Rooftops and Root Cellars Turning Unused Space Into Building Revenue

Many buildings have square footage hidden away that could be converted to residential use. Hallways, rooftops, unused garbage rooms, basement closets, abandoned water tank rooms - all are potential additions to an adjacent shareholder's apartment. The financial outlay for the building is small and the potential for revenue - both through the sale of new shares and added future maintenance - is great. Creative co-op boards and their property managers are now looking at a new tactic that adds value to both the building and certain lucky apartments; they are finding unused common space, and selling it to shareholders to enlarge their apartments.

Space-Hunt

"You already own the land," says David Magier, a managing member of Harlington Realty, a Manhattan-based real estate management company. "There is an economic incentive to use it if you have additional floor space since land is so expensive."

Sometimes, a space will become available, and thus, the opportunity presents itself. This was the case for Robert Grant, director of management at Midboro Management, a full-service real estate company based in Manhattan. In one of the buildings Grant manages, one of two old water tanks was in need of retirement. When considering their options, the board decided to keep using one tank, and to remove the other. This left a bulkhead space available, which at Grant's suggestion was offered to the tenant directly below the now empty tank room.

The result was a win-win situation. "By converting that into residential space," explains Grant, "The shareholder had a duplex and added value to their apartment. The building added immediate income by selling shares for the new space, and permanent income in the form of increased maintenance."

Grant says there is no end to the places where usable space can manifest. As technology improves, entire mechanical rooms are becoming obsolete and emptied. Even a few feet of hallway space will add to the shareholder's square footage and quality of life. "Instead of going up, you can look down," says Grant. "Those sprawling garden apartments in Queens have acres of basements."

Doing it Right

The process does take some research. When a potential space becomes available, says Grant, "The board should consult with an architect first to be sure of what's possible for the space. Then start thinking about who's above and below. They should also consult with an attorney to check articles of incorporation to see whether shares are available or need to be issued. Finally, the board might want an independent appraiser to see what the resulting apartment will be worth at market value."

According to Grant, real estate management companies should always be looking for creative ways too add income and value to a building. "We get the boards excited," says Grant, "but we don't want them to feel overwhelmed. The management company shepherds the project from beginning to end."

Any shareholder thinking of buying the space should also contact an architect, just to get some professional answers to complicated questions, such as, can the new room become a bathroom, or only a bedroom/office? If it is part of the roof, is the support structure strong enough? Can the new room be safely wired for electricity and plumbing? Is there sufficient ventilation? Can it be done within a reasonable budget?

Dollars and Shares

Then there is valuing the space, allocating the shares and determining the price. Valuation is not merely determined by square footage. Robert Von Ancken is executive managing director at Grubb & Ellis Consulting Services, Co. "You have to determine the shares by determining the value," says Von Ancken. "First, I examine an apartment to see how much additional value the space adds."

Factors that can affect the added value include exposure, and possible use (a larger kitchen or space for an extra bathroom significantly increases value).

Von Ancken also considers whether the additional space increases uniqueness - as in when an apartment goes from being simplex to a duplex. Von Ancken uses straight formulae to determine how many additional shares the apartment will need allocated. The current apartment's worth is divided by the number of shares, which equals the value per share. The increase in the apartment's worth is divided by the value per share, which gives the number of new shares necessary. For example, an apartment worth $1 million dollars carries 100 shares at $10,000 per share. The newly created duplex is worth $1.25 million. Divide that by $10,000 and you get 25 additional shares.

Grant recommends selling the shares to shareholders at a discount, since they will incur considerable expense to renovate the space for residential use. Proceeds go right into the building's reserve fund, and a sizable permanent income will come to the co-op as increased monthly maintenance.

More Building Benefits

Alan J. Harris, a Westchester-based attorney who practices condo and co-op law, says, "This is a good way for buildings to generate extra cash. It's also an excellent option for buildings faced with too much "˜bad' income under the 80/20 rule. It is a means to increase shareholder revenue with minimal financial outlay on the part of the building." Harris also points out that before the transaction can take place, a board will need to research whether additional shares are available to be issued.

