Special Purpose Condos: Not Only for Residents

Condominiums were the rage in the most recent residential real estate development boom. This form of ownership, long frowned upon by New York City purchasers, became the norm, primarily because of the advantages of direct fee ownership, minimal restrictions on transfers and the seniority of condominium indebtedness.

Reasons for Conversion of Mixed-Use Property to Condominium Ownership

In the current environment, conversion of buildings to the condominium form of ownership continues in New York but for completely different purposes. Well publicized examples of the use of condominium form of ownership are the sale of portions of Manhattan office buildings, comprising one or more condominium units, at 1540 Broadway and 666 Fifth Avenue and the sale and leaseback of the New York Times Co.’s portion of the New York Times Building.

The creation of condominiums is also often useful for special financial, real property tax exemption or income tax reasons. The Park South Tower at 425 W. 59th St., for example, was converted to condominium in 2007 in order to give St. Luke’s-Roosevelt Hospital Center the benefit of the not-for-profit real estate tax exemption, while other condominiums have been created to facilitate the sale of low-income housing tax credits.

The underlying purpose for creating a condominium is to divide one or more buildings into several different parcels of real property that can be separately sold, transferred or financed. The ability to divide buildings into retail, office and residential or other components can be useful for REITs or other buyers that target classes of real estate which are most likely to meet their objectives in the current market scenario. Sellers also benefit by reducing outstanding indebtedness and retaining ownership of a more focused property.

Condominiums are often useful today in the structuring of so-called “80-20″ or other forms of mixed income residential housing that qualify for low-income housing tax credits under Section 42 of the Internal Revenue Code. The structures that enable such credits to be sold to an investor group frequently make use of the condominium form of ownership.

Control of the condominium’s board of managers, veto rights of specific owners and permitted uses of units are among the issues that are more heavily negotiated in these transactions than in traditional residential condominiums where rights and uses are stipulated by the Sponsor in the offering plan. Reducing the amount of shared common elements and building equipment will help minimize disputes between different owners regarding allocation of costs for operating expenses and capital improvements.

Improving Regulatory Climate for Special Purpose Condominiums

Special purpose condominium conversions can often be done in a much shorter time frame than typical residential condominiums. This is because the New York State Attorney General’s office has the authority to issue a “no-action letter” that exempts certain transactions from the requirement of using a condominium offering plan. A recent Attorney General memorandum expanded the class of condominiums that are eligible to apply for “no-action letters” to include multi-use buildings that contain occupied residential space.

Meanwhile, the New York City Department of Finance, which reviews and approves applications for subdividing a building into condominium units, has, effective June 1, 2009, instituted several new procedures designed to streamline the approval process.

Given the many special purposes that can be served, from ownership of specialized real estate to utilization of tax credits, conversion to the condominium form of ownership continues to be useful, even in this economic downturn. The parallel changes in policy and practice by the New York State Attorney General and the New York City Department of Finance are welcome developments that will facilitate and promote this expanded use of condominiums.

Elliot E. Falk is a partner in the real estate department at Phillips Nizer LLP. He can be reached by clicking here. Lonica L. Smith, an associate in the real estate department, can be reached by clicking here.

The views expressed in this article are those of the authors and not those of Real Estate New York.