Many residential apartments are owned by cooperative corporations (“co-ops”). In New York City, it has been estimated the coop apartments outnumber condominium apartments by three to one. The boards of directors of co-ops have been known to be especially and unreasonably restrictive as to who they will admit as shareholders and residents, and many boards, especially in New York, have acquired reputations of being “snooty” and exclusive. The pop singer Madonna was famously rejected by the co-op board of a very expensive Park Avenue building.
The Wall Street Journal reports (“Co-ops Get Competitive”, August 29, 2013, page A-17) that the boards of cooperative apartments are now relaxing their policies and acceptance criteria in order to appeal to younger buyers, as well as to foreign buyers, who are not willing to put up with onerous admission requirements and unreasonable restrictions. These co-op boards are changing their policies in order to be competitive with condominiums and in order to attract new investment and new buyers.
First, one’s home, whether a co-op, condo, house or otherwise, is normally a very significant asset and should be protected from future claims.
As the Wall Street Journal points out, “while buyers have always been able to buy condos and townhouses anonymously under corporations and trusts, now even some Fifth Avenue [co-op] boards have let brokers know that they would now consider purchases done in the names of trusts or limited liability companies . . . .” And, we would expect, in the names of family limited partnerships (FLPs), which are similar to limited liability companies (LLCs) but offer better asset protection. Thus, ownership of a co-op by an FLP is advisable if allowed by the co-op board.
Second, as noted above, co-op boards are positioning themselves to take advantage of the healthy demand by wealthy foreign buyers for U.S. real estate. As the Wall Street Journal reported, co-op boards have clarified their rules, and made “it clear that international buyers, who are active in the condo market, were welcome” at co-ops as well. We have written before about the appeal of U.S. real estate, especially expensive apartments, to wealthy foreign buyers. We have also discussed how, through the use of certain hybrid trusts, foreign buyers can minimize their exposure to the Foreign Investment in Real Property Tax Act (“FIRPTA”), which imposes an onerous 10% tax on the gross sale proceeds when a foreign owner sells U.S. real estate. Please see our article, How Foreign Purchasers of U.S. Real Estate Can Save Significant Taxes.
As co-ops attract new buyers, domestic and foreign, it is important to consider the best form of ownership of real estate. Ownership in entities such as FLPs and trusts may offer significant asset protection and tax benefits. Please contact us for additional information.