Q I am a shareholder in a co-op that has 400-plus units in our building. We have an outside management company that has an office in our building and handles the general operation of the building. I would like to know if there are any legal ramifications if we, the co-op, opened our own sales office inside the building and handled only those shareowners that wanted to sell their apartments, and we would only work exclusively with our building. The shareholder/owner would have the option to use us, or go to any outside broker if they prefer.
—Curious in Brooklyn
“At your co-op, you must first refer to your co-op’s governing documents (i.e. bylaws and proprietary lease), to ensure that the operation of a sales office does not violate any of the provisions of said documents. Generally speaking, it appears that performing this service would be permissible under the New York Cooperative [Business] Corporation Law, subject to there being no prohibition in the co-op’s governing documents.
“In addition, you must look at the building’s certificates of occupancy and review the local municipalities building code to insure the space where the sales office will exist can be occupied for said purpose.
“There are also licensing requirements of the New York State Department of State, Division of Licensing Services, which must be complied with. You must speak to your co-op’s attorney with respect to the licensing requirements that must be met in order to provide the services required to sell the shares and proprietary lease attributable to co-op apartment units at the co-op.
“Finally, careful consideration must be made to insure the income which will be derived from the sales office operation is acceptable. In that regard, Internal Revenue Code Section 216 (commonly referred to as the 80/20 rule) requires that eighty percent of a cooperative’s income must be received from qualified tenants/shareholders in their capacity as tenants of the residential units. In the event that more than twenty percent of the income is not qualified income under Internal Revenue Code Section 216, the cooperative can lose its cooperative status and the shareholders will not be able to deduct their portion of the interest of the co-op’s underlying mortgage, real estate taxes, etc.
“Certainly, if the monies generated from a sales office will not generate more than twenty percent of the co-op’s annual income, and the co-op’s accountant determines said income does not qualify as acceptable income under Internal Revenue Code Section 216, the co-op should not perform these services. However, you should be aware, in one tax case where the IRS challenged a co-op’s classification of the income as income derived from tenants-shareholders in order to satisfy the 80/20 Rule, the IRS ultimately permitted the amounts received from real estate brokerage services the cooperative provided only to its tenant/shareholders, in connection with the transfer of their units, as permissible income derived from tenant/shareholders for purposes of Internal Revenue Code Section 216. However, the decision was based upon the fact that the revenue generated was used for the co-op’s repairs and maintenance expenses. Clearly, the issue of where the revenues are applied will be paramount to the issue.
“Putting aside the legal issues, on a practical matter, your community may be far better served by allowing sales of shares of stock and proprietary lease associated with co-op apartment units to be performed by either local real estate sales offices or if your co-op has a managing agent, by the co-op’s managing agent’s real estate sales division, if they have the requisite experience in handling these types of sales and have the requisite staff and time in relation thereto. Clearly, a co-op’s board is not typically experienced in real estate sales.
“In essence, you must consult with your co-op’s attorney and accountant before entering into such arrangements.”