Residential Realities April 2012
April 30, 2012--Dialing Back Digital: The AG hits the hold button...
A few months ago, the AG’s office unveiled a new regulation, requiring developers to make offering materials available to the public in a digital, searchable format. By all considerations, this was a significant step in the right direction. The AG’s office was finally beginning the long process of bringing offering plan distribution into the 21st century. Eventually, all offering documentation should be available online. Then, a few days ago, it was announced that developers would not be obligated to offer the digital format to potential purchasers (although they could choose to do so). The so-called one step forward, promptly took two steps back. Apparently, it is too costly for smaller developers to incorporate the new technology. But why abandon the upgrade completely? Why not implement the regulation in stages, with larger developers required to provide digital format as planned? Smaller developers could incorporate the technology further down the road.
The Force is Strong
The reversal of this new policy is a big disappointment to those of us who deal with offering documentation day in and day out. It’s a big loss for the consumer as well. Although every step should be taken to make access to offering documentation as available to the public as possible, that is simply not the case. When it comes to purchasing new construction condos, the dissemination of information continues to track consumer unfriendly…
April 21, 2012--Avoiding Closing Chaos: Inattention to details can cause delays...
Humans are forgetful creatures who tend to leave things all over the place. Keys, glasses, phone chargers, wallets, E-ZPasses, iPads. We’ve all been there. The same can be true of remembering all of the items that are required for a closing. Despite checklists and post-its on the computer monitor, closing necessities, both big and small, often fall through the cracks. When an attorney drops the ball before a closing, it’s stressful for all the participants and delays abound. Here’s a list of the five main causes of delays and how to make sure it doesn’t happen at your closing.
Lock, Stock and Lease
There is nothing worse than getting a call from the seller’s attorney a week before a co-op closing sheepishly disclosing that the attorney forgot to order the stock and lease from the pay-off bank. Banks can be notoriously slow in producing the co-op collateral documents. It can take thirty days or longer for a bank to retrieve the document or to declare the documents lost. Even when there is a mortgage contingency, the stock and lease should be ordered as soon as possible to insure that the documents will be available when the parties are ready to close. When a closing is adjourned for several weeks while the parties wait for the stock and lease to finally show up, unintended consequences start to kick in. Rate locks can expire, and worse, a purchaser may be obligated to vacate his or her current residence by a date linked to the original closing. In the lending environment we are in today, never give a bank an excuse to withdraw its funding as a result of an unexpected adjournment.
Federal law requires a withholding of ten percent of the purchase price if the seller is a foreign citizen within the meaning of The Foreign Investment In Property Tax Act. To avoid this issue, the seller can deliver a “Firpta Certification” at closing indicating that the seller is not a foreign citizen, so that no withholding is required. Despite the fact that this document is always required at a real estate closing, it never ceases to amaze me how many attorneys show up at a closing without bringing the required form for the seller to complete. In most cases, the form gets faxed over to the closing and the requirement is satisfied. In one recent situation, however, the documents were executed in advance and the seller was not present at the closing. An hour before the closing, the seller’s attorney had his client running through the airport lounges in Los Angeles trying to find a fax machine to deliver the document in time for the closing.
A Matter of Trust
Many co-ops and almost all condos allow the purchaser to take title to the apartment in the name of a trust. When trust ownership is permitted (as well as ownership by other business entities), there will be any number of other documents that the co-op or condo may require in order to permit title to be held by an entity and not by the individual purchaser. Those documents will include a personal guaranty by the beneficial owner, an occupancy agreement, opinion of the counsel as to the validity of the trust and other security documents to insure that the trustees of the trust will meet the economic obligations of ownership. Those documents must be prepared and reviewed by the co-op or condo counsel in advance. In some cases, the documents will require modification or revision. Each co-op or condo has slightly different documents. Trusts can originate from different states and outside counsel may not be comfortable with some of the draconian requirements that are often imposed. When a purchaser is permitted to take title in a business entity, it is essential that all of the required documents be attended to soon after the contract is signed.
