NYC Living: Coops and Condos

HEIBERGER SDK ATTORNEYS AT

OFFERED BY: RE CREDITS, LLC PRESENTED BY: JAMIE HEIBERGER, ESQ SDK HEIBERGER, LLP 205 East 42nd St., 6th Floor, New York, NY 10017 475 Port Washington Blvd Port Washington, NY 11050 Direct: 212.532.2067

Mobile: 917.697.5853 1 Overview

• Cooperative Apartment • Ownership • Due diligence • Board approval • Subletting • Loan documents in a co-op lendingHEIBERGER transaction • SDK ATTORNEYS AT LAW • Ownership of a condo unit • Condo waiver of Right of First Refusal • New Development Projects • Townhouses • Characteristics • Engineers Inspection • Legal Aspects • Due Diligence

2 HEIBERGER SDK ATTORNEYS AT LAW Co-Operatives

3 Form of Ownership

• A cooperative corporation owns the (land, buildings, and property rights and all interests). • title to the property, as shown on the , is in the name of the corporation • The ownership interest in a co-op is evidenced by shares of stock. • Ownership of cooperative stockHEIBERGER is essentially the same as stock in corporationsSDK such as Microsoft,ATTORNEYS Facebook, Yahoo, AT etc. LAW • However, accompanying the shares of stock in a cooperative is a proprietary lease granting the right of the shareholders to reside in a particular apartment. • Leasehold Coops (a Co-Op with a ground lease)

4 Proprietary lease- what does it mean to owners?

• Rights and obligations included in proprietary lease and corporation bylaws • Receive proprietary lease • long-term lease or estate for years • Receive stock certificates HEIBERGER SDK ATTORNEYS AT LAW

5 Due Diligence

• Financial Statements: • Each shareholder of the corporation is obligated to pay monthly maintenance charges which are aggregated and used to pay all costs and expenses in operating and maintaining the building. A portion of the maintenance payment is allocated to paying the debt service of any underlying building mortgage • Each prospective purchaser of a cooperative apartment should have the financial statements of the corporation reviewed to determine if the corporation is being run in a fiscally sound matter. HEIBERGER • Generally, the amountSDK of revenue generatedATTORNEYS by the building AT (ie., LAW common charges or maintenance) should be at least equal or greater than building operating expenses • Annual increases in common charges/maintenance should be in the range of 3%-5% per annum. • The building should have a reserve fund of at least 10% of the annual common charges/maintenance. • Determine if there is an underlying building mortgage and the existing terms of any such mortgage (ie., mortgage amount, interest rate and maturity date). • All notes should be thoroughly read as they may contain substantive information such as the status of any pending litigation involving the building.

Sample financial statement in hand out.

6 Due Diligence

• Board Minutes • Generally, building will conduct regular meetings on a monthly, quarterly, semi-annual or annual basis. The coop or condo secretary will take “minutes” at the meetings which are a summary of the topics discussed. • Board “minutes” are traditionally stored at the office of the managing agent. Although managing agents areHEIBERGER reluctant to send copies of board minutes to attorney representingSDK the prospectiveATTORNEYS purchaser, AT the LAWminutes are available for review at the offices of the managing agent. • Minutes can provide critical information relating to • Past or current financial concerns • Building maintenance and repair issues • Issues with disruptive owners/occupants • Contemplated repairs or capital improvements projects • Changes in building operating policies • Questionnaire

7 Due Diligence

• Key Issues to Review in a Co-op Board’s Minutes Maintenance and • Many cooperative reserve Assessment HEIBERGERfunds receive income from the SDKHistory flip tax, a charge levied when ATTORNEYSunits AT change LAW hands

Reserve Underlying Fund Mortgage

8 House Rules - why are they important to Agent?

• Cover issues – garbage disposal, maintenance, noise and conflict resolution • Shared with purchaser HEIBERGER SDK ATTORNEYS AT LAW

