End of 60/40 Presentation

Report
WELCOME
We are the Brooklyn Law School Corporate and Real Estate Clinic. Our mission is to
provide legal services to HDFC’s in Brooklyn, Bronx, and Manhattan. Our work
primarily consists of loan closings, co-op unit closings, shareholder meetings and bylaw and proprietary lease amendments. We also provide this seminar periodically to
inform directors of their options for the future of their HDFCs.
Brooklyn Law School Real Estate Clinic
1 Boerum Place, 3rd fl.
Brooklyn, N.Y. 11201
718-780-7994 (ph)
718-780-0367 (fax)
Contents
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Background--------------------------------------------------------------------------------------What is A 60/40? -------------------------------------------------------------------------------Ending the 60/40 -------------------------------------------------------------------------------What is a 70/30? -------------------------------------------------------------------------------HPD’s Audit -------------------------------------------------------------------------------------How To Use ACRIS ---------------------------------------------------------------------------Overview -----------------------------------------------------------------------------------------Term -----------------------------------------------------------------------------------------------Profit Split ----------------------------------------------------------------------------------------Affordability Standards ------------------------------------------------------------------------Purchaser Income Standards ----------------------------------------------------------------Primary Residence Requirement -----------------------------------------------------------Sublease Requirement ------------------------------------------------------------------------HDFC Leasing Restrictions -------------------------------------------------------------------Training Standards ------------------------------------------------------------------------------Reporting Standards ----------------------------------------------------------------------------Reserve Fund Standards ----------------------------------------------------------------------Maintenance Fees -------------------------------------------------------------------------------Moving Forward -----------------------------------------------------------------------------------
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Background
1. To satisfy the current Security Agreement(whether because it has
expired or the HDFC wishes to sign on to a new Regulatory
agreement) a Satisfaction must be provided by the City.
1. By-laws, proprietary lease and Certificate of Incorporation will remain
unchanged unless amended.
1. While signing onto the New Regulatory Agreement is not a
requirement at the time being, it is something which the HPD and
UHAB recommend. The agreement could highly benefit the HDFC
operations and include a higher income limit.
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What is a 60/40 Security
Agreement
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Each of the Co-op’s you are a part of are subject to a Security
Agreement.
At the HDFC’s creation, they signed onto this agreement with the city.
Like a mortgage, the 60/40 Security Agreement is a promise to pay
money. Also like a mortgage, the Security Agreement is recorded with
the city.
Each time a unit is sold, 40% of the profit from the sale must be paid
to New York City
They last 25 years, but even when they expire all the 60/40 related
restrictions do not expire. There is a detailed process that must be
completed in order to satisfy the security agreement and to make your
corporate documents reflect this.
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Ending the 60/40
1. Once the security agreement expires, a satisfaction must be requested and granted by the
City before the HDFC is released from the security agreement.
1. TO GET A SATISFACTION LETTER:
a. Send a satisfaction request to [email protected]
b. HPD checks to see if payments were properly made.
c. A satisfaction, which terminates the security agreement, will be prepared by HPD.
1. AFTER SATISFACTION HAS BEEN GRANTED: Certificate of Incorporation, proprietary
lease and by-laws MUST be amended.
a. Note that there must be enough Shareholders eligible to vote for amendments to
these documents. Without enough eligible voters, the HDFC will not be able to adopt
the new regulatory agreement.
1. If these steps are not taken, then after the expiration the corporations documents will be
incorrect and a shareholder who sells their unit would get 100% of the profit, leaving the
HDFC empty handed.
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HPD’s Audit for Flip-Tax
- HPD will audit the HDFC requesting the satisfaction to make
sure the 40% flip tax was paid to the city for all sales within
the resale period.
- HPD will use ACRIS to check for the sales which occurred
during the resale period and determine how much is still
owed to them.
- The HDFC should use ACRIS to look for outstanding fliptaxes owed to the city. If flip-taxes are owed, City may
withhold satisfaction letter.
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How to Use ACRIS
1. ACRIS is NYC’s online record database.
2. Type a836-acris.nyc.gov into the navigation bar, or simply type ACRIS into
a Google search.
3. Click “Find Addresses and Parcels.”
4. Fill in the top portion (i.e. Borough/County, Street Number, Street Name,
Unit).
5. Click “Document Search by BBL” on the bottom right corner of the page.
6. Click “Search” on the bottom left.
7. Increase “Max Rows” to 99.
8. The column that reads “Document Type” should lead you to the document
you are looking for. In the case of transfers of co-op shares, look for “Real
Estate Transfer Tax” or “UCC” filings.
9. A tab with the letters “IMG” is on the left. Click that to open the document.
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What is the new 70/30
Regulatory Agreement
- It is a new regulatory agreement being offered by the City,
and city allows all HDFC’s to sign onto the new
agreement, EVEN IF THE 60/40 HASN’T EXPIRED.
- Instead of splitting unit sale profits with the city, the profits
are split between the seller and the HDFC (70% profit to
the Shareholder and 30% profit to the corporation.
- There are many other benefits to choosing the 70/30
Regulatory Agreement.
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Overview of Regulatory Agreement
There are many differences between the 60/40 Security Agreement and the 70/30 Regulatory
Agreement. Over the next few slides we will go over the following:
1. Term Length - How Long?
2. Profit Split - Who gets what?
3. Purchaser Income Standard - How much can a new buyer make?
4. Affordability Standards - How much can an apartment be sold for?
5. Primary Residence Requirement - How many days per year does the owner need to be living in
their apartment?