New York State of Mind
When a seller is not a New York resident, or has not lived in New York as his or her primary residence for two out of the past five years, New York State will require an estimated capital gains tax payment to be made at the closing. The transfer tax document required at closing, called the “TP-584”, will require the seller to certify whether or not he or she is a resident of New York. If the seller cannot make that certification, or does not qualify for an exemption, the estimated capital gains tax payment has to be collected and paid to New York State, together with the form calculating the payment that is due. When the seller’s attorney does not determine the seller’s residency in advance of the closing, and if the seller is not a resident of the state, the closing checks usually have to be redone to provide sufficient funds for the estimated capital gains tax payment. In one recent situation, the seller’s residency was not determined until the seller’s attorney asked the seller to sign the residency certification on the tax form at the closing table. Fortunately for the purchaser, the seller was selling at a loss, so no capital gains tax payment was due. Had the seller recognized a profit on the sale, the closing fire drill would have been underway, with the purchaser scrambling to find a nearby bank to redo the closing checks.
Part and parcel of the co-op transaction is the ubiquitous lien search that discloses outstanding UCC-1 loan filings, judgments and other liens. Where there have been several refinancings by the seller, sometimes the new bank neglects to file the termination of the old bank’s UCC-1 filing. In some cases, the old filing has expired and is no longer effective, but that’s not always the case. Even if a filing has expired, it does not necessarily mean that the prior bank’s loan has been paid in full. When the lien search is not carefully reviewed, and an unexplained UCC filing appears in the report, the closing can be delayed if a termination for the additional filing is not delivered at closing. Addressing this issue at the closing is usually a disaster as it is often time consuming to obtain the required termination of a prior UCC filing, particularly if the bank has merged with another bank.
Residential Realty: Double Check Everything
Pre-closing transaction requirements and deliverables is the best way to avoid unnecessary delays and to insure a speedy closing. When a disheveled attorney shows up at a closing and appears to be looking at the file for the first time, the other participants commence the closing prayer circle. Focusing on the above issues should minimize the need for a higher power to complete the transaction.
April 6, 2012--A Big Piece of the Pie: New York City’s Insatiable Appetite
My Life in Minutes
Increased real estate activity in Manhattan translates into spending more time reviewing the actions of the co-op and condo Boards, perusing financial statements and speaking with account executives about the physical and economic well being of the buildings they manage. Although due diligence often reveals negative information about a particular co-op or condo, potential purchasers rarely take a pass based upon a building’s metrics. It does happen, but it’s the exception and clearly not the rule.
It’s getting to be the time when co-ops and condos issue financial statements for the year ended December 2011. At the moment, the most current financial statement reflects a building’s financial position as of December 2010. Although the financials do give a snapshot of the co-op or condo’s financial health, a snapshot taken fifteen months ago is as stale as a week-old bagel. A lot can happen in a co-op or condo’s life over a fifteen month period, so simply reviewing the 2010 financial statement is not enough to get a sense of a building’s current financial status. Even when the 2011 financial statement is issued, it is already three to five months old. The equivalent of driving via the rear view mirror. Accordingly, it is imperative that the property manager be questioned about the building’s current status to determine whether there have been any material economic changes since the last financial statement was issued.
The Elephant in the Room
If there is one issue about owning a co-op or condo that will take center stage over the next few years, it will no doubt be carrying costs. That is, the monthly charges paid by a unit owner to cover his or her pro rata portion of the building’s common expenses. With co-ops, there is one particular expense that is bordering on the uncontrollable: real estate taxes. New York City is not shy about increasing tax assessments. A review of the expense pie chart included at the end of most financial statements, reveals the obvious—real estate taxes usually account for the largest expense item on a co-op’s yearly budget. In one small co-op whose financials I reviewed recently, real estate taxes accounted for more than sixty percent of the co-op’s budget. Wow…Try as they might to control expenses, real estate taxes will present a huge challenge for many buildings. With a beloved 17.5% co-op and condo tax abatement about to expire unless it is renewed by both the City Council and the New York State legislature in June, this budget line item could increase significantly in the next few months. When you throw in commodity costs and union payroll, most co-ops have limited ability to control a number of operating expenses that continue to increase year after year.
Residential Reality: Do the Numbers
As the market finally comes back to life, there seems to be a forgetfulness about the excesses that resulted in the real estate economy blowing up only a few years ago. Buying at a discount is a hedge against the ups and downs of ownership that will certainly occur, but the purchase price is not the only issue that buyers need to consider when deciding on a property. It’s all about the carrying costs—what those costs are today and what those costs are likely to be over time. So factor that in…