Buildings with lots of LLC-owned apartments like the Laureate are likely to suffer the most.

During the past decade, it has become increasingly popular for  home buyers—particularly those with bold-faced names—to shield their identities with LLCs and trusts. By using an LLC, a privacy-minded person can (usually) prevent sleuths from salmon-colored papers like this one from dredging up their purchase from city records and exposing how much they paid and what their new kitchen looks like.

But while such identity cloaking has become all but de rigueur for the celebrity buyer and a matter of preference for other press-averse people, the cost of privacy is poised to go up considerably. That's because the city's co-op and condo tax abatement, which has been enjoyed by nearly all co-op and condo owners at a sizable 17.5 percent since 1996, will no longer be available to those who own their apartments through LLCs or trusts. The change will mean considerably higher taxes for some 7,700 property owners.

This winter, the State Legislature voted to extend the condo and co-op tax abatement—which was initially enacted as a temporary measure to eliminate the discrepancy between the taxes on single family homes and the much higher taxes on homes in multi-unit buildings—through June 30, 2015. But this time around, the Legislature decided to exclude pied-a-terres from the abatement program—a category which the city's Department of Finance says includes all trusts or LLCs.

"There is no provision in the new coop/condo abatement law that allows the beneficial owner of a trust or an LLC to qualify for the benefit," Department of Finance spokesman Owen Stone wrote to The Observer in an email explaining the policy change. "As you know a new law was enacted last month that restricted the eligibility for the coop/condo abatement to only primary owner occupied residences. We have not changed our interpretation of the law- the law has changed. Under the previous law, there was no restriction, and LLCs and Trusts could qualify, under the new law, they do not."

Which has not stopped many in the real estate community from slamming the policy as unfair.

"They're penalizing people who want their privacy or the convenience of owning in a trust," said Eva Talel, a real estate attorney and partner at Strook & Strook & Lavan. "For reasons of privacy, not wanting the world to know what you own is perfectly reasonable at any income level, and to throw the people out of this abatement program seems to be fundamentally unfair."

"I think there must be a misconception somewhere down the line that things like LLCs or trusts are for rich people, but you don't have to be rich or advantaged to put your home in a trust," she added, noting that given the high cost of New York real estate and its rapid appreciation over the last two decades, many New Yorkers count their home as their primary asset. Why should they be punished for trying to lessen their tax burdens in a perfectly legal way?

Even co-op boards, which are notoriously hostile to pied-a-terres (and for demanding reams of personal documentation and disclosure from potential buyers), have started acknowledging the need for trusts in estate planning. More and more of them are now allowing established residents to transfer their apartments into trusts.

"No one would have expected that there would be adverse tax consequences to buying in a trust or an LLC. There aren't otherwise," she said. " I think they made a social engineering decision that these units were owned by more affluent people in more affluent co-ops and were therefore fair game."

(Another real estate professional likened the change, coming in conjunction with larger tax breaks for less valuable co-ops and condos, to "class warfare.")

Ms. Talel also pointed out that the decision to give the tax benefit to only some condo and co-op owners violates the spirit of the original abatement, which was intended, in lieu of more far-reaching tax reform, to equalize the tax burden on single-family homes and those in multi-unit buildings. Townhouse owners are not subject to any restrictions or requirements, primary residence-related or otherwise, to enjoy their lower tax rates. Why should there be a different standard for co-op and condo owners?

Mary Ann Rothman, the executive director of the Council of New York Cooperatives & Condominiums, told The Observer that the Council begged the Department of Finance to reconsider their interpretation, particularly in respect to trusts.

"We told them that 99 percent of the time, there's an agreement between the co-op board and the trust that only the trust-holder will live there," she said, adding that trust-holders can apply for other benefits, like the STAR program.

Ms.Rothman said that building managers are up-in-arms about the changes to the law, which will be phased in over this tax year and the next. It's also a relatively recent shock—while the primary residence requirement has been anticipated for some time, few anticipated that trusts and LLCs would be excluded from that category.

An additional problem is that in some condo buildings more than three-quarters of the units are owned by LLCs—a serious problem for developments that used the tax benefit for maintenance or capital improvement projects. Now, managing agents will need to either raise maintenance fees or figure out how to cover the lost income.

