Generating ancillary income while protecting your co-op/condo status

Real Estate Weekly, Oct 21, 1998 by Frank Spinelli

Storage Lockers and Bicycle Racks: If your property has vacant basement space, consider installing storage lockers and/or bicycle racks that can be rented to residents for their use. A wide variety of storage locker and bike rack types are available, and properties are free to determine how much to charge for their rental and all other policies governing their use.

On-Premise Gyms: Properties with appropriate unused space also can convert that space into an on-premise "mini-health club" for which an annual membership fees can be charged. Depending on the facilities offered and the fee charged, on-premise gyms can be very lucrative revenue-generators.

Social Room Rental: Unused space also can be converted into a Social Room for rental use by residents. Here, too, properties are free to design the facility (some are just empty rooms while others offer mini-kitchens and other amenities), and to determine how much to charge and how to administer use of the room.

Transfer and Sublet Fees: Also known as a "flip tax," a transfer fee is a fee that the selling shareholder pays to the corporation when his unit changes hands. A sublet fee is similarly paid by the shareholder when he sublets his apartment. Considering the current high level of activity in the real estate market, you may want to revisit your property's transfer fee and sublet fee policies to determine whether or not your property is getting the maximum benefit from them.

There are other ways to generate income for your property too. For example, many properties get considerable sums from the lease of their parking facilities to outside parking management companies. Some rent their rooftops to telecommunications companies that use them for the placement of their antennas. And some even invite movie production companies to use their buildings as shooting sites.

All of these ways are effective ways to increase your property's income. But beware: There's "good" income, and then there's "bad" income.

The concept of good and bad income is related to what is commonly referred to as the 80/20 Rule, a part of Section 216 of the Internal Revenue Code which states that 80 percent of a co-op's income is to be obtained directly from tenant shareholders (good income), while up to 20 percent of the property's income may come from other sources (bad income).

According Abe Kleiman, partner in the Manhattan-based accounting firm Kleiman & Weinshank, LLP, the 80 percent generally comes from maintenance payments, transfer fees, sublet fees, storage fees and the like. Money-makers like storage lockers, gyms and social rooms also fall within the category of good income because the revenue they generate comes directly from shareholders.

But Kleiman warns that the remaining 20 percent, which could come from commercial rent, garage space that's rented to a separate garage company, investment income, and all other income that doesn't come from shareholders, falls into the category of bad income. Properties need to be careful about this kind of income, because if a co-op exceeds 20 percent of income from sources other than shareholders, the building is at risk of losing its status as a co-op.

(Condominium Boards Please Note: While the 80/20 Rule applies only to cooperatives, Section 528 of the Internal Revenue Code discusses similar restrictions regarding income sources for condominiums in order for condos to qualify for favorable tax treatment.)

Norman Prisand, partner in the Long Island-based accounting firm Prisand-Newman, points out that there are several ways for properties to change bad income to good, and avoid violating the Rule of 80/20. These include restructuring laundry room and garage leases and/or the way electricity is billed to result in payments directly from shareholders to the corporation; investment of corporate funds in certain types of tax exempt instruments; and the creation of a "short" fiscal year, among other ways.

Although the rules of income for co-ops and condos can have serious consequences if they're violated, let this not deter you from investigating and implementing ways to generate more revenue for your property. The first step is to consult with your corporate accountant to determine what your property's current financial status is, and what your options are. Assuming there is no risk, you are then free to pursue as many ways as you can come up with to generate ancillary income that is sure to come in handy for your property's present and future use.