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Leah, Both Buyer and Seller in New York, NY

What is the 80/20 rule, and how can the 80/20 rule affect buyers of co-ops in NYC?

Asked by Leah, New York, NY Fri Nov 5, 2010

So what's this whole 80/20 thing that buyer should be aware of when purchasing co-op? I heard (and correct me if I am wrong), that if a co-op building has commercial property on their first floor that some 80/20 rule goes into affect that can affect a buyer? How? What? Where? (Also- are dentist and doctor's offices considered commerical?)

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Mitchell Hall’s answer
The federal 80/20 law had mandated that no more than 20 percent of a coops income could come from outside sources including commercial tenants. This law had become a problem for many coops that include retail space in their buildings since retail rents have gone up significantly. Many coops have been renting space to Mom and Pop retailers at low rents to keep the outside income within 20 per cent.

The Mortgage Forgiveness Debt Relief Act of 2007 now allows co-ops to raise rents for their retail tenants, which could bring in more money to pay for staffs, and capital improvements and can lead to reduced monthly maintenance fees.

The change in the law modified those rules, and co-op boards can now get high rents for their retail space and use the income for building operations and improvements without losing their coop tax status.

Because of the previous 80/20 law many rental buildings with commercial space converted to "condops" rather than coops. Many new developments in the 1980's were "condops"

A condop is a "hybrid" A condominium made up of a separate commercial unit and residential unit. The residential unit is a cooperative.

Dentist and doctor's offices are considered "professional" space and they are considered commercial office space. Many doctors bought the professional space. Since corporate ownership is usually not allowed in coops, the co-op usually requires the doctors who own the professional corporation to buy the apartment, but the co-op then allows the doctors to lease the apartment back to the professional corporation.

Mitchell Hall, Associate Broker
The Corcoran Group
mhall@corcoran.com
1 vote Thank Flag Link Tue Jan 24, 2012
Mitchell Hall, Real Estate Pro in New York, NY
MVP'08
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The 80/20 rule is a federal tax rule requiring co-ops to obtain 80% minimum gross income from their tenant-shareholders and no more than 20% from commercial rents and other sources in order for shareholders to qualify for the same tax benefits as real property owners. This has been a challenging rule as co-ops with commercial spaces where required to keep commercial rents below market value in order to satisfy this ratio. The rule was relaxed for the tenant-shareholder by the Mortgage Forgiveness Debt Relief Act of 2007, with required that at least 80% of the total square footage of the co-op’s property is used or available for use by shareholders for residential or residentially-ancillary purposes, or at least 90% of the co-op’s expenses are for the acquisition, construction, management, maintenance or care of the co-op’s property for the benefit of its shareholders, thus releasing the burden of higher maintenance charges and other potential assessments on the tenant-shareholders in order to meet the standards of the 80/20 rule.
2 votes Thank Flag Link Fri Nov 5, 2010
The 80/20 rule refers to the amount of income from commercial space in general for a coop. Lenders also have strict guidelines on the amount of commercial space allowable in a coop or condo not to exceed 20% of GLA. There are some sources of funding that can get around this figure, but for the tax benefits and financing guidelines, most coop buildings acting in their self interests will abide by this standard.
1 vote Thank Flag Link Wed Nov 10, 2010
The Internal Revenue Service gives co-op owners the same income tax treatment as home and condo owners. Prior to Jan. 2008, the portion of maintenance charges that covers property taxes and mortgage interest could be taken as a deduction as long as the property's other income sources did not violate the 80/20 rules that were in place prior to the current change in law that occurred in December 2007 (Mortgage Forgiveness Debt Relief Act of 2007). Before 2008 the earlier 80/20 rules indicated that no more than 20% of the co-op's income could come from nonshareholder sources commonly known as passive income such as rental of commercial space. The change in the law allows co-ops to set commercial rents without sacrificing tax benefits to the shareholders of the co-op.
Web Reference: http://www.clovelake.com
1 vote Thank Flag Link Fri Nov 5, 2010
The 80/20 rule is a tax benefit for co-ops that was recently improved by changes in the law.

You can read all about it here:

http://bit.ly/cD0P1r

It's nothing to be alarmed or worried about. Co-ops are a beloved form of housing for many thousands of New Yorkers (including moi!)

Karla Harby, VP
Charles Rutenberg Realty
kharby@RutenbergRealtyNY.com
1 vote Thank Flag Link Fri Nov 5, 2010
And thus, the creation of Condops. Generally the commercial space is structured as a condominium and the residences as coops.
0 votes Thank Flag Link Sat Jan 22, 2011
You should consult a New York accountant, as the state law regarding this issue was recently amended. You would be best served by professional counsel, as you will want to consider the effects of both the federal and state rules.
0 votes Thank Flag Link Fri Nov 19, 2010
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