For its part, the Department of Finance says that its hands are tied, but that it is exploring the possibilities for extending the benefit to some trusts.

"We are continuing to review our options regarding eligibility for beneficial owners of trusts," Mr. Stone wrote. "We will listen to the concerns of those who have questions regarding the eligibility for beneficial owners of trusts, and will take them under consideration."

The department is unlikely to hear many complaints from the property owners themselves, though. While LLC owners will no doubt grumble to their friends, their lawyers and their property managers about the new "privacy tax," we don't anticipate many outspoken opponents or resounding outcries from a group that prefers to remain off the record and under the radar.

kvelsey@observer.com

Taxes are going up. (flickr, Joshua Alan Davis)

Keeping a place in the city has never been an easy or cheap proposition for out-of-towners, but it has now become a good deal more costly, after state legislators declined to extend a long-standing tax abatement to pied-à-terre owners.

The State Legislature, when it resumed after the New Year, voted to extend the co-op and condo tax abatement—which has been received by nearly all co-op and condo owners—through June 30, 2015.

However, the new extension applies only to primary residences (granted, one can get the abatement on up to three residences in one building, so the law is not completely insensitive to the needs of the well-to-do)—but it is the first time the benefit has been restricted based on residency since it was enacted in 1996.

The abatement came into being as a temporary measure to help correct imbalances in the tax code which put on a heavy onus on owners of co-ops, condos and rental buildings (single-family homes, townhouses and very small condos are taxed at a much, much lower rate). Through a series of extensions (five), the abatement has managed to survive all these years as the most convenient fix for a very inconvenient problem—the need for comprehensive tax reform.

Indeed, the current code transfers the largest share of the tax burden onto rental buildings. Owners pass the cost onto renters, meaning that the people who bear the brunt of the property tax burden (New York City's largest single source of revenue) are the people who don't own property, according to a study released last spring by NYU's Furman Center.

The last tax abatement extension—which granted a sizable 17.5 percent property tax reduction to almost all homeowners regardless of residency—expired on June 30, 2012. The city, assuming that an abatement bill would pass and be applied retroactively, sent out tax bills that reflected the prior reductions. Now some property owners will have to pay more, although the benefit will be phased out for pied-à-terre owners over the next few years, rather than disappearing completely.

"The transition period is potentially going to be very messy," said Eva Talel, a real estate attorney at Strook & Strook & Lavan. Ms. Talel cautioned that the real headaches of the policy change would be suffered by co-op boards. In the past, given that generally all shareholders qualified for the abatements, boards were able to use the funds for building-wide repairs and capital improvements. Now, with only some of the residents receiving abatements, buildings may lose a source of maintenance income; they will also be left with the question of how to assess taxes and fees.

So will the move discourage pied-à-terre owners, or slow the trophy market madness? Unlikely. While it certainly makes a Manhattan apartment a slightly less lucrative investment, residents of foreign countries were never eligible in the first place—a SSN or EIN was required to take advantage of the abatement. Moreover, keeping a second home in one of the most expensive cities in the world is, in essence, a statement that one has more than enough money to go around.

The good news, and there is some good news, is that co-op and condo owners with properties assessed at or below $60,000 will be getting a bigger tax benefit. Over the next few years, the abatement will increase incrementally from 20 percent to 22.5 percent for residents with properties assessed at $55,001 to $60,000; from 22.5 percent to 25.2 percent for residents with properties assessed between $50,001 and $55,000; and 25 percent to 28.1 percent for residents with properties assessed at $50,000 or less, according to the department of finance.

Under the prior law, the 17.5 percent benefit was given to all applied to buildings with an average assessed value greater than $15,000 per unit; buildings with lesser average values received 25 percent abatements.

Clearly, the move is in part inspired by the city's desire to increase revenue, as the abatements have cost New York hundreds of millions of dollars. It is also, Ms. Talel opined, a reflection of the city's desire to privilege full-time residents over its more fair weather friends.

