Streamlined Sale of Common Space to Shareholders

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On January 26, the New York State Attorney General’s Real Estate Finance Bureau announced new standards that will streamline the allocation of stock to, and the sale of, cooperative common areas, such as hallways, servants’ rooms and storage lockers, to existing shareholders.  Previously, the Attorney General had taken the position that such sales required the issuance of “no action letters” by its office in order to comply with New York State’s securities laws.  This position has now been abandoned.  In the future, cooperatives may allocate stock to common areas and sell the stock to existing shareholders without involving the Attorney General.

Cooperatives should nonetheless keep in mind a number of issues in connection with any such sales, including:

  • The cooperative must verify that its certificate of incorporation authorizes the issuance of enough “extra” shares to complete the transaction.   If enough shares are not available, it must amend its certificate of incorporation to increase its authorized shares, which will require shareholder approval.
  • A determination must be made as to the number of new shares to be allocated to the space in question. In order to maintain the cooperative’s compliance with Section 216 of the Internal Revenue Code (which allows shareholders to qualify for homeowner tax deductions), the allocated shares must bear a “reasonable relationship” to the area’s proportionate share of the entire building.  A reasonable relationship determination may be made by the cooperative’s managing agent or an appraiser.
  • The board must determine the sale price for the shares.  It may, but is not required to, obtain an appraisal to guide its determination of the market value.
  • Once the number and price of the shares have been determined, the cooperative must enter into a written agreement for the shareholder to purchase the shares and, if applicable, to incorporate the area into his or her apartment.  (Issues concerning the related construction are normally left to a separate alteration agreement.)
  • In general, at the closing of the sale agreement, the new shares must be combined with the shareholder’s existing shares, and the shareholder’s proprietary lease must be amended to add the new space.  A separate share certificate and separate proprietary lease for the common area may not be issued unless the space could independently constitute a legal apartment.  If a new share certificate and proprietary lease are to be issued, and the shareholder’s shares and lease are presently pledged to a bank as collateral for a cooperative loan, the shareholder will also need to obtain the bank’s approval for the transaction.
  • The closing of the sale is similar to any cooperative apartment sale and is subject to the New York City and New York State transfer taxes.  Most cooperatives require the purchaser to pay those taxes on the cooperative’s behalf.

 

Please note that this new position by the Attorney General applies only to the sale of space to existing shareholders.  For example, a cooperative’s allocation of stock to a space such as a doctor’s office and the offer of that space to outsiders will still require the issuance of a no action letter.

The sale of common area in a condominium is virtually unheard of because it would change the common interest percentage of all unit owners which would result in a number of complications, including an amendment to the declaration and floor plans filed with the City.   As a result, most condominiums simply enter into a license agreement with a unit owner whereby the unit owner licenses the right to use the common area for a license fee, and the license is then assigned to subsequent unit owners.

If you have any questions concerning the sale of common area, please call us.

 

This memorandum was initially issued by the cooperative/condominium practice group of Balber Pickard Maldonado & Van Der Tuin, PC which joined Smith, Gambrell & Russell, LLP on February 1, 2017 and now practices as part of SGR’s cooperative/condominium practice group.

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