Q&A: Commercial into Residential

Q We have a two-building, 146-unit cooperative that has a five-hundred-square-foot ground floor of commercial rental space. It has been vacant for about a month now. We, the board of directors, would like to know: Can this space be converted into another cooperative apartment unit? Who would we have to contact to make [sure] it is done legally?

—Board Member in Manhattan

A “Commercial space in a cooperative building may be converted to residential space legally and without jeopardizing the cooperative’s favorable tax status, if it’s accomplished in accordance with the provision of Section 216 of the Internal Revenue Code, the attorney general’s regulations and applicable zoning codes,” says Jeffrey S. Reich, Esq., co-chair of the real estate department of Wolf Haldenstein Adler Freeman & Herz LLP.

“In order to ensure that the conversion of commercial space to residential use is done in compliance with law, the cooperative’s board of directors should contact an attorney familiar with cooperative law, an architect who is well versed in zoning and conversion issues and a real estate broker or appraiser.

“As a threshold matter, the board should retain an architect to review the building’s certificate of occupancy and the New York City zoning resolution to determine whether the building’s certificate of occupancy may be amended to provide for residential use of the commercial space.

“Once the feasibility of the conversion has been determined, the board should seek counsel from an attorney familiar with cooperative law to help guide it through the conversion process. An analysis of the apartment corporation’s certificate of incorporation and bylaws must be conducted by the cooperative’s attorney to ensure that the cooperative has a sufficient number of authorized shares and the authority to allocate some of those shares to the commercial space. If the cooperative does not have a sufficient number of authorized shares, a vote of the shareholders (usually a majority vote of the shareholders is required, but a greater number may be required by the cooperative’s certificate of incorporation) will be necessary to authorize the issuance of additional shares. The cooperative’s governing documents and the New York State Business Corporation Law often provide a board with the authority to issue and allocate new shares.

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