6. Sublease Requirement - Who can an owner sublet to? For how long?
7. HDFC Leasing Restrictions - Who can the co-op rent to? When will the co-op NOT be able to
rent a unit?
8. Training Requirements, Reporting Requirements, Reserve Fund Requirements - What does the
board have to do each year?
9. Maintenance Fees - How much will maintenance be increased?
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Term
Security Agreement Expired
*Must make request in writing to City for satisfaction of this
agreement. Once the satisfaction is granted, HDFC must record it.
Regulatory Agreement:
Expires 30 years from signing.
(“Commencement Date”)
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Profit Split
If HDFC Doesn’t Sign Onto New:
Regulatory Agreement:
Article XV, Sec. 2 of By-Laws: The
profit sharing with corporation only
lasts through the “resale period.”
70% of Profits to Shareholder and
HDFC (Non-city profit share will be
decided by shareholders and reflected
in by-laws).
At this point, it appears that a
shareholder could sell a unit and take
100% of the profits.
The HDFC could amend the by-laws
to change the allocation of the noncity profit share.
30% of profit from sales goes to the
HDFC.
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Purchaser Income Standards
If HDFC Doesn’t Sign Onto New:
Regulatory Agreement:
Income of prospective tenant cannot
exceed 6-7x annual maintenance and
utilities.
Income of prospective tenant cannot
exceed 120% of AMI as determined
by HUD from time to time.
i.e. $600 maintenance + $100 utilities =
$50,400/$58,800
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Affordability Standards
If HDFC Doesn’t Sign Onto New:
The buyer’s income must be below 6 or 7 times the maintenance
- HOUSING COSTS (maintenance, utilities, mortgage, etc.) must not
be more than 30% of the buyers income.
-6 times the annual maintenance + utilities (approx. $9,456.00) means
that buyer must not make more than $56,736.00 per year.
-Also, this means that the total housing cost must not exceed
$17,020.80. (30% of 56,736).
-After maintenance and utilities (9,456) this only leaves room for a
mortgage payment of about $630.00 per month.
Regulatory Agreement:
The buyers income must not exceed 120% of the Area Median
Income. For a family of 4 that is $95,050.
-Only 30% of this income can be used towards housing costs
-30% of 95,050 is $28,515.00
-After Maintenance and utilities(9,456.00), this leaves room for a
mortgage payment of $1,588.25 per month.
-A person within these guidelines could afford a purchase price of
approximately $250,000.00
-A person within these guidelines will only be able to afford a total
purchase price of about $100,000.00.
-70% of $250,000.00 is $175,000.00
-95% of $100,000.00 is $95,000.00
*Based on 20% down payment and 6% mortgage rate.
*Based on 20% down payment and 6% mortgage rate.
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Primary Residence Requirement
Current Proprietary Lease:
Regulatory Agreement:
Must be primary residence. Must be
domiciled in unit or live in unit for
183 days (approx. 6 months) out of
the year.
Must be the primary residence.
Must be domiciled in unit or live in
unit for 183 days (approx. 6 months)
out of the year.
Cannot sublet for more
than 6 months at a time.
Same
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Sublease Requirement
Current Proprietary Lease:
Regulatory Agreement:
Sublessee must fit the income
guideline of 6/7x maintenance
Sublessee must meet the 120% or
less of the AMI requirement.
Need Board approval to sublet. If
not, then ⅔ shareholder approval.
Sublessor cannot rent out for more
than 18 months every 5 years.
Cannot sublet for more than 10%
more than maintenance fees
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HDFC Leasing Restrictions
Security Agreement:
Regulatory Agreement:
Any resident/shareholder of the
80% must be owner occupied.
HDFC must fit the income guidelines HDFC cannot rent if it owns more
than 20% of the units.
Current: brings in lower income individuals via
renting and HDFC still gains revenue. Also
maintain some control. Limits renting.
Regulatory: HDFC forced to enter into
proprietary leases rather than rent (at a certain
point). Non-rental of vacant units could results
in loss of revenue for HDFC. (Counterbalanced
by sales income)
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All residents, whether renters or
shareholders must still meet
income guidelines
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Training Requirement
Current Proprietary Lease:
Regulatory Agreement:
There are currently no training
requirements.
- All Board Members must take a training
course (each year) in housing
management which is approved by the
HPD.
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Reporting Requirements
Security Agreement:
Regulatory Agreement:
There are currently no regulations
regarding the submission/review of
documentation to HPD.
Board shall submit documents to
HPD annually. HPD can inspect and
audit documents and financials.
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Reserve Fund Requirement
If HDFC Doesn’t Sign Onto New:
There are no requirements for the
HDFC to establish and/or maintain
reserve funds.
Regulatory Agreement:
HDFC must establish a reserve fund to be
used for repairs and emergency repairs in
which they deposit:
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$750/dwelling the first year
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$200/dwelling each year
This is highly recommended for all Co-Ops
regardless of security agreements.
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Maintenance Fees
If HDFC Doesn’t Sign Onto New:
Regulatory Agreement:
There currently are no requirements
for increasing maintenance fees.
Mandatory requirement for
maintenance to be increased AT
LEAST 2% EACH YEAR.
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Moving Forward
Directors that are pleased with the Regulatory Agreement should seek a satisfaction letter,
whether or not their current agreement has expired.
Prior to the satisfaction letter, Directors must be certain that they have enough Shareholders
eligible to vote. The amendments to the corporate documents, which is required for the
adoption of the Regulatory Agreement, cannot be done without the vote of the
Shareholders.
If you have any questions or concerns with regards to the Regulatory Agreement please get
in touch with HPD, UHAB, or the Brooklyn Law School Real Estate Clinic.
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