Hallway space, lobby space, roof space, backyard space — any co-op or condo common space that's underutilized, if used at all, offers a novel method for how your building can generate income and lowers the maintenance cost per share.
The 125-unit co-op at 860-870 West 181st Street in Manhattan for instance, privatized part of a back courtyard in order to bundle it with a former superintendent's apartment that the board was selling. "We had one special shareholders' meeting, coupled with a presentation by our accountant," says Barbara Taylor, the board president.
Her board is also overseeing two separate renovations in which the owner of two adjoining apartments is taking the small hallway between them and enclosing it, thus creating a foyer for what will be one large, combined apartment. "These kinds of activities increase the value of certain units, which ultimately makes the average sales price go up," Taylor notes.
Privatizing common co-op or condo space isn't difficult, but it's time-consuming and meticulous, and can rack up lawyer and consultant fees. Boards generally have the right to do it: The 2000 decision in Cohen v. Board of Managers of 22 Perry Street Condominium ruled that a board could grant "a revocable license" allowing an owner to enclose a small portion of common hallway space in order to create a new entranceway to two adjacent apartments. Moreover, the court ruled, a board doesn't need the unanimous consent of all unit-owners to grant this license and to charge a fee for the space. The caveat? A board cannot diminish other owners' rights to a common area, which was not an issue in this case of a dead-end hallway space that did not include a fire exit.
Guidelines, Not Formula
Once you've chosen the space you want to sell, how do you decide what it's worth? There aren't any formulas, only guidelines. For a condo, this means devising a sales price; for a co-op, it means a sales price and the number of new shares assigned to the space.
You have to determine a reasonable amount of shares," says building manager James Goldstick of Mark Greenberg Real Estate, referring here to co-ops but describing the general process for condos as well. "For example, if an 800-square-foot, one-bedroom apartment is 400 shares, you'd think you could say, 'Well, that's one share for every two square feet, and they're adding 50 square feet from the hallway, so that makes 25 shares.' But it's not that simple. A living room or a kitchen is more valuable than a foyer, for example. There has to be what's called 'a reasonable relationship' between a space and its share allocation."
Two Documents and One Letter
"There are two standards for a fair price," adds attorney James Samson of Samson Fink & Dubow. "For the IRS, you need to get a 'Letter of Adequacy' from a broker, who will start by looking at the original offering price." That sets the lower limit of a price per share or square foot.
"Then," continues Samson, "the broker looks at the square footage — let's says it's 44 square feet — and how much the building's square footage is worth, based on recent sales — let's say $1,100 a foot. Now you've got an upper limit, which in this hypothetical example is $48,400. But this isn't full, usable space; it's not like a living room. So somewhere between the offering plan price and the current per-square-foot price is your number."
For co-ops, a real estate professional must also prepare a "Letter of Reasonable Relationship." This attests that the number of new shares you're allocating is reasonable. If the math in the original offering plan allocated, say, 1 share for every 3 square feet of apartment space, then that hypothetical 44-square-foot example above would come out to 15 shares (since 44 divided by 3 equals 14.66, which rounds up to 15 since you cannot allocate fractions of shares).
The next step generally involves contacting the state attorney general's office. For co-ops, if the original sponsor's lawyer planned well, he or she would have authorized more shares than were immediately needed, thus providing you with the available extra shares you now need. If that's the case, you simply go to the shareholders and vote to amend the certificate of incorporation in order to release some of those authorized but unused shares.
If that's not the case, then you may have to create and file an entirely new offering plan. Or not. There's an alternative that could save you the trouble — an "Application for No Action" letter.
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