9 Cooperative Policy Statement 1 Phase:

• Sets out New York Attorney • The CPS1 period General’s rules • lasts 120 days from acceptance of • how a developer may test market the CPS1 statement by the for a new development before Attorney General filing the offering plan and before • can be extended by request from construction is completed HEIBERGERthe developer for an additional 60 SDK ATTORNEYSdays AT LAW

10 Offering Plan

• If the seller is not the sponsor, only certain portions of the offering plan need to be reviewed (such as Special Risks) since many of the offering plan sections are inapplicable to the transaction. • Special Risks section will highlight issues such as • Lot line windows HEIBERGER • Real estate taxesSDK exemptions suchATTORNEYS as J-51 or 421 -ATa LAW • Amenity features such as parking, storage bins, etc. • Potential sale or reservation of development rights • Older offering plans tend to have “stale” or less relevant information such as projected budgets, composition of initial condo board, unit finishes and fixtures, etc.

11 Board Packages

• Financial documents like tax returns, verification of employment; etc. • Managing agent of cooperative review package • Board wants full financial picture of purchaser HEIBERGER SDK ATTORNEYS AT LAW

12 Cooperative Board Application and interview preparation

• Cooperative board application • Attorney for seller draws co-op of sale • Interview scheduling- package submitted to managing agent for review and submit for next scheduled interview meeting • Familiarize purchaserSDK packageHEIBERGER for discussion purposes • Need for total disclosure by purchaserATTORNEYS during AT interview LAW

13 Board approval

• Controlling contract provision; • This sale is subject to the unconditional consent of the Corporation. • Purchaser shall in good faith: • Submit to the Corporation or Managing Agent an application with respect to this sale on the form required by the Corporation, containing such data and together with such documents as the Corporation requires, and pay the application fees and charges that the Corporation imposes upon Purchaser.HEIBERGER All of the foregoing shall be submitted within 10 days afterSDK the Delivery Date, or, if ¶ 1.20.1 or 1.20.2 applies and the Loan Commitment Letter is required byATTORNEYS the Corporation, within AT 3 LAW business days after the earlier of (i) the Loan Commitment Date (defined in ¶ 1.21) or (ii) the date of receipt of the Loan Commitment Letter (defined in ¶ 18.1.2); attend (and cause any Proposed Occupant to attend) one or more personal interviews, as requested by the Corporation; and promptly submit to the Corporation such further references, data and documents reasonably requested by the Corporation. • Either Party, after learning of the Corporation’s decision, shall promptly advise the other Party thereof. If the Corporation has not made a decision on or before the Scheduled Closing Date, the Closing shall be adjourned for 30 business days for the purpose of obtaining such consent. If such consent is not given by such adjourned date, either Party may cancel this Contract by Notice. In the event of cancellation pursuant to this ¶ 6.3, the Escrowee shall refused, or not given, due to Purchaser’s bad faith conduct, Purchaser shall be in default and ¶ 13.1 shall govern.

14 Board approval

• Pursuant to current NY law, a coop board is NOT required to provide reasons for a rejection of an application for approval. Unless a purchaser can prove that the basis of a denial was due to discriminatory reason (such as religion, nationality, sexual orientation, age, etc.), a purchaser should not seek legal recourse against a coop board for issuing a denial. • Generally, decisions made by corporations are governed by the “business judgment rule” which is broadly interpreted by courts and gives great discretion to boards in decision- making areas. • Board applications vary from building HEIBERGERto building. Customarily, a board application will require the submissionSDK of the following: • Copy of the Contract of Sale ATTORNEYS AT LAW • Personal and professional reference letters • Financial statements • Tax returns • Credit reports • search • Commitment letter, if any • Recognition Agreement, if bank financing is involved. • Typically, board applications are reviewed and approved by the real estate agents involved in the transaction before they are submitted to the board.

