LEGISLATIVE PRIORITIES FOR 1996
CNYC is constantly pursuing legislative solutions to many of the problems
facing New York cooperatives and condominiums. The following is a brief
look at some of these legislative goals:
A FLAT TAX HURTS ANY STATE WITH HIGH LOCAL TAXES
The Council of New York Cooperatives & Condominiums is unalterably
opposed to any federal "flat tax". If there were a flat tax,
taxpayers would not be able to deduct their payments for state or local
taxes from their federal income tax. There is even some question as to
whether mortgage interest would continue to be deductible. New Yorkers
have the dubious distinction of living in a city with high taxes, as well
as in a state with high taxes. Homeowners in New York cooperatives and
condominiums have a strong interest in preserving a tax system that allows
for these deductions.
SECTION 216 SHOULD NOT CONSIDER CERTAIN REVENUE
Section 216 of the Internal Revenue Code sets stringent requirements
for qualifying as a housing cooperative. Cooperatives that qualify are
able to pass on to their shareholders proportional shares of homeowners'
tax deductions for property taxes and mortgage interest paid by the cooperative.
Section 216's 80/20 rule requires that a cooperative must derive 80% of
its revenue from tenant stockholders. However, certain problem situations
have been identified that can threaten the 80/20 balance. For example,
when cooperatives have taken over a number of occupied apartments from
a defaulting sponsor, the rental income from these units can exceed 20%
of the cooperative's income. CNYC has proposed that the 80/20 calculation
exclude such specific factors. Senators Moynihan and D'Amato are reviewing
I.R.C. SECTION 277 DOES NOT APPLY TO HOUSING COOPERATIVES
CNYC has frequently asserted in this Newsletter that Section 277 of the
Internal Revenue Code should not be applied to housing cooperatives. After
years of waiting, two federal tax court cases decided in November 1994
(Buckeye Countrymark) and June 1995 (Trump Village Section 3) affirmed
that Section 277 does not apply to cooperatives governed by Subchapter
T of the Code.
In the wake of the Trump Village decision, many pending cases have been
settled with the I.R.S. But these decisions still leave questions to be
resolved for many housing cooperatives. The Internal Revenue Service will
now narrowly apply the criteria described in the Buckeye and Trump cases
to determine whether a cooperative is subject to Subchapter T. When a
cooperative does not conform precisely to these criteria, the I.R.S. will
apply Section 277 to tax what it considers non-member income.
Efforts continue in the courts to obtain decisions that will affirm that
Section 277 does not apply to any cooperative meeting the requirements
of Section 216 of the Internal Revenue Code.
At the same time, CNYC continues to pursue this goal through Congressional
legislation. Senators Moynihan and D'Amato are committed to
support in the Senate, H.R. 1546, which was sponsored by Congressmen
Charles Schumer and Charles Rangel. It affirms that Section
277 does not apply to housing cooperatives.
INVITE THE CO-OP OR CONDO TO BUY DEFAULTED LOANS
When an individual defaults on a bank loan collateralized by the shares
in their cooperative or by their condo unit, or if the cooperative
itself defaults on its underlying mortgage loan, the bank
that holds the loan will normally seek to recuperate its investment
by selling the loan. Sometimes this is done by packaging a
number of loans and selling them to third parties at a deep
discount. The purchasers then seek to recover the full face
amount of the loan. CNYC maintains that lenders should be
obliged to offer the cooperative or condominium the first
option to purchase these units.
REDUCE TAX DELINQUENCY PENALTY
When cooperatives seek to cure a tax delinquency, the interest grows
so fast that catch-up becomes a desperate pursuit. New York
City assesses interest at the rate of 9% on tax delinquencies
of less than $2,500. Once the amount owed exceeds $2,500,
interest soars to 18%, and it continues to accrue until the
entire amount due is repaid. This excessive rate should be
HELP CONDOMINIUMS COLLECT DELINQUENT CARRYING CHARGES
If a condominium unit owner fails to pay carrying charges, the condominium
has limited recourse. Assemblyman John Ravitz has proposed
legislation to give the condominium association more leverage
in its effort to collect charges due, by enabling the condominium
to curtail all non-essential services to unit owners in default.
PERMIT CONDOMINIUMS TO BORROW MONEY
The present New York Condominium Law requires unanimous agreement of
all unit owners to permit the condominium to borrow money. Because of
the difficulty of obtaining so high a level of agreement, most condominium
repairs and capital improvements are funded through assessments.
Now legislation prepared by the Co-op & Condo Committee of the New
York State Bar Association would permit limited borrowing by simple board
action for all condominiums that are more than five years past conversion.
Borrowing more than $5,000 per unit would require approval by a majority
of unit owners. CNYC enthusiastically supports this practical modification
of the Condominium Law.
A COOPERATIVE AND CONDOMINIUM SECTION OF THE HOUSING COURT
CNYC has joined forces with the Coordinating Council of Cooperatives,
the Federation of New York Housing Cooperatives and the Coalition of Housing
Development Fund Corporations to ask for a separate part in housing court
to specialize in housing matters arising in cooperative and condominium
buildings (see Housing Court). This
would help reduce the congestion in the regular housing court by removing
cooperative and condominium cases that are different from standard rental
housing cases. Cases relating to cooperatives and condominiums would proceed
more expediently because they would be heard by judges knowledgeable in
this area. This would result in better honed and fairer decisions, which
would build a better, more consistent and less confusing body of case
law than we currently have.
A separate part in housing court could be implemented without increasing
the number of judges or the space currently devoted to housing court.
Modest administrative costs, devoted to establishing this program and
screening incoming cases so as to direct those involving cooperatives
and condominiums to the new part, would be quickly offset by the time
and money saved in the expedited resolution of cases. Judges versed in
the relationships between the board and residents in these resident-owned
and -governed buildings will be able to hand down decisions that interpret
the law consistently and clearly. There would also be fewer appeals, even
further reducing the burden on the courts.
Fruitful discussions with the housing court administration have led to
an agreement to collect data about the volume of co-op and
condo cases in the housing court today. We need to know of
all such cases heard during the months of February, March
and April 1996. CNYC has distributed forms for this information.
Please be sure that your attorney is participating. This data
will support the case for a separate part.
RIGHT OF PRIVATE ACTION UNDER THE MARTIN ACT
Under current law, shareholders and unit owners who believe
that the sponsor of their conversion has not dealt fairly
with them or their buildings have no direct recourse to the
courts unless they can prove intentional fraud. Instead, they
are dependent upon the Attorney General's office to investigate
problems and bring charges. With the Attorney General's office
understaffed and the workload enormous, only the most blatant
cases receive attention. Granting shareholders and unit owners
a right of private action would help redress this situation.