Welcome Mr. & Mrs. LLC

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Just a few years ago, the idea that a corporation could own a unit in a co-op was unthinkable. A co-op is designed to be a community, not an asset for a faceless corporation. Or so goes the thinking at most co-ops. And board members have long kept it that way by unilaterally refusing corporate ownership of apartments in their buildings.

But that ironclad rule is loosening. In the past few years, co-op boards, particularly in downtown neighborhoods like Soho, Noho, the West Village, Chelsea, and Tribeca, have begun to let residents buy units as limited liability corporations, or LLCs, and in some cases even as full corporations.

Many co-op boards throughout the city now allow residents to change their ownership from an individual to a family trust as part of a resident’s estate planning. By creating a trust, the apartment is owned by an entity and no longer an individual. Should your building even think about the unthinkable?

Changing Times

As New York City’s real estate values soar, the types of people who are buying apartments in the city’s toniest neighborhoods are changing. Buyers with enormous wealth, for example, may bristle at the idea of owning an apartment in their own name. Instead, if they buy as an LLC, they can provide themselves with layers of financial protection. For someone who lives in New York only a few months a year, an LLC reduces the risk of a residency audit. And then there are people, like celebrities, who are drawn to the anonymity of a corporate name.

To accommodate these well-heeled buyers, co-op boards are beginning to rethink old rules. “The psychology of the buyers and the boards has changed over the last 10 years. The boards are trying to become more user-friendly to the people they want in the building,” says attorney Michael Beckman, a partner with Beckman, Lieberman & Barandes.

Broker Siim Hanja, a senior vice president at Brown Harris Stevens who was president of his co-op board for 14 years, says that 20 percent of the co-ops he sells are structured as LLCs. Many of them are Soho lofts bought by wealthy foreigners. His own co-op recently began allowing the practice. “It’s a reflection of the changing times. It’s not another artist who moves in when someone retires and moves upstate. It’s someone from Italy with $100 million net worth,” says Hanja.

Co-ops have long resisted corporate ownership because when an entity owns an apartment there is no clear human being immediately responsible for it. If maintenance goes unpaid or damage is done, it is difficult to go after an entity, especially if the individual does not live in New York and assets are held in accounts that are out of state or out of the country.

There are symbolic reasons, too. The notion that an entity could own an apartment in a co-op runs against the fabric of what a co-op is intended to be. Unlike condos, co-ops are not designed to be corporate hotels for traveling executives or empty investment properties. They were created to be an individual’s home, and the resident is expected to be part of the community of the building. “Co-ops are better places to live specifically because they don’t allow for corporate pieds-à-terre. Most of the better co-ops jealously guard their buildings against this,” says attorney Elliott Meisel, a partner at Brill & Meisel.

Be Flexible

But some co-op boards are finding that in order to accommodate wealthy buyers, they have to be flexible. Attorney Mary Cronquist has seen several of the co-op boards she represents face this issue. One board president told her that it was “inevitable” that this would happen when a celebrity asked to buy into the building as an LLC. And in a Tribeca co-op, a shareholder who was a hedge fund manager ultimately convinced the board to let him refinance as an LLC when he showed members how much money he could save by doing it. “Their feeling was very much that if it didn’t really hurt them and it helped the purchaser, why not do it?” says Cronquist.

To protect the building, boards take steps to ensure that a real live human will be held responsible for the property, even if an entity owns it. The buyer or shareholder should sign a personal guaranty stating that the named individual of the LLC would be responsible for all the obligations of the LLC like maintenance, assessments, and other co-op charges.

The buyer should also sign an agreement both as an individual and as the principal of the entity stating that only the people named in the LLC will live in the apartment and that ownership of the LLC cannot be transferred to someone else without board approval.

Among the other points:

• Any agreement should ensure that the entity submits to the jurisdiction of New York State and county.

• An agreement should designate an individual who resides in New York City to accept notices and be accountable for the property.

• An escrow account should be created to hold up to two years of maintenance charges.

“What you’re doing is stripping out all the corporate protections,” says attorney Ronald Gold, a partner with Kagan Lubic Lepper Lewis Gold & Colbert.

In Families We Trust

While corporate ownership is still relatively rare, many co-ops are warming to the idea of family trusts. Sometimes a family will create a trust if a parent is buying an apartment on behalf of his or her adult child. But in the majority of cases, family trusts have more to do with estate planning.

A decade ago, co-op boards dismissed the idea out of hand, but now they readily accept it, especially as board members consider their own estate planning needs.

“It’s a baby boomer thing,” says real estate broker Bruce Robertson, senior associate at Corcoran, whose own Washington Heights co-op began allowing family trusts two years ago. “They love their apartments and the kids love the apartments and people are starting to plan for inheritance.”

Trusts are an attractive option because, unlike a will, a trust ensures a smooth transfer of ownership of the shares of the co-op. It can also shield assets from hefty estate taxes. As with LLCs, co-op boards require the shareholder to sign a personal guaranty and set up an escrow account for maintenance charges.

There is also a potential benefit for a board to allow a family trust. If a shareholder plans to leave his apartment to an adult child who wants to live there, the board can vet the child long before the parent’s demise. If the child doesn’t meet the board’s muster, that can be resolved ahead of time. “I’ve been encouraging co-ops to permit family trusts for many, many years,” says Meisel.

Despite all the protections co-ops can demand, many boards simply recoil at the idea of an entity owning an apartment and won’t allow it under any circumstances. And many attorneys advise against the practice, particularly in the case of LLCs.

“I personally don’t like it,” says Cronquist. “If you want to run your building as a place where people live and a place where people participate and treat their units as their home, I feel it’s better to limit your purchasers to individuals.”