Will co-ops invite LLCs inside?

It’s always been a given: Don’t even try to buy a Manhattan co-op through an LLC. Have buyers in 2010 missed the memo?

“Years ago, people thought it was so out of the question to even ask,” said Michele Kleier, president of boutique residential brokerage Gumley Haft Kleier, an affiliate of residential building management firm Gumley Haft. But today, more and more buyers are seeking ownership through these kinds of entities, she said.

By most accounts, it’s still a long shot, but in isolated instances, buyers are succeeding. “The co-op board, generally, is going to want you to buy [shares] in your own name,” said Aaron Shmulewitz, an attorney at the law firm Belkin Burden Wenig & Goldman, who represents high-end co-ops and condos in Manhattan. “That’s starting to change now, but only to a small degree. … I wouldn’t say it’s a lot yet but certainly it’s a marked trend.”

Lawyers and brokers warn that we shouldn’t expect a flood of LLCs to hit property records for co-ops, but they say a convergence of forces could ultimately shift the status quo, if ever so slightly.

As real estate values have gone up and the population of New York City co-op shareholders has aged, the question of how to pass along co-op ownership, in part to avoid a big tax hit, has arisen more often. Since the late 1980s, owners have increasingly used trusts to transfer ownership and escape the estate tax, real estate lawyers and brokers say.

An LLC, or limited liability company, allows purchasers to do just that: limit their personal liability in the case of a lawsuit. Like trusts, properties owned by LLCs do not count as assets in the estates of their principals, and thus are not subject to estate taxes. And while trusts can shield lots of information, LLCs are the gold standard for legal lock boxes on personal data, making them particularly attractive to high-profile new buyers.

But while condos are, as Shmulewitz puts it, “like the wild west” in terms of allowing ownership by entities, LLC ownership is easier said than done in a co-op.

“Trying and doing are two different things,” Kleier said of the LLC efforts. Buyers “may be trying, but in our buildings, so far, they are not allowing it.”

Some exceptions are cropping up. Bruce Cholst, a partner at real estate law firm Rosen Livingston & Cholst, recalls one recent instance in which a downtown co-op board he was representing (he wouldn’t say which) allowed a celebrity in under an LLC because of the high-profile nature of the case.

Kleier said she recently caught wind of a similar case. She cautioned that she can’t speak for a co-op board and is not involved in the deal, but speculated that the sale, which involves well-known buyers in a tony building, might go through despite their veiled identity. As an added incentive, she said, the apartment is so expensive that it could increase other shareholders’ property values.

“It sounds and looks shady at first glance,” explained Cholst, a member of his own co-op board. “When somebody wants to buy an apartment and hold it in the name of an LLC, that immediately raises questions in the board’s mind: ‘What are they trying to accomplish? We don’t want investors.’”

It’s worth noting, however, that boards initially had a similar reaction to the idea of ownership by trusts.

Many boards worried that they’d lose control over who is allowed to live in the apartment, or would be stuck with no legal recourse if an entity with no assets stopped paying its maintenance fees.

In response, co-op attorneys developed agreements in order to prevent those fears from coming to fruition, requiring owner occupancy and sometimes holding maintenance fees in escrow.

“The initial reaction was, ‘are you kidding me?’” Cholst said. “But there was a rash of requests as people were aging. … It was a very, very gradual and grudging acceptance, and then boards got used to the idea.”