According to attorney Robert I. Oziel of Seavey Vogel Oziel, LLP, "The procedure will first depend upon the total number of authorized shares as against the number of shares actually issued and allocated to residential and/or professional apartments in a building. For example, if the Certificate of Incorporation provides for 500,000 shares and only 400,000 have been allocated and issued, the corporation may allocate and issue the additional 100,000 shares without any amendment to the Certificate of Incorporation."

Oziel continues, "In the event there are no outstanding shares which have not been allocated, then an amendment to the Certificate of Incorporation is required. The amendment would increase the number of authorized shares, and the procedure for amendment would be set forth in the Certificate of Incorporation and would almost assuredly require shareholder voting."

And, adds Grant, "Depending on the co-op's bylaws, this might be just the board, or it could be a majority vote."

"Of course, I would recommend that no cooperative board undertake this process without the assistance of counsel, "says Oziel. "Even if no amendment to the Certificate of Incorporation is required, other corporate documents and resolutions would definitely require the assistance of counsel. I would also recommend the assistance of counsel in amending the Certificate of Occupancy."

The Condo Side

While the procedure is more common in co-ops, it can also be done in condominiums. The difference, says Harris, is that "In co-ops the common space is the property of the building corporation to dispose of as it wishes. In condos, each unit has indivisible interest in the common areas." In other words, although condo owners A and B share a hallway, they both (and everyone else in the building) own all of it, not each owning the half that leads to their own front door.

Harris elaborates; "Let's say that Unit Owner X wants to expand his yard by taking a piece of the playground; The condominium association knows they don't use that part of the yard that much and they could use the money. What they would do is give Owner X a "˜licensing agreement'. It's similar to the licensing agreement given to a company that operates the laundry room." The owner leases the extra space from the condo association. Harris explains that the agreement itself could have clauses making it assignable to the next owner, or revocable to the association upon sale of the primary unit - whatever is needed.

Points to Ponder

If you are a shareholder with visions of an extra bedroom, there are many things to consider, and the sooner you seek professional opinions the better. Perhaps you are wondering how to pay for the space and the renovation? According to architect Stephen Carter of the Carman Group, who specializes in design and project management, "The new shares will not transfer until the purpose of the space is done. Some lenders have a problem with that. Other lenders specialize in that." It is possible to get a mortgage with a construction loan attached, or to get a second mortgage on the new appraised value of the apartment. The property tax of the building will not change, because that is not based on use, but rather on floor area ratios.

"There are no rezoning issues when you change a mechanical room to residential use," says Carter, "There is however, a change to the Certificate of Occupancy." An architect will know how to file this for you. Furthermore, once plans are drawn up for renovating the additional space, the co-op board must approve them, and the board will most likely require an alteration agreement as well.

In addition, remember that you will have to deal with disrupting not only your life, but the neighbors' as well for quite while, depending on the extent of the renovation. Things will go smoother if you answer all "how do I do that?" questions in advance. How will debris be removed, how will material be brought in and stored, how will the workers keep from waking up the neighbor's infant?

More Paperwork

The city will require an application for approval of a building permit from the shareholder, which is also signed by the property manager. Then the plans need to be filed with the City Building Department. "You need to show the competence of the structure," says Carter, "and your plan must understand existing electrical risers, gas and water pipes that the building has." Carter recommends checking with an electrician to ensure that the new electrical load will not overwhelm the panel.

Once a contractor is hired, they will be responsible for filing for permits from the city. Carter stresses that it is important to physically see the permits once received. "You want to make sure you see their insurance policy too," says Carter, "and be sure it is tailored to your project. At the bottom of the insurance certificate, it should say "˜also-named and the shareholder's name'." Often, the co-op is named as well. Make sure that replacing in kind and all liabilities that could occur during construction are covered. While the work is going on, the approved building plan must be kept on site.

"We've seen conversions of bulkheads, terraces, roof space, electrical closets, slop sink rooms, " says Von Ancken. "These little spaces can go for a lot of money." Converting unused space to residential use is a win-win situation all around. The building gets more cash. The shareholder gets a larger and more valuable apartment.

"From a design point of view, there are very few spaces that you wouldn't want to convert," says Carter. "Any time the payoff is greater than the risk and cost, it's worth doing."

Rebekah Mulhare is a freelance writer and frequent contributor to The Cooperator.

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