In continuing to search for a good home purchase, I continue to debate the value of a lower maintenacne building. My question is related to how the taxes on a co-op building is set. Here's the premise. Two identical buildings on opposing corners of the same blcok. Built at the same time by the same developer. One building has a great landmark retail tenant which has contributed to low maintenance... [more]
In continuing to search for a good home purchase, I continue to debate the value of a lower maintenacne building.
My question is related to how the taxes on a co-op building is set.
Here's the premise. Two identical buildings on opposing corners of the same blcok. Built at the same time by the same developer. One building has a great landmark retail tenant which has contributed to low maintenance charges for the residential shareholders. As a result of misfortune, the other building has seen their retail tenants churn and leave behind significant debts and unoccupied space resulting in a signficant draw down on the buildings line of credit, perhaps a higher mortgage and clearly higher maintenance charges to their shareholders.
The result is that comparable units have widely differing values. The one with difficult financials is trading lower at $650 psft. The one with great financials have maintained vluations at $900 psft. Rental units are trading at the same cost in each building since the buildings are the same.
When taxes are reviewed for each building will they increase more in the building that is enjoying better financials and more stable valuations or will then increase the same because they are assessed on rentals? Or are they assessed on some other factors?
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In terms of value to you, think in terms of what it does to your monthlies (lower maintenance frees up cash flow for financing), or compare what you spend over 5 years, 10 years, etc. And then adjust a bit for the peace of mind of coop financial stability, and subtract out uncertainty relating to the termination date of that high-paying retail lease!
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Response by crescent22
over 13 years ago
Posts: 953
Member since: Apr 2008
What are these debts left behind? Otherwise, I would say the retail income will eventually normalize and bring the maintenance down (presuming it is higher now because of the lack of income).
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Response by mikewalkerman
over 13 years ago
Posts: 25
Member since: Apr 2012
I apologize if i'm missing the point, but if I am understanding this correctly, this is a no brainer. You buy in the building with the difficult financials (which I'll call the "Bad Building").
If you buy in the Bad Building, you may pay higher maintenance or RE taxes than in the building with the good financials (which I'll call the "Good Building"), but assuming you are financing the purchase, you will also pay lower monthly mortgage payments because the purchase price for the comprable unit is much lower. Also, there is the possibility in the future that the Bad Building could get a new commercial tenant, thus lowering the common charges and raising property values for your unit (presumably to a comprable $900/sf such as in the case of the Good Building). So, worst case scenario with the Bad Building, you maintain the status quo and maybe your property value stays the same or goes up with time. Best case, the building gets a new commercial tenant which drives your property value up and your common charges down, while your monthly mortgage stays at the same level, which will be much lower than for the comprable unit in the Good Building.
If you buy in the Good Building, there is no potential for lower common charges and increased property value with a new commercial tenant, since the building already has one and that is factored in already. Also, there is the risk that the Good Building in the future could suffer the same fate as the Bad Building, i.e., it could lose its commercial tenant, thus driving common charges up and property values down in the building. So, best case scenario in the Good Building, you maintain the status quo and maybe your property value increases over time. Worst case, you propertly value goes down and common charges go up with the loss of the existing commercial tenant, while your monthly mortgage payment stays the same, which will be much higher than for the comprable unit in the Good Building.
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Response by mikewalkerman
over 13 years ago
Posts: 25
Member since: Apr 2012
Sorry, last line should have ended with "in the Bad Building."
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Response by Oxymoronic
over 13 years ago
Posts: 165
Member since: Dec 2007
I have seen an example where it resulted in a $1.5MM gap in finances - the property had a complete churn of all of their retail tenants and then invested in gutting the retail over a couple of years which significantly impacted the co-ops finances. Whilst, the space is now let, it doesn't help fill the $1.5MM hole and this is a good 6 months of revenue.
I think I have my answer though. The building which has taken a hit isn't going to get any respite through lower future taxes. Their taxes will increase just as fast as another more financially sound comparable building.
Just another reason to go with the co-op with better financials.
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Response by kylewest
over 13 years ago
Posts: 4455
Member since: Aug 2007
Most established coops do not own the retail space in the buildings. They are usually set up as condos with the retail space being one condo and the coop being the other. If the retails condo incurs losses etc, it is the retail condo owner who is on the hook, not the coop. Are you sure these are retail spaces generating income for the coop?
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Response by Oxymoronic
over 13 years ago
Posts: 165
Member since: Dec 2007
Definitely the case. I'd actually seen buildings where the retail spaces have been structured as condos. Are these better or worse? Whilst I understand the risk is with the co-op if it's directly contributing, if it's set up as a condo, doesn't it depend on how much maintenance is being paid by the condo?
