Braverman & Associates, P.C.

HIDDEN TREASURES

Riches beyond belief may be lurking in a co-op/condos' common area--if you know where to look for them.

By Edward T. Braverman

Edward T. Braverman is senior partner of Braverman & Associates, a Manhattan law firm that specializes in cooperative and condominium housing law.

Blackbeard and other assorted pirates plundered the high seas during the 17th century, attacking cargo ships and hiding their booty in secluded Caribbean cases, and sometimes buried 40 paces from the bending palm. Much of that plundered wealth has already been found. Some, however, still lies buried, awaiting discovery by the lucky, or by the astute student of buccaneer history.

Like the 17th century pirates, New York City developers of the late 20th century plundered the real estate market, buying buildings and converting them to cooperative and condominium ownership. Now, at the beginning of the 21st century, will astute students of this century's real estate market be able to find the hidden treasures left behind by the 20th century co-op/condo conversion-and-development buccaneers?

THE BOOTY

As in the past, an understanding of the booty, a pirate's map, and a knowledgeable crew would be helpful. Co-ops are structured so that a corporation owns the land and building. An apartment owner buys stock in the corporation which entitles him/her to a lease (proprietary lease) for a specific unit. This gives the owner the exclusive right to use certain space in the building. All other space, including the façade, is deemed to be common area, to be used and enjoyed by everyone on a non-exclusive basis.

In a condominium, the individual units are owned outright, with the remaining area of the building and its property being deemed to be common area designed to be used and enjoyed by everyone on a non-exclusive basis (limited common areas do exist but are not the subject of this article).

It is these common areas which represents the modern-day "booty" awaiting discovery, and the chance for a board to convert it to the coin of the realm. A discovery which could pay for building repairs, create modern amenities (like a gym), or forestall a needed maintenance increase or assessment.

MODERN GOLD DOUBLOON

Every building has large areas of basement space. Some of it is used for needed building services, such as boilers, electrical and mechanical equipment, laundry rooms, and the like. However, there are generally significant unused or under-utilized large open areas, sometimes generally designated for building storage. These are usually filled with unused bikes, some gathering dust from 1941; old and broken furniture; rolls of carpet and unidentifiable boxes inscribed with names that are no longer recognizable.

What to do? Clear the space (with the advice of your attorney) and buy and install individual locked storage cages (bins). These can then be sold or rented to individual tenants/shareholders. The additional storage facilities are always in demand by space-starved New Yorkers. As an alternative, lease the space in its entirety to a company which will install the facility and bill your shareholders directly. Similar to laundry facility programs, these companies will share the monthly rental they receive with the property.

Is there a doctor or other professional in your building? Sell, lease, or license the space to him or her. What professional doesn't need more space for record storage and space that is convenient? Does your building have retail or restaurant space? Installing their mechanical equipment in rented, licensed, or sold basement space will free up valuable selling or table area and result in a valuable return for your co-op or condo.

Many buildings have usable space beyond their property line (under sidewalks). This is known as vault space. In New York City, much of it has been permanently closed to avoid the New York City "Vault Tax." If the occupants of your building have a need that can be filled at a profit, by opening the space and paying any required taxes, do it. Beware, however, that this area is not owned by the co-op or condo. It can be leased or licensed, but not sold.

MORE TREASURES

Many prewar Manhattan buildings, especially on the Upper East and West Sides, were constructed with separate servants quarters. They were generally single-room occupancies, allocated on one floor in the building, with a common shared bath. Over the years, with the decline in live-in help, many of these units fell into a state of disrepair. Often, at the time of conversion of the co-op or condo, no shares were ascribed to these spaces and they passed to co-op or condo as common areas. Some buildings have leased these rooms for tenant storage at a modest monthly fee.

But how much will your tenant-shareholders/unit-owners be willing to pay to own their own private gym within the building? Or a home office or study away from the kids? Or even a modern storage facility California closet style? Plenty. You just made their apartment substantially more valuable while enhancing the building's coffers.

Some of these prewar buildings were constructed with back hallway servants' bathrooms. Most have been long-closed (permanently) or used as slop sink areas or storage facilities for building janitorial equipment or supplies. How much will someone on each floor of your building be will to pay to: store their skis; keep the baby's stroller; store their out-of-season clothes; store large quantities of paper towels, toilet tissue, and canned and boxed foodstuffs purchased from the Price Club?

OTHER POTENTIAL TREASURES

Unless otherwise restricted, every building owner has property rights to the center of the earth and up into the atmosphere. This space below and above is common area and may have potential sales value. These rights can be particularly valuable if you have an unusual location where the potential expansion will result in outstanding views (i.e., river or city). Building facades can also be a source of revenue. One obvious way is to sell sign or billboard space.

Other areas to explore include:

Kitchens. You may see about erecting and attaching a flue for the kitchen of a building restaurant or potential restaurant.

Cable/cell phone antennas. Is your building situated in such a way that cable or cell phone companies might wish to use your property as a transmitting or relay station? You could cash in on this potential.

