New York's Cooperative and Condominium Community

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Perspectives: Joel E. Miller

Because my role is usually that of a consultant on highly technical income tax and property law matters — often being brought into the situation by a cooperative's or condominium's regular attorney — I will focus on developments of that nature.

It would be nice to be able to say that 20 years ago the co-op/condo field was in its infancy and has greatly matured since then. But that is not the case. The fact is that we have had cooperative apartments for over a century, and even that relative newcomer in this area — the condominium form of co-ownership — had already been on the local scene for two decades. And, unfortunately, many unresolved issues remain.

That is not to say that the last 20 years have not seen significant developments, a few of which may be briefly mentioned. For instance, in the early '80s the Internal Revenue Service was widely applying Internal Revenue Code Section 277 to co-ops in an effort to collect tax on non-shareholder net income, and it was not until 1999 that the IRS shifted its focus to the Subchapter T rules that are still being worked out. Also in 1999, the United States Treasury Department adopted regulations that essentially put an end to the device of large upfront payments as a means of a co-op's collecting sizeable commercial rents with only short-term disqualification under the "80/20" rule. Today, co-ops with too-much-income "80/20" problems are actively considering such alternatives as allocating shares to commercial space, complete condominiumization, cond-opping, sibling entities, etc. But wholly satisfactory solutions have yet to be found.

Important non-tax developments have taken place as well. For instance, the courts have been making it ever clearer that boards have wide discretion under the so-called "business judgment" rule, so long as they are acting within their authority and not for an improper purpose. There has also been increasing recognition that, with certain very narrow exceptions, there is no legal impediment to a group of co-owners adopting governance rules to their own taste, so that we are seeing more and more co-op-like condos and condo-like co-ops. A significant event that took place in 1986 was an amendment to the Business Corporation Law that, in effect, legitimated properly imposed transfer fees charged by cooperative housing corporations even if not calculated on a per-share basis.

Some of the other developments would have occurred to no one 20 years ago. For example, two appellate courts in New York City have recently reached differing conclusions as to whether the sponsor-owner of a cooperative or condominium apartment who rents it out long after the conversion is or is not entitled to regain possession at the end of the agreed-upon rental period, and the matter is yet to be resolved. Similarly, one appellate court has recently declared that every sponsor of a cooperative conversion plan must be understood as having promised to sell off all the apartments as soon as practicable, and, as this is being written, the issue is pending before the state's highest court.

As recently as this past July 1, major changes took place in those portions of the Uniform Commercial Code that apply to cooperative apartments. Among other things: because of a number of clarifying modifications, lenders can now feel much more comfortable about loans made on the security of cooperative apartments; cooperative housing corporations have been relieved of the (often overlooked) necessity of including certain language in their stock certificates if they are to enforce their liens and transfer restrictions; cooperative housing corporations will no longer have to file financing statements to protect their maintenance liens against non-consenting lenders, judgment creditors and trustees in bankruptcy; and a cooperative housing corporation will be able to make sure that maintenance arrears are paid before any amount is paid to any foreclosing lender. Even more important in the long run, for the first time a New York statute contains key definitions that will provide a useful framework for any future legislature that wishes to enact new rules applicable to cooperative housing corporations and their tenant- stockholders.

There have been new laws benefiting condominiums as well, especially those whose physical plants are in dire need of costly renovation. Chief among those laws is a 1997 enactment that added a new section to the Condominium Act, the purpose of which is to facilitate borrowing by boards of managers on behalf of the unit-owners. The new section does two very important things. First, it reassures lenders that condo boards have the legal authority to borrow funds on behalf of the unit-owners. Second, it authorizes a condo board to give a lender a meaningful form of security by agreeing that common charges will constitute a trust fund that may not be expended for other purposes at any time that there are overdue payments on the loan. Without this legislation, condo boards would have been forced to assess unit-owners for the full costs.

In short, much progress has been made in these areas, but much remains to be done.


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