A Co-op Apartment Without Maintenance Fees? a Few Can Be Found in SoHo

A few lucky owners of cooperative apartments in SoHo have found a way to avoid costly monthly maintenance fees, an affliction most other owners endure, by covering expenses with rent collected from high-paying ground floor tenants.This scenario is most common in the neighborhood below Houston Street, where retail space demands premium rates and buildings have fewer apartment units and lower costs.The Gunther Building, a six-story cast-iron cooperative at the corner of Greene and Broome streets, charges no maintenance fees to the owners of its 10 apartments because its ground-floor tenant, the high-end bath store Waterworks, pays enough in rent to cover its costs. This is also true at 148 Greene St., which generates financing to maintain the building from its ground-floor tenant, the arty Moss furniture store.With retail space in SoHo renting for roughly $200 a square foot, a 6,000-square-foot store like Moss or Waterworks could generate $1.2 million annually in rent, said Garrick-Aug Associates broker Faith Hope Consolo.Not every SoHo cooperative is fortunate enough to own the ground floor. In some buildings, such as 113 Prince St., the sponsor owns the ground floor, so the shareholders do not benefit from the space’s lease.Many of the cooperatives that do collect rent from retail tenants, including the Gunther Building, are known as Maciunas cooperatives because they were converted into cooperatives by the artist George Maciunas. Mr. Maciunas, who began the Fluxus movement with Yoko Ono and other artists, was responsible for forming the first cooperative in SoHo at 80 Wooster St. in 1967.While there is no doubt about the benefit of not paying maintenance fees, there are some disadvantages in the form of lost tax deductions. In order for a building to be considered a “qualified coop” by the Internal Revenue Service and be eligible for tax deductions available to cooperative owners, shareholders must provide at least 80% of the building’s gross income, which is normally generated through maintenance. If a building does not meet these criteria, shareholders forfeit tax deductions on individual mortgages, the buildings’ mortgages, deductions on real estate taxes, and the $250,000 tax deduction on capital gains taxes they receive when they sell.“I don’t think it is a great thing to pay no maintenance, but it may be worth it in some situations,” said a lawyer for Reed Smith, Aaron Shmulewitz. For example, a shareholder who can avoid paying a $3,000 monthly maintenance charge could save $36,000 a year or $360,000 over 10 years, which could offset the loss of tax benefits in some cases.“There is no free lunch, and while there may be no maintenance, residents are not home-free,” said Arthur Kriemelman, the president of the cooperative board at 148 Greene St. The money shareholders receive from the retail store’s rent is considered passive income and is taxable, he explained. If the passive income generated is $10,000, for example, and the shareholder is in the 40% tax bracket, they will pay $4,000 in taxes to the IRS.“I also tell potential shareholders that if Moss were to move, in all likelihood, coop members would have to pay maintenance, at least for the short term, until a new tenant is found,” Mr. Kriemelman said. This is because, while most coops keep some money in their reserves, it is not usually enough to cover the building’s costs without either maintenance fees or revenue from a retail lease.Some cooperatives in SoHo have used innovative financial arrangements to eliminate maintenance fees without losing tax benefits. At 83 Wooster St., the coop board recently created a commercial corporation for the express purpose of collecting the store’s rent. The money generated is then issued to the cooperative shareholders in the form of dividends.“The coop has a regular maintenance charge, but some people are shareholders in both entities, and they can use the money from the commercial corporation to offset the maintenance charges,” said the president of the building’s cooperative, Shael Shapiro.Cooperatives are private corporations and are not required to divulge their monthly maintenance fees or the revenues they earn from retail tenants.The IRS is not completely clear on some of the structures involving the creation of commercial corporations by cooperatives, Mr. Shmulewitz noted. At issue is stapling, when the commercial corporation is “stapled” to the cooperative, whereby cooperative shareholders are the same as the corporation’s shareholders and cooperative board members manage the commercial corporation.“If the ownership is the same and the directors are the same, then it is just a shell company,” Mr. Shmulewitz said. If the IRS audits the cooperative, it could force cooperative shareholders to relinquish their tax benefits.If cooperative shareholders and corporation shareholders are not the same, another problem arises. As cooperative owners sell their apartments and move elsewhere, but retain their shares in the commercial corporation, they will want to lease the space to the highest-paying tenants, such as restaurants or clubs. The cooperative shareholders, on the other hand, may have other interests, such as leasing the space to a quiet tenant.“The IRS has never sanctioned or permitted these types of set-ups, but it is generally thought that if the commercial corporation has some independence from the coop, it is a safe harbor,” Mr. Shmulewitz said.

A Co-op Apartment Without Maintenance Fees? a Few Can Be Found in SoHo

More from the New York Sun

Israel and Lebanon Coordinate Aid Convoy to Christian Villages in Combat Zone

Emerging Claim That Targeting Civilian Infrastructure Is a War Crime Proves a Bridge Too Far

Stanford Calls Bluff on Students Using Jain Faith To Dodge Meal Plan

South Florida GOP Congresswoman’s Immigration Reform Bill Sparks Backlash From Colleagues, Conservative Commentariat

Middle-Class Americans Prove the Biggest Winners From Trump’s Tax Cuts in the Big Beautiful Bill

In a Funeral for Economic Liberty, the Casket Cartel Seeks To Bury the Competition

The Double Tragedy of the Jewish Bund

Borrowing a Page From El Salvador’s Bukele, Ecuadoran President Welcomes American Troops To Assist With His Drug Gang Crackdown