holy coop Batman! 80/20 hurdle falls down
why isn’t this big news?
Props to Noah Rosenblatt over at UrbanDigs.com for highlighting on Wednesday a law firm PR release about a provision in theMortgage Forgiveness Debt Relief Act of 2007 of huge importance to that small number of Manhattan coops that have the potential for huge commercial rental income. 80/20 Rule Expanded: Co-ops Should Thank Bush.
[I have had a draft of this post since Friday, without getting around to polishing and posting it. Reader Tariq gave me a nudge on Sunday, pointing put that Jay Romano did a piece on it in the Sunday Real Estate Section of the NY Times, Coops Get a Break on Revenue Rules (thx for that nudge, Tariq).]
I doubt very much that Bush is responsible for this (take a bow Charlie Rangel??) and I am amazed not to have seen something big about this in the Times before Sunday], Post or Sun, or from REBNY for that matter (take a bow REBNY??).
My take on this is that the number ofManhattan coops with continuing problems from potentially having too much rental income will shrink from a few hundred to just a handful. And many of the coops that are on the border of compliance with the new tests may be able to jigger their space or their books to reach compliance.
remember what is at stake
As I have highlighted before (in the January 16, 2007
Curiously enough, I think the coops that will benefit first (and probably most) are those that have not been in compliance with the 80/20 rule, while those that will have to wait to benefit have been straining to comply with that test. (Life is … unfair, no?)
new text adds 2 tests
I get the text of the bill as reported out of the House and Senate conference from the official
fewer coops will need clever lawyers; some need a ruler
As I said, I think nearly every coop that has either already exceeded the old Income test (like the SoHo coops with very valuable retail space, such as 55 Greene Street, which has no maintenance) or has been artificially reducing the rental income below market should be able to satisfy the Square Footage test. The coops that will be borderline on this test will be very small (4-stories, max) or will have multi-floor commercial space. These coops will retain architects or engineers to do the precise measurements, and possibly reallocate space in their leases to take some away from the commercial space that can be characterized as “ancillary” to residential use.
I wonder if a roof deck qualifies within “total square footage”, so that a 3-story coop with ground floor retail can creep over the 80% test by adding a roof deck “available” to shareholders, even if no one uses it.
… some need to count beans
The Expenditures test should provide a safe harbor for all but the smallest coops that cannot meet the Square Footage test, though the smart CPAs may be required to find the margins. The typical Big Ticket expenditures for a coop include some that are allocated evenly over the entire building (including commercial space), such as real estate taxes and insurance, but others should be allocable only to the residential portion, such as utilities and payroll. Maybe some small buildings will take this opportunity to hire some (or more) staff to soak up some ‘excess’ income.
I wonder if creating (or increasing) a coop’s reserve fund will qualify as an “expenditure” for the “management” or “care” of the building for the benefit of shareholders. If so, that is an account into which ‘excess’ income can be stashed, at least until the scale of a reserve fund gets ridiculous.
effective immediately, but benefits delayed for most
Since the bill was signed on December 20 and is effective in the current tax year, the only coops that will benefit immediately are those that have not been in compliance with the 80/20 Income test. All of a sudden, they get the benefits of pass-through deductions and non-recognition of gains (to $250k or $500k) if they meet the Square Footage or Expenditures tests.
Funny thing is, the coops that have been straining successfully to meet the Income test by capping their rental income below market will have to wait to get the full benefit of this change. For most of these coops, the additional income available from market rate rents will have to wait until the current leases expire.
some need those pesky lawyers to parse magic clauses
Some ofthe coops that have been straining to meet the Income test by capping their rental income may have magic clauses in their commercial leases that can provide immediate benefits. I know some coops have clauses that essentially escalate rental payments to the 80/20 cap. If those clauses are specific to the Income test, then they will likely not provide a way to raise rents to market rates until the leases expire, but if the clauses are written more broadly to measure against Section 216 standards, these coops may be able to go right to market rents (without passing Go but collecting the metaphoric $200).
Check the fine print.
Charlie, not REBNY
The Times article identifies Charlie Rangel as a prime sponsor of the bill, so Charlie gets the credit. One, two, three … THANKS CHARLIE.