The housing market in metropolitan New York is notoriously odd. While most other Americans own their dwellings, most New Yorkers rent. In the rest of the country, landlords pay brokers to find tenants; in New York, tenants often pay the agent who shows an apartment.
But perhaps the strangest twist is that in the New York area, many apartment owners do not actually own their apartments. This is a peculiarity of co-op living, a form of ownership that is common in New York, rare in most other big cities, and unheard of in rural and small-town America.
Another place where co-ops are an alien concept is the Federal Emergency Management Agency. This is proving to be a big problem as the New York region struggles to recover from Hurricane Sandy.
A co-op buyer does not obtain title to real estate. Instead, the buyer acquires shares in a not-for-profit corporation that, in turn, owns the apartment building and any common property. The shares come with an indefinite or extremely long-term proprietary lease, entitling the purchaser to reside in the apartment. Co-op residents, then, are not technically homeowners; they are shareholding tenants. They pay a monthly maintenance charge to the co-op corporation, which uses the money to operate and maintain the building, as well as to pay any mortgage the corporation may have taken out on the property.
Co-op buyers often get a bank loan to finance the purchase, just as home and condominium purchasers do. (In a condominium, buyers hold title to their own apartments.) Co-op owners typically think of their loans as mortgages, but they are not. Mortgages are secured by real property; co-op loans are instead secured by the co-op member’s shares and lease.
The issue for FEMA is that the Stafford Act, a law that governs federal disaster relief, says the agency can only give its discretionary grants for structural repairs to homeowners. (Like renters, co-op owners can receive limited federal assistance for damage to uninsured furniture or other belongings inside their units; the funds to which they lack access are those that would allow them to undertake larger reconstruction.)
FEMA is clearly correct in concluding that co-op residents are not homeowners. It is less clear, however, whether existing statute actually mandates FEMA’s narrow interpretation of its powers and, if so, what should be done about it.
FEMA takes the position that a co-op should be treated as a business, which is clearly not the case. Other than for very limited rentals to tenants such as doctors and dentists, co-ops do not engage in business of any kind. The law treats them as non-profit corporations, and it doesn’t make sense for FEMA to ignore their unique character.
Congress could easily produce a technical correction to clarify that co-op owners should be treated as homeowners for disaster relief purposes. An example of this sort of legislation already exists. Internal Revenue Code Section 163(h)(4)(B) allows co-op owners to treat interest paid on their loans as deductible mortgage interest, even though their loans aren’t technically mortgages.
A similar legislative patch for disaster relief ought to pass without controversy. If Congress can’t get its act together in the wake of as big a disaster as Sandy, residents of other parts of the country ought to contemplate how New Yorkers might react to future relief appeals when disaster strikes in their own neighborhoods.
Posted by Larry M. Elkin, CPA, CFP®
The housing market in metropolitan New York is notoriously odd. While most other Americans own their dwellings, most New Yorkers rent. In the rest of the country, landlords pay brokers to find tenants; in New York, tenants often pay the agent who shows an apartment.
But perhaps the strangest twist is that in the New York area, many apartment owners do not actually own their apartments. This is a peculiarity of co-op living, a form of ownership that is common in New York, rare in most other big cities, and unheard of in rural and small-town America.
Another place where co-ops are an alien concept is the Federal Emergency Management Agency. This is proving to be a big problem as the New York region struggles to recover from Hurricane Sandy.
A co-op buyer does not obtain title to real estate. Instead, the buyer acquires shares in a not-for-profit corporation that, in turn, owns the apartment building and any common property. The shares come with an indefinite or extremely long-term proprietary lease, entitling the purchaser to reside in the apartment. Co-op residents, then, are not technically homeowners; they are shareholding tenants. They pay a monthly maintenance charge to the co-op corporation, which uses the money to operate and maintain the building, as well as to pay any mortgage the corporation may have taken out on the property.
Co-op buyers often get a bank loan to finance the purchase, just as home and condominium purchasers do. (In a condominium, buyers hold title to their own apartments.) Co-op owners typically think of their loans as mortgages, but they are not. Mortgages are secured by real property; co-op loans are instead secured by the co-op member’s shares and lease.
The issue for FEMA is that the Stafford Act, a law that governs federal disaster relief, says the agency can only give its discretionary grants for structural repairs to homeowners. (Like renters, co-op owners can receive limited federal assistance for damage to uninsured furniture or other belongings inside their units; the funds to which they lack access are those that would allow them to undertake larger reconstruction.)
FEMA is clearly correct in concluding that co-op residents are not homeowners. It is less clear, however, whether existing statute actually mandates FEMA’s narrow interpretation of its powers and, if so, what should be done about it.
FEMA takes the position that a co-op should be treated as a business, which is clearly not the case. Other than for very limited rentals to tenants such as doctors and dentists, co-ops do not engage in business of any kind. The law treats them as non-profit corporations, and it doesn’t make sense for FEMA to ignore their unique character.
Congress could easily produce a technical correction to clarify that co-op owners should be treated as homeowners for disaster relief purposes. An example of this sort of legislation already exists. Internal Revenue Code Section 163(h)(4)(B) allows co-op owners to treat interest paid on their loans as deductible mortgage interest, even though their loans aren’t technically mortgages.
A similar legislative patch for disaster relief ought to pass without controversy. If Congress can’t get its act together in the wake of as big a disaster as Sandy, residents of other parts of the country ought to contemplate how New Yorkers might react to future relief appeals when disaster strikes in their own neighborhoods.
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