"There is an increasing desire for benefits to go to people who actually contribute to the city, to make sure rewards go to those who live here," she said, adding that while the extension would come as a relief to many co-op and condo, "we still haven't solved the underlying problem."

kvelsey@observer.com

Whatever happens with the fiscal cliff, no one expects the gift tax exemption to be as generous next year.

They say nothing is certain except death and taxes, but—as estate planners know—there’s nothing particularly certain about those either, especially this year. In the month and a half since Barack Obama won re-election, the only thing wealthy New Yorkers have been sure of is that if you want to give a gift, the time to do it is before January 1. And if you want to give the gift of your co-op apartment, well, you’d better hope for a holiday miracle.

If (or more likely when) America hurtles over the fiscal cliff, one of the casualties will be the $5.1 million gift tax exemption. When the ball drops in Times Square, it will revert back to $1 million. The inheritance tax, meanwhile, will leap from 35 to 55 percent.

Attorneys and property managers say that they, and countless boards around the city, are being bombarded with requests—many of them late-breaking—to transfer apartments to trusts before the window closes. Of course, at this point it’s practically impossible to get a meeting with a co-op board, let alone secure the necessary approvals. (Assuming your board even allows such transfers—and more than a handful do not.) During the first nine months of the year, the financially prudent rushed in, now only the fools remain.

“We represent several hundred co-op or condo buildings, and we’ve never seen this many transfers taking place that must be by year end,” Eva Talel, a real estate lawyer at Stroock & Stroock & Lavan, told the Transom. “For people who want to transfer, there’s a very big financial consequence if it happens, and there’s a lot of pressure on managing agents to make it happen.”

“This impacts New Yorkers in particular, because in New York a lot of people have a big portion of their wealth tied up in their apartments,” she added. And in New York, older residents planning their estates have often lived in their apartments for decades, watching values climb from well under a million to well over it. Unfortunately, it is difficult in a uniquely New York way as well, since only in New York do people own multimillion-dollar homes over which they have limited control.

While many boards are more familiar with trust transfers than they once were—a number of residents prefer to buy with them—they’re neither quick nor easy, noted Mary Ann Rothman, the executive director of the Council of New York Cooperatives and Condominiums. Ms. Rothman told the Transom that her office has spent the last few months fielding calls from perplexed co-op dwellers, calls that continue to come despite the all-but-impossible deadline.

“For decades it’s been an estate-planning device, but it doesn’t happen at the snap of fingers,” said Ms. Rothman. “The board wants to make sure it doesn’t lose one iota of control. And of course, there are still some co-ops who won’t allow it. The kind of white-glove co-ops who want all-cash purchases, which most of the world finds rather difficult in the 21st century.”

But things might not be as dire as they seem. Whether we as a country run over the fiscal cliff or not, it’s likely that the gift tax will be higher than $1 million. Mr. Obama, who was actually responsible for raising the gift tax in the first place when he signed a piece of temporary legislation in 2010, has proposed setting it at $3.5 million, which would likely be retroactive.

This is good news, given that, even for people who live in buildings with the most accommodating co-op boards on earth, there’s another, more daunting problem with gifting an asset in late December.

“Right now you can’t get an appraisal for love or money, and that’s the case across the country,” said Steven Schanker, an estate lawyer with Schanker and Hochberg. “We’re still getting phone calls from people who want to gift, and I tell them it had better be cash.”

kvelsey@observer.com

Wellington Tower Condo Board Says, "Play By the Rules: No Payment, No Pool."

Gracious living is the hallmark of life at Wellington Tower Condominium. Luxuries like a round-the-clock doorman, concierge and parking valet, a skylit swimming pool, on-site maid services, dry cleaning and spa facilities provide residents “with the very essence of living well.”

Unless, that is, a resident falls from grace.

A few years ago it became obvious to the board of the East 82nd Street building that not everyone was contributing to Wellington Tower’s luxurious lifestyle. A few occupants—not many, but a few—were more than a little bit behind on their common charges. And although they weren’t paying for the kinds of comforts that smooth out life’s rough edges, they were still enjoying them. This didn’t seem right to the board. So they cut the delinquents off.

“We decided it really wasn’t fair to allow them to use the same amenities,” said board president Rebecca Sheinberg. “Other people in the building don’t want to be subsidizing people who aren’t paying.”