Terraces. Does your building already have terraces adjacent to some apartments? Do some, or all, of those owners want to permanently enclose the terrace area and make it a permanent part of their apartment? If you don't believe that such a change will have a negative impact upon the exterior esthetics of the building, sell them the right to expand and add dollars to your treasury.

Courtyards. Do you have rear courtyard space? Is it dark, dreary and unused? Do you have a commercial establishment (i.e., doctor's office or store) that could have some of its mechanical equipment in that space and frees up valuable interior floor space? If so -- cash in.

BUILDING AMENITIES

As an alternative to direct dollars through the sale, lease or licensing of common areas, your board may wish to consider converting some of these areas into ancillary building amenities. Among the possibilities:

Gym. Can basement space be converted into a gym for building residents?

Play area. Will appropriate alterations and additions on the roof permit its use as a children's play area in nice weather.

While additions similar to these do not bring direct dollars into the property's treasury and will undoubtedly result in an expenditure from the building's treasury, you will be increasing the desirability of apartments, thereby increasing resale value. Your shareholder/unit-owners will love you. Certainly these examples do not exhaust the ideas available to a board.

LEASE, LICENSE, OR SALE

The method used to convert your common area to dollars must be carefully chosen with the aid of the property's attorney. The three options: Leasing will grant to the recipient tenant an exclusive right to use a fixed area for a fixed term of years. The lease will spell out the terms and conditions of use. The operative document is a lease. Licensing will grant a non-exclusive right to use an area belonging to the building for a term, which may or may not be fixed, but will generally be subject to termination. The license will spell out the terms and conditions of use. The operative document will be a lease.

Sale in a co-op will require issuing shares. If sold to an existing tenant/shareholder, the existing certificate should be surrendered and a new certificate issued for the combined value of the old and new shares. Similarly, the existing proprietary lease should be surrendered and a new lease issued evidencing the supplementary or ancillary space.

If the tenant/shareholder has mortgaged his shares, arrangements must be made with his lender to attend the closing. If space being sold is to a new tenant-shareholder, an original issue certificate must be prepared and an original proprietary lease must be given for the space. However, before a sale can take place, a host of conditions must be met. Do unissued treasury shares exits (Most often they do)? If not, the certificate of incorporation of the co-op must be amended to increase the total number of authorized shares permitted to be issued---this will require a vote of the shareholders at an annual meeting or at a special meeting.

How many shares must be issued? The co-op will be required to have a licensed real estate broker make this determination. The new shares allocated to the space being sold must bear a reasonable relationship to that portion of the co-op being transferred (i.e., represents the corporation equity in the land and building which is attributable to the space being transferred).

The ownership of shares among tenant-shareholders must be kept in proportion to assure the equitable apportionment of money: more space, more shares, more maintenance. In addition, the requirement of reasonable relationship is mandated by Section 216 of the Internal Revenue Code, as well as the regulations of the New York State attorney general---the document issued by your licensed real estate broker is known as a "Certificate of Reasonable Relationship."

All of which brings us to the issue of the attorney general's approval---the issuance of new shares technically becomes an offering of securities and falls under the purview of the Martin Act. However, because of the limited nature of the offering and the attorney general regulations' recognition of the limited need to protect the general public, the regulations permit new share to be issued once an application is made outlining the transaction.

That application is accompanied by the Certificate of Reasonable Relationship and a broker-dealer statement signed by a co-op officer. Several weeks after such a submission, the attorney general will send counsel a letter that it will waive action to enforce the technical violation of the Martin Act (this waiver of enforcement has become known as a "No Action Letter"). When the closing does finally take place and the co-op is paid, don't forget that a proprietary lease is an interest in real property and will require the filing of city and state real property transfer tax returns.

Although technical differences exist in the transfer of condo common areas, much of the same theory as for a co-op sale will prevail---with one major exception. New York State statutes provide that the common interest attached to each unit shall not be altered without the consent of all unit-owners affected, and that the common elements shall remain undisturbed and undivided or partitioned.

These provisions would appear to dictate that any transfer of a portion of the condo common areas be first approved by all unit-owners. It may even be questionable as to whether common areas in a condo can be rented or licensed without the consent of all unit-owners.

A final determination on who is an affected unit-owner and whether the condo board of mangers can license or rent common areas without the consent of all unit-owners awaits a final decision of the appellate courts.

COMPLIANCE WITH CODE

Whether you will be selling, leasing, or licensing common areas, that space must remain in full compliance with all governmental rules and regulations. All transfers must be conditioned as such and subject to the review and approval of the building's architect. Moreover, all work in the new space must be performed in accordance with the building's standard alteration agreement and the work performed by approved contractors with adequate insurance, naming the building as an additional insured.

Of course, whether a sale, lease or license, the transaction must be in full compliance with the co-op's lease and bylaws or the condo association's bylaws and declaration. So, always consult the building's lawyer when trying to negotiate these treacherous but potentially lucrative waters. Does your building have hidden booty? Are you ready to go on your treasure hunt? If Indiana Jones is still looking for the lost ark and is not available to aid you in your adventure, why not enlist the aid of an attorney and architect? Riches beyond belief may be awaiting your efforts. No kidding.

As appeared in the April 2000 issue of Habitat magazine.

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