HDFC Co-Op flip tax on profit--profit on shares or overall?

[Juletta]

I am contemplating buying 250 shares in an HDFC with a proprietary lease to a 3-bedroom apartment for $200,000.00.

However, the apartment is not in a livable condition. I don’t mean that it needs cosmetic repairs—it needs at least $100,000.00 in renovation (we’ve done this before in a different kind of co-op so we are familiar with the costs). Floors, walls, kitchen, bath, all need to be replaced, and the electrical and plumbing need significant work. I don’t think it would even be legal to reside in an apartment in the condition of this one.

We can comfortably afford both the purchase price and the renovation cost, for a total of $300,000.00. However, according to the application “the apartment is subject to a lien for profits from the resale of the shares of the cooperative which is set forth in the proprietary lease and By-Laws for a period of thirty (30) years from the date title to the building was transferred from the City of New York. In addition, shares in the corporation are transferable only to families who earn no more than 120% of the median income…”

We have not yet been able to get hold of the broker/attorney regarding the date of transfer from the city, or what percentage of the profit is under lien from the City and what percentage goes to the co-op. She mentioned NOTHING like this when she showed us the place.

So the question is, does the lien apply to profits based solely on the purchase and sale of the shares? As in, any profit above $200,000? That would make this completely unfeasible…the apartment will not be livable in its current state, and we would lose a tremendous amount of money on the renovation. Is there any legal way to get the cost of renovation to figure in when selling, and calculating profit?

We plan to live there for at least 6 years.

[TenantNet]

Do you fall within the income guidelines of the HDFC?

[Juletta]

Yes, we do.

Would they even be able to sell the shares to us if we didn't? I thought that was a hard and fast rule, that your income absolutely must fall below the maximum, or the sale couldn't take place.

Are there circumstances that would allow them to sell shares to someone above the income limit? Would that alter the resale terms somehow?

[TenantNet]

People don't always follow the rules. And for someone that can afford $300,000 for a renovation, it could be that your income is higher than the HDFC allows, or you have access to a large sums. Or -- in some cases -- people simply don't realize what a HDFC is.

Try this:
http://forums.prospero.com/HDFCCentral

[Juletta]

No, $100K for the renovation, $200K purchase price, $300K total. We bought a tiny apartment many years ago when real estate was low and paid off the mortgage, and then sold it last year and moved into a rental. It was our primary residence, so it does not count as income or capital gains. So while our income is right at that 120% median, we have all the cash from our last home available for a good-sized down payment.

In any case, $300K is perfectly reasonable for 120% median--I think the target purchase price for that income is about $349K, according to most current financial calculators and a 20% down payment.

I searched ACRIS, and the building is a 60/40 formed in 1991. They paid off their mortgage in 2007 and got a mortgage release.

So...40% of any profit would need to go to the City, and an unspecified (until I see the by-laws) percent would need to go to the HDFC? And that profit would be based solely on the purchase price/selling price of the shares, with no allowance for capital improvements?

I know that HDFCs are intended as permanent homes and that resale is not supposed to figure into it. But our jobs are dependent on the city's economy, and we don't know if the city will be feasible for us five or six years from now. We're not looking to make a big profit, but we do need to make sure we won't lose all the money we spent on renovation.

I've been to the Prospero forums and it looks like all the threads on there are quite old.

Thanks.

[Juletta]

I guess the question boils down to...

It's a 60/40 established in 1991. They paid off their mortgage and got a mortgage release in 2007.

If/when we sell, is it

a) 40% to the city, and the 15% to the cooperative, based on the difference between selling price and purchase price + improvements?
b)40% to the city, and the 15% to the cooperative, based on just the difference between selling price and purchase price?

If a), does the city put a cap on the $$$ of improvements that can be deducted?

If either, can the cooperative force you to sell the shares back to them for less than a qualified purchaser would offer?

I did try the Prospero site, if there are any other suggested resources please advise.

Thanks.

[reysmont]

First of all you must understand that the 60/40 Security Agreement is in effect for 25 years from date of conversion as well as all other HPD restrictions.

A 1991 conversion is NOT subject to to 120% AMI income restriction unless that Cooperative has entered into a 30-years regulatory agreement with HPD which you do not mention as seeing on ACRIS.

The income restriction for that Cooperative is more than likely 6 or 7 times the annual maintenance plus utilities. If the family coming is has less than 3 dependents the multiplier of the annual maintenance + utilities is 6 times. If the family has 3 or more dependents then the multiplier is times 7.

The Cooperative cannot change these unless through the aforementioned HPD 30 Years Regulatory Ageement.

The Cooperative cannot change the 40% payment to the City. However the splitting of the remaining 60% can be changed by the Cooperative usually keping a Transfer Fee aka "Flip Tax" of 30% but it can bf\e more or less than that. Must review the re-sale policy in effect.

There are no specific provision for capital improvements deductions to the unit profits per se, although it is usually integrated into the selling price .

The Cooperative has a sort of unwritten right of first refusal but it cannot force the sell of the unit back to the Cooperative without legal reasons.

The HDFC Council web Forum reflects those questions asked - there are similar questions posted some of them very recent. In fact these exchange wil be posted there shortly.

It is obvious that you are looking for property that will appreciate and that you can sell at a market level profit.

The HDFC Cooperatives are not investment property so I would suggest to look for either non-HDFC Limited Equity Cooperatives or Market Rate Coopertives as the HDFCs are probably not the business investment you seem to be looking for.

J. Reyes-Montblanc
The HDFC Council

http://forums.delphiforums.com/HDFCCent ... ?msg=932.2