For Sale: Common Areas

> If space is the final frontier, then hallway space is infinity and beyond. Hallway space, lobby space, roof space, backyard space – any co-op or condo common space that’s underutilized, if used at all, offers a novel method for how your building can generate income. And, aside from that one-time revenue, selling such areas to individual shareholders increases the building’s number of shares, which lowers the maintenance cost per share and increases the size of the apartments, which can lead to higher eventual sales prices and even such spin-off benefits as higher flip-tax revenues.

The 125-unit Manhattan co-op at 860-870 West 181st Street, for instance, is privatizing part of a back courtyard in order to bundle it with a former superintendent’s apartment that it is also selling. “We had one special shareholders’ meeting, coupled with a presentation by our accountant about why we needed money,” Barbara Taylor, the board president, half-jokes. Selling this virtually unused backyard space “was a bit of manna from heaven,” she says.

Her board is also overseeing two separate renovations in which the owner of two adjoining apartments is taking the small, arterial hallway between them and enclosing it, thus creating a foyer for what will be one large, combined apartment. “These kinds of activities increase the value of certain units, which ultimately makes the average sales price go up,” Taylor notes.

Yet cash-strapped boards thinking about selling common spaces shouldn’t suddenly picture the hallways changing into great big dollar signs. Privatizing common co-op or condo space isn’t difficult, but it’s a time-consuming and meticulous process that can rack up lawyer and consultant fees, and one that requires you to strike a balance as to how much common space you can privatize without lessening the value of your building.

First things first: it is legal and, generally, boards have the right to do it. While there’s little case law, a 2000 decision, in Cohen v. Board of Managers of 22 Perry Street Condominium, ruled that a board could grant “a revocable license,” allowing an owner to enclose a small portion of common hallway space in order to create a new entranceway to two adjacent apartments. Moreover, the court ruled, a board doesn’t need to get the unanimous consent of all unit-owners to grant this license and to charge a fee for the space. The caveat? A board cannot diminish other owners’ rights to a common area, which was not an issue in this particular case of a dead-end hallway space that did not include a fire exit.

Your initial step, after choosing what you may want to sell, is deciding how much a common space is worth. What’s tricky is that there aren’t any formulas, only guidelines. For a condo, this means devising a sales price; for a co-op, it is a sales price and its corollary, the number of new shares assigned to the space.

A real estate professional determines these things, rather than a board, under guidelines established by the Internal Revenue Service (IRS) and the New York State Attorney General.

“You have to determine a reasonable amount of shares,” says building manager James Goldstick, an executive at Mark Greenberg Real Estate, referring here to co-ops but describing the general process for condos as well. “For example,” he observes, “if an 800-square-foot, one-bedroom apartment is 400 shares, you’d think you could say, ‘Well, that’s one share for every two square feet, and they’re adding 50 square feet from the hallway, so that makes 25 shares.’ But it’s not that simple. A living room or a kitchen is more valuable than a foyer, for example. There has to be what’s called ‘a reasonable relationship’ between a space and its share allocation, and it’s not an exact science.”

“There are two standards for a fair price,” adds attorney James Samson, a partner at Samson Fink & Dubow. “For the IRS, you need to get a ‘Letter of Adequacy’ from a broker, who will start by looking at the original offering price – which obviously isn’t the price anymore, but it sets the lower limit [of a price per share or square foot]. Then, the broker looks at the square footage – let’s says it’s 44 square feet – and how much the building’s square footage is worth, based on recent sales – let’s say $1,100 a foot. Now, you’ve got an upper limit, which in this hypothetical example is $48,400. But this isn’t full, usable space; it’s not like a living room. So somewhere between the offering plan price and the current per-square-foot price is your number.”

For co-ops, a real estate professional also needs to prepare a second document, called a “Letter of Reasonable Relationship.” This one attests that the number of new shares you’re allocating is reasonable. If the math in the original offering plan allocated, say, 1 share for every 3 square feet of apartment space, then that hypothetical 44-square-foot example above would come out to 15 shares (since 44 divided by 3 equals 14.66, which rounds up to 15 since you cannot allocate fractions of shares).

