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Landlord buyouts of Rent Regulated Apartments

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Landlord buyouts of Rent Regulated Apartments

Postby TenantNet » Tue Apr 16, 2013 10:47 am

When landlords offer buyouts to tenants of rent regulated apartments, the money received by the tenant is typically considered a long term capital gain for tax purpose.

In addition, while it is advisable to have an experienced attorney negotiate the actual buyout, the agreement with the attorney might require that up to one-third of the total amount be paid to the attorney for his or her services.

If the tenant is represented, the tax liability could depend on whether the check from the landlord goes first to the tenant, or to the tenant's attorney. From what we've heard, if the check goes first to the tenant's lawyer, he/she takes their cut and sends the remainder to the tenant, who is then liable for taxes on the amount less the attorney's fee.

But if the check goes to the tenant, and the tenant pays the attorney, then the tenant would likely be liable for taxes on the entire amount.

Either way, it's good to get professional advice. While it is always advisable to consult with a tax attorney on tax issues -- and beyond the scope of a landlord/tenant forum -- we have obtained some material that can be useful.
Last edited by TenantNet on Tue Apr 16, 2013 5:25 pm, edited 2 times in total.
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Postby TenantNet » Tue Apr 16, 2013 10:49 am

Q AND A
New York Times
By SHAWN G. KENNEDY
Published: July 13, 1986

Tax on a Co-op Buyout

Question: I live in a building that is about to be converted to a cooperative. The sponsor is offering to buy out tenants who are willing to give up their leases and leave. Will this money be taxed as regular income or as a capital gain? If I were to reinvest the money in another residence would the same tax rules apply? Are the elderly exempt from this tax? . . .
M. R., Brooklyn

Answer: The Internal Revenue Service will tax the income you receive in a buyout as a capital gain in accordance with the Internal Revenue Service Code, Section 1241.

According to Anita Ireland, a spokesman for the Manhattan office of the I.R.S., there are no provisons in the law that would exempt you from this tax if you are elderly or if you reinvest it in another residence.
Last edited by TenantNet on Tue Apr 16, 2013 1:35 pm, edited 1 time in total.
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Postby TenantNet » Tue Apr 16, 2013 11:01 am

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Re: Landlord buyouts of Rent Regulated Apartments

Postby TenantNet » Sat Sep 22, 2018 9:32 pm

Note: The Law Firm of Wagner Berkow is portrayed in this article as a law firm that is friendly to tenants. While we do not object to anything stated in the article, we do not know if this law firm is a tenant firm, or not. We do not know as we have never heard of them.

https://www.brickunderground.com/rent/rent-stabilized-buyout-hire-lawyer
Why should I hire a lawyer to negotiate a buyout from my rent-stabilized apartment?
SEPTEMBER 19, 2018 - 10:00AM
SPONSORED BY WAGNER BERKOW

QUESTION:
I've seen ads for services that help rent-stabilized tenants negotiate buyouts, and they make it sound like there's no need to hire a lawyer. What can a lawyer do that one of these operations can't?

ANSWER:
There are indeed firms pitching the expert advice of real estate brokers to help renters negotiate a buyout. The argument is that as real estate professionals, they are best positioned to negotiate such a deal (wherein a tenant relinquishes his or her coveted rent regulated apartment for money so that the landlord can hike the rent), better positioned even than a real estate lawyer.

"I disagree with that strongly," says Steve Wagner, a real estate lawyer and partner at the firm Wagner Berkow, with decades of experiences representing co-op and condo owners and boards, as well as tenants. "There are a patchwork of laws, regulations, and codes that come into play when you're negotiating a buyout, and the case law is fluid as well. You need someone who is on top of these things."

"These are lawyer issues," he continues. "These are not broker issues."

If you hire someone who's not familiar with tax law, for example, "your likelihood of getting audited goes up dramatically," Wagner says. A lawyer will also scrutinize the fine print of the agreement to be sure that you're not still on the hook for the lease of the apartment you're leaving, or if you're agreeing to be relocated, that there's not something hidden in the terms that will force you to leave that place before you're good and ready.

A knowledgeable lawyer can also put the buyout money in escrow, to keep your landlord from holding onto some or all of it once you've moved out.

