Should Cooperatives or Condominiums Permit Apartment Ownership by Trusts or LLC's?06/06/2014 | Summer 2014 Newsletter
We represent many cooperatives and condominiums and are often asked if their boards should allow apartments to be held by trusts or by limited liability companies (LLC’s). For estate planning purposes and to limit personal liability, both existing and prospective apartment owners sometimes seek to have ownership of their apartments held by trusts, limited liability companies or other entities.
Prior to 1987, Section 216(b)(2) of the Internal Revenue Code required cooperative apartments to be owned by individuals in order to qualify for tax benefits incident to home ownership, such as deductions of real estate taxes, mortgage interest and the ability to limit taxes on sales. For this reason, cooperatives did not permit apartment ownership by trusts or entities. The Tax Reform Act of 1986 expanded the definition of “qualified tenant-stockholder” to include trusts, estates, partnerships and corporations. For estate planning and other reasons, tenant-shareholders in cooperatives began asking their boards to permit a transfer of their shares and proprietary lease to a trust or LLC created for their benefit. Similarly, condominium owners have also sought to have their apartments owned by trusts or LLC’s.
Some cooperative boards are receptive to these requests, as it helps their tenant-shareholders. Condominium boards usually do not have the power to prevent such transfers. A review of the cooperative proprietary lease and condominium by-laws will determine if the boards have the power to approve or prevent such transfer.
There are several issues that must be addressed to ensure that such a transfer will not adversely affect the cooperative or condominium and the other tenant shareholders or owners. These include: (1) ensuring that the trust or LLC is properly created; (2) identifying and limiting the number of persons who may reside in the apartment; (3) ensuring that maintenance will be timely paid; (4) ensuring that potential successor owners upon termination of the trust are subject to review and approval by the board before they may own the shares and lease and occupy the apartment; (5) ensuring that the trustees and occupants will be amenable to service of process should a dispute arise, and (6) ensuring in an LLC that management and ownership changes are approved by the board.
Other important issues to be considered include the extent to which trustees or managers should be permitted to vote the shares or common interest allocated to apartment, whether to obtain a proxy from trustees or managers to assure a quorum or passage of important votes at meetings, and whether ownership of apartments by non-resident trustees or managers will affect the ability of a cooperative and its tenant-shareholders or a condominium and its unit owners to obtain bank loans when financing or refinancing the building or apartments.
We protect our cooperative and condominium clients by preparing a three-party agreement, where the trustee or LLC manager and occupants guarantee all financial obligations to the cooperative or condominium and where an escrow fund may be required to cover such obligations. The agreement generally limits occupancy to the trust beneficiary and members of the immediate family and provides for board review and approval of successor owners and occupants of the apartment during the existence or upon termination of the trust or LLC. Provisions are made for service of process upon the managing agent should a dispute arise and we require an opinion from counsel to the trustees or LLC representing to the cooperative or condominium that the trust or LLC has been properly formed and that the agreement signed by the trustees or managing member of the LLC will be binding upon them. Finally, we assure that any current lender to the tenant-shareholder or unit owner also approves the transfer. There is normally no financial hardship to the cooperative or condominium, as the cost to prepare the agreement and review the trust or LLC documents is paid for by the tenant-shareholder or unit owner seeking the board’s consent to the transfer.
With these types of protections, boards can be comfortable approving such transfers.
About the author: David L. Berkey is managing partner of Gallet Dreyer & Berkey LLP, where he practices real estate law and litigation, concentrating on issues affecting cooperative corporations and condominium associations. He is the Chairperson of the New York State Bar Association’s 4000 member Real Property Law Section. Mr. Berkey is counsel to numerous cooperative and condominium boards, companies and individuals. He is a regular speaker at bar association seminars on matters involving co-op and condo law, and he is a faculty member at Cardozo Law School’s trial advocacy program. Mr. Berkey has been named by Super Lawyers magazine as one of the top attorneys in real estate law in the New York metropolitan area. Mr. Berkey can be reached at firstname.lastname@example.org.