15 Board Approval

Cooperative Board Application and Interview Preparation

Before Scheduling Interview Consider SDK HEIBERGER Co-op ATTORNEYS AT LAW Interview The Role Board Prep Of Time Application

Familiarize Need for total Purchaser disclosure Package for By purchaser Discussion During purposes Interview • Situation Analysis: Mr. Jones an investment banker is a single man who is paying cash for a cooperative. He has sizable and safe investments and no debt. The cooperative board refuses him. No reason is given. 16 Documents Needed for the Sale/Purchase of Cooperatives

Proprietary Lease HEIBERGER Stock SDKAlteration ATTORNEYSCertificate AT LAW Agreements

Offering House Plan Rules

17 Documents needed for the Sale/Purchase of Cooperatives

• Include articles of incorporation, bylaws, proprietary lease or occupancy agreement, subscription agreement and house rules • Cooperative sponsor prepares subscription agreement when he sells each cooperative unit HEIBERGER SDK ATTORNEYS AT LAW

18 Financing

• Share loan type • type of loan in which shares of stock serve as collateral • Proprietary lease • Conditionally assigned to lender as additional security • Conducts a cooperative searchHEIBERGER to clear and liens or judgments against chattelSDK ATTORNEYS AT LAW • Lender/Co-Op Aztech Recognition Agreements • Understanding between co-op and lender that provides share loan’s to cooperative’s shareholders

19 Loan documents in a co-op lending transaction

• Since the ownership interest in a co-op apartment is in the form of shares of stock, lending transactions are governed by the Uniform Commercial Code (the “UCC”). • The UCC provides that you secure or “perfect” your security interest in personal property by physically taking possession of the collateral. • Therefore, an owner/borrower will not sign a mortgage (which is only applicable in a transaction involvingHEIBERGER ) and will sign a security agreement wherebySDK the owner/borrowerATTORNEYS pledges AT his/her LAW collateral to the lender. • In addition to a pledge of the stock and lease, a lender will also file a UCC-1 financing statement in the county where the property is located to memorialize its lien on the collateral. • Other customary loan documents required by lenders are a “blank” stock power, of lease and recognition agreement. • A foreclosure action on a co-op apartment is a non-judicial process that involves a public sale conducted in a commercially reasonable manner pursuant to the Uniform Commercial Code.

20 Primary Residency Versus Subletting Issues In the Cooperative

• Primary resident • owner of the cooperative unit

• Subletting • allows tenant shareholders more flexibility in ownership • board may limit the length of timeHEIBERGER a tenant shareholder can sublet a unit SDK ATTORNEYS AT LAW

• If the sponsor owns the shares allocated to the apartment, he may be permitted under bylaws or rules to sublet or rent a unit even though a unit owner cannot

21 Subletting

• A sublease transaction of a cooperative apartment is subject to the approval of the corporation’s Board. • The same criteria apply with respect to the approval of a sublease as used in the approach of as sale. • Generally, corporations will limitHEIBERGER any sublease to no more than two (2) years in anySDK five (5) year period.ATTORNEYS AT LAW • It is important for a board to preserve a certain level of owner-occupied apartments as well as prevent a transient living situation in the building and financing opportunities. • Subletting premiums or fees

22 Alteration Agreements

• Permission cooperative gives shareholder before making changes to unit

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23 HEIBERGER SDK ATTORNEYS AT LAW

24 Condominiums

• Ownership • Condo waiver of Right of First Refusal • New Development Projects • Condo issues • New DevelopmentSDK HEIBERGER • Price Changes ATTORNEYS AT LAW • Certificate of Occupancy (CO) • Flipping/Simultaneous Closing • Title issues in the purchase of Condominium • Closing costs • Buyer’s financial ability to purchase a cooperative or condominium residence

