BASEMENT SPACE, P.2

Let's say 50 bins are constructed and rented at $50 per month. The vendor would receive $22,500 per year and the building would net $7,500. If the board wants to receive 100 percent of the revenue ($30,000 per year in the example), then it must hire a contractor to construct the room. If every apartment is going to receive one bin, then using the reserve fund to pay for construction is fair since every shareholder/unit-owner is reaping equal benefit. However, if there are not enough bin for all, then it is not fair to use the building’s funds. In that case, a fair compromise is to have a lottery to determine who gets the bins, and asking the lottery winners to pay an amount up front toward construction.

In the $50-per-month example, if the total cost of construction comes to $600 per bin, you can ask each lottery winner to pay $600 at the time they sign the storage lease. The money is treated as a prepayment of the first 12 months’ rent, after which the renter pays $50 per month beginning in the second year. This allows you to defer laying out any money toward the construction, and then reap 100 percent of the proceeds after the first year.

Pitfalls

While basement storage can provide the building with an additional service and a new source of income at very little cost, it can also be a source of problems. You have to make certain no one's storing propane tanks, paint and other flammables. You also have to think about moisture — not only the periodic flood but also seepage and even high humidity levels. Construction of the bins may involve dealing with asbestos and other such elements.

Have your legal counsel prepare a storage-bin lease containing a provision that it cannot survive a sale or transfer of ownership of the apartment that is tied to it, and stipulating that there must be:

• insurance coverage for contents and a waiver of subrogation,

• a strict prohibition about storage of prohibited substances,

• a cross-default provision to tie apartment defaults to the right to use the storage bin, and

• a right to inspect.

Your lawyer, of course, will insist on many more provisions. A storage facility also requires the board to address several practical problems:

• If there are fewer bins than apartments, will a waiting list be maintained?

• Can one owner lease more than one bin?

• How will the area be accessed? Who controls the keys? What are the hours of access?

• Can rent-regulated tenants lease a new storage bin? Can a free-market subtenant use a bin rented by the owner?

• Who is responsible for maintaining the lighting, etc., in the storage area?

For most of these issues, there is no single answer. However, the board must establish these policies before beginning operation of the facility and before a controversy arises.

James Samson is a partner at Samson, Fink & Dubow. James Goldstick is vice president of Mark Greenberg Real Estate.

Adapted from Habitat February 2008. For the complete article and more, join our Archive >>

Art by Marcellus Hall