"Lawyers are best suited to set up escrows," Wagner says. "We put our licenses on the line every time we set up an escrow. We're held to very high standards."

Nor do you want to hire just any lawyer if you're considering a buyout. When interviewing attorneys, Wagner recommends asking if they have experience representing tenants, if they have experience negotiating with developers and landlords, and how familiar they are with tax issues. What many tenants don't realize when they're dreaming of buyout dollar signs is that buyouts are subject to taxes. Plus, it's easy to forget the money it costs you to move and the continuing housing costs wherever you end up.

In addition to helping clients structure the transaction to minimize the tax hit, Wagner says his firm helps tenants plan financially, "to ensure that we are not putting someone in a situation they're not going to be able to afford."

And at least for Wagner's firm, they are typically paid on a contingency fee basis, meaning you don’t pay lawyer fees unless and until you receive the money in a buyout.

Another highly technical piece of the puzzle that Wagner says not everyone is equipped to figure out is whether the apartment is stabilized in the first place (a landlord may argue it's not when it is) and what the rent should be. Also, hidden in the property records for your building and neighboring ones could be the making of a big air rights deal that would mean your apartment is worth exponentially more to the building owner than you thought. Yes, a lawyer costs money, but the research a good one does could mean a significantly larger buyout amount in the end.

"I have seen this where people leave enormous amounts of money on the table," Wagner says. "They see the number they want to put in their pocket, not realizing that the landlord is going to negotiate no matter what. They're waiting to hear a number from you, and on your own you may give a number that's even less than what they were willing to offer."

And finally, a buyout agreement is fundamentally a legal document. Given that, it's a good idea to have a legal professional scrutinize it, to reduce your risk of ending up in court when some piece of it turns out to be not as it seemed. And if the situation does go south, the real estate professionals aren't going to be there to advocate for you.

"Say there is an issue," Wagner says. "The broker isn't going to represent you in court and continue to negotiate."

New York City real estate attorney Steven Wagner is a founding partner of Wagner | Berkow with more than 30 years of experience representing numerous co-ops, condos, and individual owners and shareholders. To submit a question for this column, click here. To ask about a legal consultation, send an email or call 646-791-2083.
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Re: Landlord buyouts of Rent Regulated Apartments

Postby TenantNet » Mon Jan 25, 2021 9:15 am

We saw this article on buyouts:
https://www.brickunderground.com/rent/negotiating-buyout-rent-stabilized-apartment-nyc

Note: While the firm Himmelstein, McConnell, etc. is not one of our advertisers, they are a well-known (albeit expensive) tenant law firm. Other firms that advertise on this site also have experience in negotiating buyouts. What is not addressed in this article is that first, lawyers will often take a percentage of any buyouts. We've heard of percentages as high as 1/3 of the buyout. That needs to be spelled out in writing in any agreement with the attorney. Always read the fine print. Second, tenant are likely to be liable for taxes to be paid on buyout amounts. Tenants should consult with a tax professional. But understand that with the attorney fee and tax consequences, tenant might retain less than 50% of any buyout earnings.

In addition, tenants should put together a multi-year budget for what they will need for future rents and living expenses. If you get a $10,000 net buyout, that money will likely last less than one year. It is important that tenants look ahead. As rent stabilized units within a reasonable range are harder to find, tenants cannot expect to end up in the same type of situation as they currently have. And with the unpredictability of the pandemic, for both housing and income, it's even more important to weigh very carefully any buyout arrangement.

My landlord is offering me a buyout to leave my rent-stabilized apartment. Can I negotiate for more?
by Himmelstein, McConnell, Gribben, Donoghue and Joseph, LLP
January 21, 2021

Question:
I'm the last rent-stabilized tenant in a Cobble Hill building, where I've lived for many years. My landlord offered to buy me out, either through a lump sum or by allowing me to live in another of his apartments rent-free for one year. My current rent is about $2,000. Am I eligible to get a larger buyout? What's a reasonable amount to ask for?

Answer
First of all, renters in this situation are under no obligation to move, unless the landlord can come up with grounds to force them out within the bounds of rent-stabilization laws (illegal sublets and non-primary residence claims are two main grounds for eviction from stabilized apartments), says Sam Himmelstein, a lawyer with the firm Himmelstein, McConnell, Gribben, Donoghue & Joseph who represents residential and commercial tenants and tenant associations.

