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May 6, 2015

New York Law Journal

Faced with the challenges of ever increasing real estate taxes and the ongoing need for funds for capital expenditures and working capital, coupled with a reluctance to increase maintenance fees and impose assessments, boards of cooperative housing corporations are always on the look-out for creative ways of generating additional income. Selling underutilized building common areas (such as portions of hallways, lobbies, rear-yard space, rooftop space, basement space, and the like) can be a viable source of such income. Common area space such as corridors, hallways or terraces may be incorporated into an existing apartment.  In addition, if certain requirements discussed in this article are met, shares for commercial or professional spaces may be sold, such as stores and offices. In addition to the income generated by sale of the new shares, issuing new shares will likely make co-op apartments more attractive to potential buyers because the maintenance cost per share is reduced as a result of the increase in the total number of shares outstanding.
 
Importantly, when such new shares are issued and sold, the revenue received by the co-op is treated as a capital contribution and is not subject to income tax, making it attractive from a tax
vantage for co-ops to sell such shares. Private letter rulings issued by the Internal Revenue Service (IRS) confirm that so long as the share are sold for the exclusive and sole use of the shareholder, amounts paid for the shares will not constitute gross income to the co-op, but
instead will be treated as a capital contribution.
 
This column updates our 2006 column on the procedures to be followed for the issuance
and sale of new shares and addresses the 2012 Policy Memorandum issued by the New York State Department of Law regarding the sale of certain spaces in co-ops and condominiums. This column also discusses the potential adverse impact on a co-op and its shareholders’ continued eligibility to take certain tax deductions—because the issuance of new shares can result in the loss of such tax benefits—and how to prevent such a loss.
 

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