ops and the tax benefits that come with it. As a result, buildings charged below-market rent for their commercial spaces or otherwise performed legal gymnastics to retain their status as co-ops.

When Congress relaxed the law, co-ops became free to charge more for their ground-floor stores. But it hasn’t been until recently that most buildings could take advantage of the rule change, because many of them had signed 10- or even 20-year leases that are only now expiring.

In neighborhoods like SoHo and along Madison Avenue, where retail rents are high, it has meant a windfall for some co-ops. [...] A lucrative ground-floor lease can add 10 percent or more to the value of an apartment, residential brokers say. A sprawling two-bedroom loft at 464 Broome Street in SoHo, for example, is in contract for $3.22 million, nearly 10 percent over its asking price, in large part because the listing not only offers no maintenance but provides its shareholders with $20,000 a year in income.

Steve Clowney


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