25 Ownership of a Condo Unit

• The ownership interest in a condominium unit is a ownership interest in real estate. Unlike a cooperative corporation structure where there is one (1) deed for the entire building and one (1) real estate tax lot, each condominium unit has a separate deed and a separate tax lot. • Similar to a cooperative structure, each condominium unit owner will pay monthly common charges which are aggregated and used to pay all costs and expenses in operating and maintainingHEIBERGER the building, except that no portion of theseSDK payments are allocatedATTORNEYS to debt service AT LAW of a mortgage or real estate taxes. Each condominium unit owner will pay his/her individual mortgage payment and real estate tax payment. • The financial statements of the Condominium must be reviewed, as well as the board minutes, before purchasing a condominium unit. • A security interest in a condominium unit is “perfected” by recording a mortgage in the county’s clerk’s office. The foreclosure of a security interest in a condominium unit is a judicial process pursuant to Real Property Actions and Proceedings Law.

26 Ownership fee – simple or leasehold

• gives right of possession of apartment and use of common areas

HEIBERGER SDK ATTORNEYS AT LAW

27 Condominiums

• A structure of two or more units • Interior space is individually owned • Common elements, are owned by owners of the individual units • To create, the owner/developer of the property signs a condominium declaration HEIBERGER SDK ATTORNEYS AT LAW • Shareholder’s rights and obligations are in the condominium’s bylaws • The sponsor is the owner or developer.

28 Condo Waiver of Right of First Refusal:

• Controlling contract provision: • Right of First Refusal: if so provided in the Declaration of By-, this sale is subject to and conditioned upon the waiver of a right of first refusal to purchase the Unit held by the Condominium and exercisable by the Board. Seller agrees to give notice promptly to the Board of the contemplated sale of the Unit to Purchaser, which notice shall be given in accordance with the terms of the Declaration and By-Laws, and Purchaser agrees to provide promptly all applications, information and references reasonably requested by the Board. If the Board shall exercise such right of first refusal, Seller shall promptly refund to Purchaser the Down Payment (which term,HEIBERGER for all purposes of this Contract, shall be deemed to includeSDK interest, if any, earned thereon) and upon the making of such refund this Contract shall be deemed canceledATTORNEYS and of no further force AT or LAW effect and neither party shall have any further rights, against, or obligations or liabilities to, the other by reason of this Contract. If the Board shall fail to exercise such right of first refusal within the time and in the manner provided for in the Declaration or By-Laws or shall declare in writing its intention not to exercise such right of first refusal (a copy of which writing shall be delivered to Purchaser promptly following receipt thereof), the parties hereto shall proceed with this sale in accordance with the provisions of this Contract. • Rarely will a condo board exercise its right of first refusal and overwhelmingly will issue a waiver of right of first refusal. • The overzealous Condo board

29 A Condo and Coop Closing Compared

Condominium Cooperative

Type of Fee simple Personal HEIBERGERproperty; shares transaction SDKownershipATTORNEYSof stock AT LAW Transfer Deed Proprietary lease documents Taxes at NYS NYS transfer fee; flip tax closing transfer tax Flip tax

30 Closing Costs

Real Common Estate Charges Tax

HEIBERGER Mansion SDK ATTORNEYSTax AT LAW Tax Deductions

Mortgage Right of Recording First Tax Refusal

31 Flipping

• Real estate investors or • Flipping may be a problem speculators believe that they because it can drive up prices can turn quick profits by buying the property at a certain price and then immediately selling • The investor attempts to buy the property at a higher priceHEIBERGERlow and sell high SDK ATTORNEYS AT LAW

32 HEIBERGER SDK ATTORNEYS AT LAW New Development

33 New Development Projects

• Sponsors are obligated to file with the Office of the Attorney General an Offering Plan for new construction projects. The key provisions of the Offering Plan include. • Special Risks • For a period of time following your closing, continuing work conditions may create a noisy and disruptive condition inHEIBERGER the building and there may be a disruption in certain services andSDK building systems. ATTORNEYS AT LAW • The real estate taxes are subject to a 421-a abatement and will be fully assessed after ten (10) years will periodic phase in increase during this ten (10) year period. There is no assurance that such exemption and/or abatement will become effective • No financing contingency