And since the passage of the Housing Stability and Tenant Protection Act of 2019, landlords have less incentive to buy out rent regulated tenants and are less likely to offer huge buyouts. The main reason for this: HSTPA eliminated vacancy deregulation, which allowed landlords to deregulate rent-stabilized apartments after the tenants moved out and the rent reached a certain threshold.

“Landlords could deregulate rent-controlled and rent-stabilized apartments and then charge market rent, and the difference was tremendous in many cases,” Himmelstein says. “They were willing to pay large buyouts because they’d make that money back eventually. That was the main scenario for buyouts, and that’s gone for the most part.”

There are a few situations remaining in which landlords have incentive to buy out stabilized tenants. Some landlords may try to combine two vacant apartments, for instance, or chop up an existing one into multiple units, and charge “first rent” on them, which means they could increase the apartment’s monthly rent while keeping it stabilized.

Tenants who rent apartments in co-ops or condo buildings may also be able to negotiate sizable buyouts with their landlords.

“Those apartments would be immediately deregulated upon a vacancy because the new law doesn’t keep those in stabilization. In that scenario, the landlord could sell or rent the apartment at market value, so you still see buyouts there,” Himmelstein says.

Some landlords will also offer to buy out rent-controlled tenants, whose apartments can be converted to rent-stabilization status, which often means higher rents.

“Even though those apartments go into rent-stabilization, the formula is such that landlords can get the apartment’s rent close to market-rate,” Himmelstein says. “If they serve the tenant with the new registration and give notice that they have 90 days to challenge the new rent, and those 90 days pass, that rent is locked in forever.”

Finally, landlords who plan to demolish a rent-regulated building and develop a new property on the site are particularly willing to offer buyouts.

“Depending on the size of the project, the landlord stands to make millions and will usually pay tenants anywhere from six figures to multimillions,” Himmelstein says.

Keep in mind, though, that demolition and redevelopment plans take quite a while to come to fruition.

"He'd have to file a case at the Division of Housing and Community Renewal, which could drag on for years," Himmelstein says. This doesn't seem like your landlord’s plan, nor is it likely in a neighborhood like Cobble Hill, where zoning laws restrict the development of high-rises.

If you are a stabilized tenant whose landlord plans to demolish the building, you may be entitled to a stipend, based on the difference between the rent you're paying now and what it would cost to get a new apartment. Tenants paying significantly below market rate, therefore, stand to get much larger stipends than ones paying a higher rent. However, in many demolition cases, tenants negotiate seven-figure buyout payments that are far above the stipend amounts.

Being the last stabilized tenant in your building may also provide you some added leverage.

"The landlord doesn't have to worry that if he pays them a certain number, other tenants will find out and come also looking for buyouts," Himmelstein says of holdouts. "Being the last man standing is always something that's valuable."

A buyout isn't a question of eligibility, he adds, but rather a number of objective and subjective factors—most significantly, the temperament of your landlord.

"Are they a cheapskate or a big spender? I find that when negotiating buyouts, there's often no rhyme or reason to it other than the individual," he says. "Some never pay buyouts, some pay less than others, and some just want to get it done quickly and will pay the maximum so they can move on."

Regardless, it's crucial that you speak to a lawyer before engaging in negotiations. Himmelstein cautions that a tenant who has had a conversation with her landlord about buyouts before retaining an attorney may have limited her prospects by suggesting an amount lower than what a lawyer could get.

"After a tenant says they'll take a certain amount, the landlord will probably say 'No way' to more," he says. "People begin negotiations and think they're being noncommittal, but they're not. Landlords are professionals who negotiate these things all the time."


Sam Himmelstein, Esq. represents NYC tenants and tenant associations in disputes over evictions, rent increases, rental conversions, rent stabilization law, lease buyouts, and many other issues. He is a partner at Himmelstein, McConnell, Gribben, Donoghue & Joseph in Manhattan. To submit a question for this column, click here. To ask about a legal consultation, email Sam or call (212) 349-3000.
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Information from TenantNet is from experienced non-attorney tenant
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