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After Selling Air Rights, Co-op Boards Can't Play Favorites

New York City

Air rights, lot-line windows, co-op boards, compensation, Business Corporation Law.
Sept. 30, 2022

The selling of air rights can be a financial boon to a co-op — one that benefits all shareholders. But some shareholders pay a higher price than others for the windfall, especially those with lot-line windows whose light and view get blotted out by the new building next door. That disparity can lead to ticklish decisions for co-op boards.

“Owners of apartments with lot-line windows will inevitably argue that it’s unfair for them to have their views blocked or windows bricked as a result of the sale of air rights for the benefit of the building,” Steve Wagner, a partner at the law firm Adam Leitman Bailey, tells Brick Underground.  

However, unless there is an easement — a contract protecting a shareholder's light and air — there are no standard rights to air or light or views in New York. This means that once a developer owns an adjacent property and purchases the air rights from neighboring buildings, that developer can build right up to your property line.

“Buyers of apartments with lot-line windows need to be aware of this,” Wagner says. In other words: Caveat emptor.

In many cases, compensating shareholders most affected by the sale of air rights may be prohibited under laws governing the conduct of co-ops because in nearly all cases shareholders must be treated equally. “Unequal treatment of tenant shareholders is prohibited by the Business Corporation Law —the law under which co-ops are governed,” Wagner says.  

Another consideration for co-op boards is that serious tax issues could arise if the co-op tries to compensate shareholders whose windows might be blocked after the sale. For example, the ability for all shareholders to make tax deductions on the maintenance may be affected.

In order to qualify as a co-op entitled to deduct a portion of your maintenance charges on your taxes, there can be no distributions to shareholders. “Payment to shareholders whose views are blocked may be a distribution and violate that rule,” Wagner says. Under the Internal Revenue Code, no shareholders can receive distributions from the co-op unless it is upon complete or partial liquidation of the co-op. 

This has big consequences for a co-op building because if a co-op does not meet the IRC rules, all shareholders would lose their deductions for the applicable portions of maintenance charges. Some shareholders might get the short end of the stick from an air-rights sale, but that doesn't mean the co-op board can give them special concessions.

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