34 New Development Projects

• The Condominium has purchase Unit ___ as the resident manager which purchase was financed 100% on a 5-year term. The financing must be refinanced or paid off at the end of 5 years. • Sponsor is retaining unused development rights. Sponsor may merge the zoning lot with the adjacent lot and may develop this lot. If Sponsor develops this lot, current views mayHEIBERGER be obstructed. • Sponsor retainsSDK the right to rent,ATTORNEYS rather than sell, theAT units.LAW This may affect your ability to obtain mortgage financing since some lenders have minimum sales requirements. • No representation is being made with respect to the use of the Commercial Units. • Certain windows on the east side of the building may be reduced in size or permanently closed if adjourning property is developed. Unit Owners will incur the cost of approximately $2,000 to seal/reduce any such windows. • Until 75% of the units in the building are occupied, some services and facilities may not be available.

35 New Development Projects

• Purchasers will be obligated to pay the New York City Real Property Transfer Tax and the New York State Real Estate Transfer Tax. • Schedule “A” – Sets forth specific information for each unit including (i) number of rooms, (ii) offering price, (iii) percentage of common elements, (iv) projected common charges, and (v) projected real estate taxes (see exhibit “3”). • Identity of the parties – DisclosuresHEIBERGER the names of the individuals that comprise the Sponsor together with its attorneys, construction professionals, architects, SDK ATTORNEYS AT LAW managing agent and selling agent. • Description of the Property and Specifications – includes information such as (i) room dimensions, description of appliances and unit finishes. (See Exhibit “4”). • Prerequisite to closing: • Offering Plan being declared effective (need at least 15% of the units in contract) • Recording the Condo Declaration • Release of the Unit from any liens • Issuance of a temporary or permanent certificate of occupancy. • Be aware of taxable consideration and $982,250.00

36 Offering Plan

Size of unit TheHEIBERGER floor plans SDK TheATTORNEYS construction AT LAW

The size and materials

The plans of recreation buildings

The make and model of appliances

The scope of the landscaping

The land on which condominium is located

37 Offering Plan Amendment: Building Conversion

• NYS law • When a developer files an offering plan with the Attorney General to convert an existing building to a condo or co-op, the tenants have a 90-day exclusive right to buy their apartment

• During this period sponsor cannotHEIBERGER negotiate separate prices SDK ATTORNEYS AT LAW

38 Offering Plan Amendment: New Development

• New building and after 90-day • The developer can sell one tenant’s exclusive period in a apartment for $200,000 and converted building then sell another identical apartment for $175,000 • sponsor can separately HEIBERGER negotiate the SDKprice of a ATTORNEYS AT LAW particular apartment

39 Offering Plan

• Includes declaration and disclosure statement with New York Attorney General’s Office • Once Attorney General accepts prospectus • Known as black book or offering plan HEIBERGER SDK ATTORNEYS AT LAW

40 Primary residency vs Subletting issues in the Co-Op

• Primary resident – owner of co-op • Subletting discouraged in co-op • Shareholders- owners take better care of property than subtenants do • Shareholder – still responsibleHEIBERGER for maintenance payments SDK ATTORNEYS AT LAW

41 Subletting Issues

• Board may limit time tenant shareholder can sublet • May adopt ceiling on number of sublets permitted

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42 Sponsor shares, holder of unsold shares and sold shares

• If sponsor owns shares - may be permitted to sublet or rent unit even though owner can not • Rules for sponsor subletting generally part of offering plan HEIBERGER SDK ATTORNEYS AT LAW

43 80-20 Rule Concerning Passive Income Activities

• Passive investment activity can be rental activity • For tax benefits at least 80% of co-op’s gross revenue must be from shareholders HEIBERGER SDK ATTORNEYS AT LAW

