New Landmark Ruling: Co-ops Leaving Mitchell-Lama Need Pay No Transfer Tax

The decision affirmed a lower-court ruling that held that while the co-op had reincorporated to become a for-profit entity, the shareholder-owners had remained unchanged and so no transfer had taken place.

The Coney Island, Brooklyn, cooperative of approximately 1,740 apartments in three buildings was spared a $21.2 million tax plus penalties and interest.

"The method Trump 3 used was rather than transfer the deed to a new private corporation, it amended the existing certificate to strip out the Mitchell-Lama references and leave behind the standard co-op business-corporation language," attorney Daniel A. Ross, a partner at Stroock & Stroock & Lavan, who represented the co-op, told Habitat. "Assuming you can do it that way, and I think most co-ops probably can, it's a method where you can privatize and not pay the Real Property Transfer Tax at the time of privatization."

"We are disappointed, as we believe the imposition of the Real Property Transfer Tax was warranted under the statute and was also fair and appropriate," a New York City Law Department spokesperson said in a statement.

While the value of the buildings increased dramatically, from $54 million to $528 million, Ross said the vast majority of Trump Village 3's middle-class residents had no immediate plans to sell their apartments, and that raising the tax payment would have been a burden. Due to the increased valuation, the co-op expects to pay a much higher annual property tax than currently.

For future generations, however, “This decision is not a win for New York’s middle class. It is not a win for police officers, teachers, sanitation workers and others priced out of neighborhoods they grew up in," Rachel Fee, executive director of the New York Housing Conference, told Habitat. "At a time when housing affordability is an issue for one in three New Yorkers, this ruling is a setback.”

Eroding Mitchell-Lama

Trump Village Section 3 was one of the 269 co-op and rental buildings, totaling 105,000 apartments, built under the 1955 Limited-Profit Housing Companies Act, nicknamed after its sponsors, New York State Senator MacNeil Mitchell and Assemblyman Alfred Lama. Designed to provide affordable housing for moderate- and middle-income people, it allows the purchase of co-ops for very little money but limits the eventual sales price in order to keep apartments affordable to the working class. 

The city says 45,310 apartments in 110 buildings remain. Other estimates vary.

"When apartments exit the Mitchell-Lama Housing Program, New Yorkers lose out," said Fee. "The program is designed to benefit generations of middle-class families, but market pressures make it hard for cooperative owners to resist the temptation to sell out. This decision makes it easier for owners to opt out for their own benefit and makes it more difficult for the City to preserve opportunities for future generations."

"There is no question it is in the city's best interest for these major developments to remain affordable," a spokesperson for New York City Mayor Bill de Blasio told Habitat. "Preserving our existing stock of affordable housing is a huge component of our housing plan."

That issue "is for some policy-maker or legislator to decide," said Ross. "My job was to defend my client against an unfair tax." When Mitchell-Lama rental buildings leave they program, he notes, "That's a different method. They're sold to different owners and [the sellers] pay the tax." 

Yes, No, Maybe

It's a method where 

you can privatize and 

not pay the transfer tax.

In the 1990s, said Ross, the city's stance was that limited-equity co-ops going private were not subject to the transfer tax. "Then around 2006, 2007, the city took a different view and started to say, no, that's taxable" when co-ops inquired at the New York City Department of Finance. "I think that scared a lot of people off, so they didn't go ahead with [privatization] or they did and paid the tax."

Trump Village 3 pursued privatization without seeking an opinion from the DOF, he said, "and in 2010 got a notice of determination saying it owed $21.2 million. We may have been the first to get dinged with the tax, and as far as I know we were the only ones to go to court."

Section 3's sister co-op, the 1,144-apartment Trump Village Section 4, had also petitioned in 2007 to leave the Mitchell-Lama program, but pursued a decision administratively from the City's Tax Appeals Tribunal. There an administrative judge ruled in July 2013 that the co-op's dissolution as a Mitchell-Lama entity "and its reconstitution by means of an Amended Certificate of Incorporation … is not subject to [the Real Property Transfer Tax] because such dissolution-reconstitution involves neither a conveyance by deed nor a taxable transfer of economic interests in real property."

The city has appealed the administrative judge's ruling to the Tax Tribunal's three-member board. That appeal is pending.

Photo courtesy of PropertyShark.com. Click to enlarge.

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