The Real Deal New York

Co-op owners could see windfall from new retail deals

April 15, 2013 09:00AM

Updated, 2:34 p.m., Apr. 15: The effects of a 2007 change in a federal tax regulation known as the “80-20 rule” are only now trickling in, and could drop maintenance fees and prove lucrative for co-op owners, the New York Times reported.

The “80-20 rule” stipulated that in order to qualify for co-op status and the resulting tax benefits, co-ops have to make at least 80 percent of their gross income from tenant-shareholders, which meant only 20 percent could come from sources such as ground-floor retail space rents. Consequently, buildings often charged below-market rents for their commercial spaces. 

Though Congress relaxed the law in 2007, most co-ops were still hamstrung by long-term below-market deals with retailers. But now, many of these deals are expiring, freeing up co-ops to make lucrative deals that can add value to the building’s apartments, brokers told the Times.

“Over the next few years, you are going to see those co-ops that are lucky enough to have commercial spaces see a tremendous amount of revenue,” Stuart Saft, a partner at the law firm Holland & Knight, told the Times.

A two-bedroom loft at Soho’s 464 Broome Street, for example, is in contract for $3.22 million, a 10 percent premium over its asking price, primarily because retail rents offer shareholders $20,000 a year in income.

“The building has just eight apartments,” Henry Hershkowitz, a broker at Douglas Elliman who represented the seller, told the Times. “So the revenues from the two stores on the ground floor cover the real estate taxes, the building’s upkeep, even a full-time super, and then there is money left over for an annual dividend.” [NYT]  –Hiten Samtani

  • KOC

    The Real Deal did not summarize this article accurately, Congress relaxed nothing in 2010, it was the fourth quarter of 2007 when the 80/20 rule was replaced with a different set of tests to determine if the cooperative qualified under IRS rules.

    • HitenSamtani

      An error on my part KOC. Thanks for spotting.