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Council of New York Cooperatives & Condominiums
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LEGISLATIVE PRIORITIES FOR 1996

CNYC is constantly pursuing legislative solutions to many of the problems facing New York cooperatives and condominiums. The following is a brief look at some of these legislative goals:

A FLAT TAX HURTS ANY STATE WITH HIGH LOCAL TAXES

The Council of New York Cooperatives & Condominiums is unalterably opposed to any federal "flat tax". If there were a flat tax, taxpayers would not be able to deduct their payments for state or local taxes from their federal income tax. There is even some question as to whether mortgage interest would continue to be deductible. New Yorkers have the dubious distinction of living in a city with high taxes, as well as in a state with high taxes. Homeowners in New York cooperatives and condominiums have a strong interest in preserving a tax system that allows for these deductions.

SECTION 216 SHOULD NOT CONSIDER CERTAIN REVENUE

Section 216 of the Internal Revenue Code sets stringent requirements for qualifying as a housing cooperative. Cooperatives that qualify are able to pass on to their shareholders proportional shares of homeowners' tax deductions for property taxes and mortgage interest paid by the cooperative. Section 216's 80/20 rule requires that a cooperative must derive 80% of its revenue from tenant stockholders. However, certain problem situations have been identified that can threaten the 80/20 balance. For example, when cooperatives have taken over a number of occupied apartments from a defaulting sponsor, the rental income from these units can exceed 20% of the cooperative's income. CNYC has proposed that the 80/20 calculation exclude such specific factors. Senators Moynihan and D'Amato are reviewing this proposal.

I.R.C. SECTION 277 DOES NOT APPLY TO HOUSING COOPERATIVES

CNYC has frequently asserted in this Newsletter that Section 277 of the Internal Revenue Code should not be applied to housing cooperatives. After years of waiting, two federal tax court cases decided in November 1994 (Buckeye Countrymark) and June 1995 (Trump Village Section 3) affirmed that Section 277 does not apply to cooperatives governed by Subchapter T of the Code.

In the wake of the Trump Village decision, many pending cases have been settled with the I.R.S. But these decisions still leave questions to be resolved for many housing cooperatives. The Internal Revenue Service will now narrowly apply the criteria described in the Buckeye and Trump cases to determine whether a cooperative is subject to Subchapter T. When a cooperative does not conform precisely to these criteria, the I.R.S. will apply Section 277 to tax what it considers non-member income.

Efforts continue in the courts to obtain decisions that will affirm that Section 277 does not apply to any cooperative meeting the requirements of Section 216 of the Internal Revenue Code.

At the same time, CNYC continues to pursue this goal through Congressional legislation. Senators Moynihan and D'Amato are committed to support in the Senate, H.R. 1546, which was sponsored by Congressmen Charles Schumer and Charles Rangel. It affirms that Section 277 does not apply to housing cooperatives.

INVITE THE CO-OP OR CONDO TO BUY DEFAULTED LOANS

When an individual defaults on a bank loan collateralized by the shares in their cooperative or by their condo unit, or if the cooperative itself defaults on its underlying mortgage loan, the bank that holds the loan will normally seek to recuperate its investment by selling the loan. Sometimes this is done by packaging a number of loans and selling them to third parties at a deep discount. The purchasers then seek to recover the full face amount of the loan. CNYC maintains that lenders should be obliged to offer the cooperative or condominium the first option to purchase these units.

REDUCE TAX DELINQUENCY PENALTY

When cooperatives seek to cure a tax delinquency, the interest grows so fast that catch-up becomes a desperate pursuit. New York City assesses interest at the rate of 9% on tax delinquencies of less than $2,500. Once the amount owed exceeds $2,500, interest soars to 18%, and it continues to accrue until the entire amount due is repaid. This excessive rate should be eliminated.

HELP CONDOMINIUMS COLLECT DELINQUENT CARRYING CHARGES

If a condominium unit owner fails to pay carrying charges, the condominium has limited recourse. Assemblyman John Ravitz has proposed legislation to give the condominium association more leverage in its effort to collect charges due, by enabling the condominium to curtail all non-essential services to unit owners in default.

PERMIT CONDOMINIUMS TO BORROW MONEY

The present New York Condominium Law requires unanimous agreement of all unit owners to permit the condominium to borrow money. Because of the difficulty of obtaining so high a level of agreement, most condominium repairs and capital improvements are funded through assessments.

Now legislation prepared by the Co-op & Condo Committee of the New York State Bar Association would permit limited borrowing by simple board action for all condominiums that are more than five years past conversion. Borrowing more than $5,000 per unit would require approval by a majority of unit owners. CNYC enthusiastically supports this practical modification of the Condominium Law.

A COOPERATIVE AND CONDOMINIUM SECTION OF THE HOUSING COURT

CNYC has joined forces with the Coordinating Council of Cooperatives, the Federation of New York Housing Cooperatives and the Coalition of Housing Development Fund Corporations to ask for a separate part in housing court to specialize in housing matters arising in cooperative and condominium buildings (see Housing Court). This would help reduce the congestion in the regular housing court by removing cooperative and condominium cases that are different from standard rental housing cases. Cases relating to cooperatives and condominiums would proceed more expediently because they would be heard by judges knowledgeable in this area. This would result in better honed and fairer decisions, which would build a better, more consistent and less confusing body of case law than we currently have.

A separate part in housing court could be implemented without increasing the number of judges or the space currently devoted to housing court. Modest administrative costs, devoted to establishing this program and screening incoming cases so as to direct those involving cooperatives and condominiums to the new part, would be quickly offset by the time and money saved in the expedited resolution of cases. Judges versed in the relationships between the board and residents in these resident-owned and -governed buildings will be able to hand down decisions that interpret the law consistently and clearly. There would also be fewer appeals, even further reducing the burden on the courts.

Fruitful discussions with the housing court administration have led to an agreement to collect data about the volume of co-op and condo cases in the housing court today. We need to know of all such cases heard during the months of February, March and April 1996. CNYC has distributed forms for this information. Please be sure that your attorney is participating. This data will support the case for a separate part.

RIGHT OF PRIVATE ACTION UNDER THE MARTIN ACT

Under current law, shareholders and unit owners who believe that the sponsor of their conversion has not dealt fairly with them or their buildings have no direct recourse to the courts unless they can prove intentional fraud. Instead, they are dependent upon the Attorney General's office to investigate problems and bring charges. With the Attorney General's office understaffed and the workload enormous, only the most blatant cases receive attention. Granting shareholders and unit owners a right of private action would help redress this situation.

 
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