So now, the doormen won’t accept packages for residents who are more than a few months’ behind, and their key fobs no longer open the doors to the pool, the gym or the playroom.
“We haven’t gone to the extent as some other people, like cutting off the elevator,” noted Ms. Sheinberg, pausing for a moment of reflection. “Besides, the elevator is situated far from the front desk, so it would be too hard to enforce. And going to the extreme like that, it wouldn’t be beneficial to the other unit owners.”

Such tactics may make genteel Gold Coasters draw a disapproving breath, but they are being adopted by a growing number of buildings in New York. And for buildings that embrace medieval life in more than their “baronial living rooms,” there is even public shaming.
“Some buildings will put notices of who’s delinquent in the halls, the elevator, at the front desk,” co-op and condo board attorney Jeffrey Reich told The Observer. “What you might call Scarlet Letter techniques.”

Depriving guests of luxuries is increasingly popular with boards, Mr. Reich said, especially at condos. Co-ops are in a “first lien” position, meaning that they collect before the mortgage-holder. Not only do they get paid first, but banks will often pay a delinquent resident’s maintenance charges. Condo boards, on the other hand, get paid last and must either collect the scraps following foreclosure proceedings or win a money judgment against a delinquent tenant.

Moreover co-ops, unlike condos, did not engage in the amenities arms race of the early ’aughts that brought swimming pools and golf simulators, acres of shared terraces and media rooms rivaling movie theaters—felicities that can easily push maintenance costs above $1,000 a month, even for modest units (and unlike co-op charges, theirs don’t include the property tax bill). Also, resentment builds much faster when you see your deadbeat neighbors sunning themselves by the pool.

“If one or more shareholders aren’t paying, the cash requirements still have to be met,” said Eva Talel, an attorney at the law firm Strook, Strook & Lavan, which advises hundreds of building boards and is the in-house counsel to REBNY. “It’s not just a matter of frustration—it can really become a matter of economic hardship, especially in smaller buildings.”
Restriction measures, Ms. Talel added, are not intended to be punitive—it’s just another means of getting the maintenance paid—but she admitted that they might feel that way.

“I haven’t heard of any fisticuffs on account of people having to go down to pick up their Chinese food,” Ms. Talel said. “But I expect that people are not happy when it happens. And that’s the idea.”

Fisticuffs no, but temper tantrums? Definitely.

“They create scenes,” sighed Midboro Management president Michael Wolfe. Midboro is careful to notify residents before they’re cut off, to eliminate surprises, Mr. Wolfe said, and publicizes the policy so that those with deactivated keycards will be less likely to rap at the doors with sob stories of mysterious demagnetizations. But still, there are scenes.
One of the on-site managers related to The Observer how one man last week became “very upset and screamed at the people in the pool to let him in: ‘I’m an owner here, how can you not let me in?’

“Usually, they’ll try to bluff their way out of it, but if it’s hot enough, they’ll come back with a check,” Mr. Wolfe quipped. “It is an effective tool. When the amenities are gone, certainly, life isn’t as pleasing as it might be. Also, it’s embarrassing.”

And what are the most “effective” amenities to cut-off?
“I think parking is the most painful, although I hate to use the word painful,” Mr. Wolfe struggled to find a softer word choice, finally settling on “the most motivating.”

Other management companies said that they have seen similarly promising results.

“People are angry, but sometimes things get resolved, or at least resolved quicker, when they don’t have access to the amenities,” explained David Wurtzel, the president of Cooper Square Realty.

And even the loss of small luxuries can be nettlesome. A resident of Chelsea condo Chadwin House who hadn’t paid his common charges for years and had a unit in foreclosure, pleaded with the judge to restore his doorman services if he started paying his monthly fees again, according to Robert Holland, a lawyer who represents the Chadwin House board.

“He was complaining that the doorman wouldn’t open the door for him or accept his food deliveries,” Mr. Holland said. The judge was sympathetic. The man started paying around $500 a month common charges, although, given that he still owes more than $40,000 to the board—a debt that remains unresolved—it’s hardly a fairy-tale ending.