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Response by NWT
over 13 years ago
Posts: 6643
Member since: Sep 2008
A cond-op's commercial unit is almost always owned by the sponsor, who chose that structure because that was the best way to retain control of the commercial space and its profits.
They came about in the 1980s because it became more difficult for sponsors to get away with long-term sweetheart leases.
The offering plan will detail how the CCs are apportioned between the commercial and cooperative units. Some expenses, e.g. doormen, are carried entirely by the cooperative unit, and others are split other ways.
You can assume that the ratios are as favorable to the sponsor as possible, without ticking off the Attorney General or deterring buyers of the co-op unit. I.e., just like the PCI allocations in a straight condo.
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Response by NWT
over 13 years ago
Posts: 6643
Member since: Sep 2008
Also, until several years ago the IRS wouldn't permit a co-op to get more than 20% of its income from the commercial space, so that was another reason for a cond-op structure.
Here's how the taxes work:
http://www.nyc.gov/html/dof/html/property/property_condo_coop_comp_rental.shtml
In terms of value to you, think in terms of what it does to your monthlies (lower maintenance frees up cash flow for financing), or compare what you spend over 5 years, 10 years, etc. And then adjust a bit for the peace of mind of coop financial stability, and subtract out uncertainty relating to the termination date of that high-paying retail lease!
What are these debts left behind? Otherwise, I would say the retail income will eventually normalize and bring the maintenance down (presuming it is higher now because of the lack of income).
I apologize if i'm missing the point, but if I am understanding this correctly, this is a no brainer. You buy in the building with the difficult financials (which I'll call the "Bad Building").
If you buy in the Bad Building, you may pay higher maintenance or RE taxes than in the building with the good financials (which I'll call the "Good Building"), but assuming you are financing the purchase, you will also pay lower monthly mortgage payments because the purchase price for the comprable unit is much lower. Also, there is the possibility in the future that the Bad Building could get a new commercial tenant, thus lowering the common charges and raising property values for your unit (presumably to a comprable $900/sf such as in the case of the Good Building). So, worst case scenario with the Bad Building, you maintain the status quo and maybe your property value stays the same or goes up with time. Best case, the building gets a new commercial tenant which drives your property value up and your common charges down, while your monthly mortgage stays at the same level, which will be much lower than for the comprable unit in the Good Building.
If you buy in the Good Building, there is no potential for lower common charges and increased property value with a new commercial tenant, since the building already has one and that is factored in already. Also, there is the risk that the Good Building in the future could suffer the same fate as the Bad Building, i.e., it could lose its commercial tenant, thus driving common charges up and property values down in the building. So, best case scenario in the Good Building, you maintain the status quo and maybe your property value increases over time. Worst case, you propertly value goes down and common charges go up with the loss of the existing commercial tenant, while your monthly mortgage payment stays the same, which will be much higher than for the comprable unit in the Good Building.
Sorry, last line should have ended with "in the Bad Building."
I have seen an example where it resulted in a $1.5MM gap in finances - the property had a complete churn of all of their retail tenants and then invested in gutting the retail over a couple of years which significantly impacted the co-ops finances. Whilst, the space is now let, it doesn't help fill the $1.5MM hole and this is a good 6 months of revenue.
I think I have my answer though. The building which has taken a hit isn't going to get any respite through lower future taxes. Their taxes will increase just as fast as another more financially sound comparable building.
Just another reason to go with the co-op with better financials.
Most established coops do not own the retail space in the buildings. They are usually set up as condos with the retail space being one condo and the coop being the other. If the retails condo incurs losses etc, it is the retail condo owner who is on the hook, not the coop. Are you sure these are retail spaces generating income for the coop?
Definitely the case. I'd actually seen buildings where the retail spaces have been structured as condos. Are these better or worse? Whilst I understand the risk is with the co-op if it's directly contributing, if it's set up as a condo, doesn't it depend on how much maintenance is being paid by the condo?
A cond-op's commercial unit is almost always owned by the sponsor, who chose that structure because that was the best way to retain control of the commercial space and its profits.
They came about in the 1980s because it became more difficult for sponsors to get away with long-term sweetheart leases.
The offering plan will detail how the CCs are apportioned between the commercial and cooperative units. Some expenses, e.g. doormen, are carried entirely by the cooperative unit, and others are split other ways.
You can assume that the ratios are as favorable to the sponsor as possible, without ticking off the Attorney General or deterring buyers of the co-op unit. I.e., just like the PCI allocations in a straight condo.
Also, until several years ago the IRS wouldn't permit a co-op to get more than 20% of its income from the commercial space, so that was another reason for a cond-op structure.