44 Condominiums

• Condominium declaration • Includes certain provisions required by statute • Condominium Structure of 2 or more units, interior space individually owned • Common elements- remainingHEIBERGER property owned in common by owners of individualSDK units ATTORNEYS AT LAW

45 Condo issues

• Bylaws- shareholder rights and obligations • Sponsor- owned or developer of the condominium

HEIBERGER SDK ATTORNEYS AT LAW

46 HEIBERGER SDK ATTORNEYS AT LAW New Development

47 New Development

• Reading offering plan – read “Description of Property” to determine sponsor’s obligations • Special risks – what sponsors promises not always what purchaser receives • Real estate tax validation – difficult to validate property taxes unless project completed HEIBERGER • Hidden costs – readingSDK offering planATTORNEYS should determine AT LAW upgrade • Delays in construction hold up closing • Letter of intent – written offer to reserve specific unit under construction • Legal issues – clauses may state letter not legally binding obligation • Letters of intent forwarded to sponsor; purchaser shows letter to his attorney • CPS1 phase • Cooperative policy statement • How developer may test market for new development

48 Price Changes

• Offering plan amendments – building conversion • Tenants have 90-day exclusive right to buy their apartment • During this period sponsor cannot negotiate separate prices • Offering plan amendments – new development • Sponsor can separately negotiateHEIBERGER price of apartment • Why and whenSDK developers raiseATTORNEYS prices AT LAW • Developers sell few apartments at once- if units sell quickly developer raises prices • Current market practice • Price increases in new buildings when units initially marketed

49 Certificate of Occupancy (CO)

• CO documents legal use and/or occupancy of building • Requirements for obtaining CO • When completed work complies with submitted plans and applicable laws • Must be final or temporary CO before new building can be legally occupied • Temporary CO can be issued HEIBERGER SDK ATTORNEYS AT LAW

50 Flipping/Simultaneous Closing – developer’s policy

• Flipping – buying property at one price and immediately selling at higher price • Can drive up prices • To prevent – sales contract may require investors to live in project before they can rent or sell HEIBERGER SDK ATTORNEYS AT LAW

51 Title issues in the purchase of Condo

• Purchaser receives deed to unit plus undivided interest in common areas • Needs title insurance policy • Covenants, conditions and restrictions (CCRs) incorporated in deed • CCRs – rights, duties and obligationsHEIBERGER of unit holders SDK ATTORNEYS AT LAW

52 Closing costs

• Buyers concerns –inquires about buyers credentials and bank references before purchase • Common charges – upkeep, insurance and salaries of building staff • Real estate taxes – condos assessed for tax purposes; owners responsible forSDK paying real propertyHEIBERGER tax • Tax deductions – mortgage interestATTORNEYS tax-deductible AT LAW • Right of first refusal • Mortgage recording tax • Mansion tax – 1% from buyer who purchased condo • Total consideration of $1M or more

53 Buyer’s financial ability to purchase a co-op or condo

• 2 parties who look deeply into purchaser’s : • Lender with loan • Board of Directors (or managers) of condo or co-op HEIBERGER SDK ATTORNEYS AT LAW

54 Difference Between a Condop, Condominium, and Cooperative Apartment

Condop Real Estate Example: Why it is created? • A condop is a building that includes • Building owner Sal owns a multi-unit condominium and cooperative ownership apartment building that includes a store in the same structure on the street level. Sal records the Declaration of Condominium, dividing the property into two condominium units: HEIBERGERCondo A (the commercial unit) and Condo SDK ATTORNEYSB (the residential AT LAW unit). Sal continues to own fee title to the commercial condominium unit and collects rent from the store. As fee title owner to Condo B, Sal the residential unit to Big City Co-op Corp. in exchange for the shares of Big City Co-op Corp. Various blocks of shares are allocated to the different apartments. Sal now sells the block of shares allocated to each unit (together with a proprietary lease) to individual purchases.

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