Paul Brensilber, president of Jordan Cooper & Associates, the management company that oversees not only Wellington Tower, but a handful of other buildings that have taken a hard line on amenities, has mixed feelings about the practice.

“It’s never a good thing to have owners fighting against owners. It adds a lot of tension to the relationship between neighbors,” he said. “And while, from a sporting perspective, it’s interesting to watch, it puts the building staff in a bad position.

“If the goal is to get paid, I haven’t seen that yet,” Mr. Brensilber added. “But foreclosures take forever and a few shareholders can dramatically impact a condo’s budget. Other owners have to increase their common charges to make up for lost revenue. It’s ugly.”

Ugly is putting it mildly. At 95 Greene Street, a SoHo building that Mr. Brensilber also manages, celebrity photographer Kenneth Nahoum and his Victoria’s Secret model girlfriend, Basia Milewicz, stopped paying the common charges for the four penthouses they had amassed, units that accounted for some 20 percent of the building’s square footage and a good deal of its operating budget.

After phone calls, letters and liens failed to elicit any response from the couple, the building cut off elevator service to the penthouses (legal, since the building is only six stories) and removed their names from the door buzzer. At some point, Mr. Nahoum’s courtside seats at a Knicks game further fanned the flames. The board ultimately hung posters in the building with a photo of the couple at a Halloween party captioned “Why aren’t these ‘caped crusaders’ paying their common charges?”

“We didn’t have a lot of recourse. The legal system is extremely slow,” said board president Jesse Newhouse. “We knocked around a number of ideas and this was pretty much the only thing we could think of that was in any way enforceable and legal.”

The couple fired back with a $2.1 million harassment suit; the judge asked the board to remove the posters. One of the units has since sold, but the couple still owes the board more than $100,000, according to board attorney Robert Braverman, and everyone else in the building is paying 25 percent more every month to make up for the difference. Deprivation has worked in other buildings that he advises, Mr. Braverman said, but 95 Greene is “a very unusual, crazy situation.”

“It’s unfortunate that it came down to something as silly as that,” Mr. Newhouse reflected. “But we had someone who was gaming the system and there was nothing we could do about it. He had multiple units. He certainly had the opportunity to sell some.”
Had he lost faith in the method?

Mr. Newhouse sighed. “No. I mean we have to do something. I think it’s a war of attrition at this point, but we would be negligent if we did nothing.”

Mr. Nahoum was not available for comment. Like many of the other residents in arrears The Observer tried to contact, his listed number was no longer in service (phone companies, unlike condos, do not view cutting services as a novelty). The Observer did, however, reach Solomon J. Jaskiel, the lawyer who had represented the couple in the countersuit.

“Legally, I thought the poster was breaching the board’s fiduciary duty,” said Mr. Jaskiel. “Personally, I thought it was outrageous. Can you imagine if anyone who you owed money to could hang up signs in front of your house? I mean, the fact that they were living with these people—it’s even more outrageous!”

Still, the methods are not something that boards, brokers or management agents are all that eager to discuss. The practice seems a little indelicate, in the words of one source, or tacky even, as another whispered with gleeful reluctance. Prudential Douglas Elliman and Halsted property management declined to comment, and while Brown Harris Stevens admitted to using the practice, none of the buildings they manage wanted to talk about it.

They were even more reluctant to discuss public shaming, aka, posting arrears lists, although a few expressed shock and horror on even hearing that such a thing existed.

“I don’t think that’s appropriate. We don’t shun people!” cried Roberta Axelrod, who sits on the board of 10 buildings as a sponsor representative of Time Equities residential, where she is director of the sales and rentals division.

Certainly, some residents want to know who is in arrears, she admitted, but in her opinion, it’s none of their business.

Distasteful as the tactics may be—and even if they don’t persuade delinquents to pay up—they do serve some purpose. At Wellington Towers, the results of the austerity measures have been financially negligible, Ms. Sheinberg admitted, but they were certainly worthwhile.

“Has it caused people to pay their arrears?” she pondered. “I don’t know. But it has given the other unit owners …” she paused to find le mot juste. “I wouldn’t say satisfaction, that’s not the word. It’s almost like the punishment fits the crime.”

kvelsey@observer.com