The next step generally involves contacting the state attorney general’s office. For co-ops, if the original sponsor’s lawyer planned well, he or she would have authorized more shares than were immediately needed, thus providing you with the available extra shares you now need. If that’s the case, great: you go to the shareholders and vote to amend the certificate of incorporation in order to release some of those authorized but unused shares.

If that’s not the case, then you may have to create and file an entirely new offering plan. Or not. There’s an alternative that could save you the trouble – called, with seemingly Dr. Seussian whimsy, an “Application for No Action” letter.

“There are certain circumstances,” says Samson, “where the attorney general decides you don’t have to offer a whole new offering plan.” To find out if you’re in that category, “You file a ‘No Action’ letter request, saying that you want to allocate shares for hallway space; that the space isn’t required for co-op function, such as a hallway with a fire door; and that the shares will be incorporated into an apartment. The AG will either require a new offering plan, or sign off on your ‘Application for No Action’ letter.”

As a sidenote, there’s a tax advantage: “When a co-op issues shares,” says Samson, “it’s deemed to be a capital contribution and not income. It’s tax free if you [issue them] as a subscription agreement and [follow your accountant’s instructions].”

Once all this paperwork is in place, the board proceeds as though it were like any other interior renovation, with the usual checklist of things: requiring a licensed architect to file an approved plan, a bonded and insurance-carrying contractor, and so on. It’s also good to communicate with the other residents, through a newsletter or a note tucked into the monthly maintenance- or common-charge-envelope. This should emphasize not just the economic advantage to the building, but the plusses to the individual owners as well – who, all things being equal, will pay a slightly lower fee each month since the owner with the new space will pay more.

Finally, along with selling the space itself, the building can also charge a fee to cover the additional time, trouble, and professional(legal/broker) fees for assigning a price and/or allocating new shares. While the board at Barbara Taylor’s West 181st Street co-op hadn’t charged such a processing fee, Taylor now reflects: “There should be a fee for that, similar to the one the board already charges for processing interior renovations.”

Whatever you do, use common sense and ethics. “Giving away corporate assets will get you sued,” Samson warns, “especially if you’re giving them to a board member, his brother, or his best friend. Corporate assets are valuable.”

That said, the 134-building Glen Oaks Village in Queens has found a progressive, long-term approach, in which it does give away shares to any owners willing to make improvements.

“Each of our buildings is two stories plus an unused basement [that usually serves as a meter room or utility-line/plumbing conduit, if utilized at all],” says board president Bob Friedrich. “Some of these are just crawl spaces, but others have seven- to eight-foot ceilings. In those buildings, if a first-floor shareholder wants to do what we call a ‘basement addition’ – not just a place to keep their weights and bicycles, but a bona fide living space – then we’ll allocate new shares for which we do not charge. We give the shares to the individuals” – who in turn must pay for any needed asbestos removal and do a timely renovation, which can cost from $15,000 to $50,000 – “and they are taking unused space and creating usable space that increases the value of their co-op. When they sell, the appraisals come in higher, and that raises everybody’s values.”

Second-floor owners get a roughly similar deal for raising their attic roofs to create a third-story living space. “We do everything we can to encourage long-term residency,” says Friedrich, “which to us is fundamental to a healthy and growing community.” Along those lines, the co-op gives away common green areas to people who, for instance, want to plant gardens or create patios, and so “take an area no one was using to one that people use.”

The possibilities are many and varied. “I had a building that had storage closets on every hallway,” says Goldstick, “and the building sealed them from the hallway, and then sold them to the apartments that backed up on them.” Each owner then cut through his or her inside walls and created a closet door where the back of the closet had been.

“Hallways, lobbies, rear-yard space, rooftop space, basement space – if it’s real estate, it can be sold,” says Samson. “But you’ve got to do it right.”