For decades, co-op boards and managers have had to walk a delicate line between generating revenue and obeying the law when it came to renting out space in their buildings to commercial tenants.
As of December 20, 2007, that has changed. On that date, President George W. Bush signed into law legislation dramatically liberalizing the so-called "80/20 Rule" restricting the amount of non-shareholder income co-ops are allowed to receive. Going forward, most co-op boards and management will be able to skip the "80/20 two-step" entirely, and charge fair-market rents for their commercial spaces.
A Little History
In order to better understand the significance of this latest development, it's helpful to know a little about the 80/20 rule itself.
According to a provision in Section 216 of the Internal Revenue Service (IRS) tax code, the amount of commercial revenue a co-op building can take in annually may not exceed 20 percent of the building's total cash inflow. At least 80 percent must come from shareholders' monthly fees, maintenance charges, or special assessments. If a building's outside income—sometimes even referred to as "bad income"—slides even one percent over 20, individual shareholders forfeit valuable tax write-offs and abatements.
But why is that, exactly? There's not really an ironclad answer to that question. The 80/20 rule came about when the federal government determined that people living in housing cooperatives were, in fact, homeowners—and then had to determine how they would be taxed.