Could your building use a facelift? Have you contemplated better-fitting windows, new carpet or an updated elevator, but the board's answer was always "There's not enough cash." From renovation and moving fees to renting out roof or basement space, resourceful co-ops and condos are finding ways to increase revenue. Adding revenue-producing amenities—like an on-site gym or roomy storage bins—can also improve residents' quality of life and increase the marketability of the building.
Balancing 'Good' and 'Bad' Income
It's important to remember that when co-ops are seeking to generate revenue, they are subject to Section 216 of the Internal Revenue Code, otherwise known as the 80/20 rule. This means that 80 percent of a co-op's income—known as "good income"—must be obtained directly from shareholders, while up to 20 percent—known as "bad income"—may come from outside sources.
The failure to maintain this balance results in the building losing its tax status for the fiscal year, and individual shareholders losing their homeowners tax deductions. Not only that, but according to CPA Carole Newman, a partner with the accounting firm Prisand-Newman located in Syosset, New York, owners selling their units during that year would lose the Exclusion From Gain Benefit which makes the first $250,000 of gain on a home sale tax exempt. Condos are subject to Section 528 of the Internal Revenue Code which enforces similar restrictions on income sources in order to qualify for favorable tax status.
But working within those limitations, experts suggest that the first place to look for income potential is within the building's policies. Eric Kornfeld, executive vice president and director of management at Heron, Ltd., a property management firm in Manhattan, recommends revisiting the proprietary lease. Are there late fees and moving fees in place? What about sublet charges, application fees for potential buyers and tenants and fees to renovate an apartment. "It pays to remember," says Kornfeld, "that the original rules favored the sponsor. Once the sponsor's majority role is past, all buildings should examine whether their rules are in line with current laws and whether they favor the shareholder."
Newman suggests, "It is prudent to find ways to generate income from individuals." She adds that renovation and moving fees are easily justified by the additional work created for employees and board members. In addition, there is the risk of damage to the building's common areas.