Apartment combinations on the rise in NYC.
In 1997, the NYC Department of Buildings ("DOB") amended the Building Code to make it significantly less difficult to obtain approval to combine residential apartments.
In addition, many unit owners have found that they are happy where they live and really would prefer not to move to a new location.
Finally, the cost associated with purchasing an adjoining apartment versus purchasing a new larger apartment is usually significantly less.
The DOB amended Local Law 77 to eliminate the necessity of obtaining a certificate of occupancy where the alteration only consisted of combining apartments to create a larger residential apartment.
Under the new law an Alteration Type II application can be filed for combining apartments without removing open violations against the building.
The new law lets the work be self certified by a licensed architect, plumber and electrician. The DOB will require the removal of one of the kitchens and that gas and electrical lines are properly capped. Instead of obtaining an amended certificate of occupancy, the DOB now issues a Letter of Completion which recognizes that apartments have been legally combined.
There are two scenarios when combining apartments. The first is where an owner already owns an apartment and wants to purchase and combine an adjoining apartment. The second is where a purchaser is buying two apartments simultaneously for combination.
The process to purchase an adjoining apartment is less difficult than buying two apartments simultaneously. For the unit owner who already owns an apartment in the building, the board of directors/ managers may be more accessible and receptive to a unit combination. In addition, the plans and specifications and the building's superintendent are more accessible if a unit owner already owns an apartment in the building.
The first step before any apartment combination is to determine whether the co-op or condo will allow the two units to be combined and what the co-op corporation or condominium requirements are.
The apartment combination approval process varies building to building, but most co-ops and condos require DOB approval for an apartment combination. Always obtain a copy of the alteration agreement from the managing agent or board of directors to determine the rules and requirements of the building before agreeing to purchase the apartment(s). Talk to the superintendent or managing agent to discuss the feasibility of the combination. Try to get floor plans to make sure the two units are aligned for combination.
The next step is to interview and hire an architect. An architect will need to prepare plans and specifications showing the combined apartments. A copy of the plans will be required by the co-op or condominium for review. A determination has to be made whether the combination will have an impact on load bearing walls, relocation of risers and vents as well as, plumbing, heating and electrical lines. The plans must reflect that the alterations meet all handicap code requirements. It is wise to obtain estimates of the cost of the combination to be sure the work is within budget.
In addition to an architect, the services of an expeditor may be necessary. An expeditor is an unlicensed expert who knows the requirements of the DOB. The expeditor can assist with processing the Alteration Type II application and procuring the Letter of Completion. Frequently, the architect may provide the services of an expeditor and accordingly, a separate expeditor may not be necessary.
Before considering any unit combination, financing issues must be examined. Speak to the loan officer to see what requirements the lender has when combining apartments before signing a contract. Lenders usually require some form of consent from the co-op or condominium that the units can be combined. Most lenders require that the mortgage (if condominiums are involved) or lien (if co-ops are involved) be filed against both apartments. If one apartment is already owned and the other is to be purchased, any existing loans will need to be refinanced so that the loan is secured against both apartments.
Generally, the lender will also need to perform 3 appraisals: one for each apartment and one for the apartments as to what they are worth when combined. Furthermore, many lenders will require that monies be held in escrow until the apartments have been physically combined. The escrow amount is usually equal to the higher of one and one half percent of the cost of the project or $10,000.00. The escrow is required by the lender to insure that the units will be combined and that they will not be used as investment properties.
When a loan is made where one unit is already owned and the other is being purchased, the lender treats this as a refinance and the loan will not fund until three days later. This will require that the loan closing be held on one date and the purchase transaction be held three days later.
Another serious consideration concerns transfer taxes. While New York City transfer tax is generally a seller's expense, it can be an issue in a unit combination. The Department of Finance taxes the seller of two apartments at the commercial rate rather than the residential rate. Normally, a seller will pay NYC transfer tax at 1.0% of the sales price if under $500,000 and 1.425% of the sales price if $500,000 and over. However, when two units are transferred simultaneously, the transfer tax rate jumps to 2.625%. If the purchaser is acquiring the two apartments from a sponsor, it is important to review the offering plan to determine who is responsible for paying the transfer taxes at closing. Many offering plans place the burden of transfer taxes on the purchaser which can add a substantial closing expense.
There are special considerations if the combination involves condominium apartments. Because condominium apartments have separate tax lots, a decision should be made as to whether the tax lots should be combined when the apartment is combined. This additional step usually requires an amendment to the condominium declaration and an amendment to the offering plan. An amendment to the declaration may require a vote of the unit owners. Once a condo unit is combined into one tax lot, the cost to convert the apartment back into 2 units at a later date may be very difficult. Alternatively, if the units are not combined into one tax lot, the commercial tax rate may apply when the apartment is sold. When financing the purchase of two uncombined units, the New York State Department of Taxation and Finance also taxes the transaction as a commercial transaction.
When a lender makes a loan to a purchaser for the acquisition of a condominium unit, the state imposes a mortgage recording tax. The mortgage tax is calculated at 1.75% of the loan amount in the five New York City boroughs when the loan is under $500,000 and 1.875% of the loan amount if the loan is $500,000 and over.
However, when a purchaser obtains a mortgage on two uncombined apartments, the State treats the acquisition as a commercial transaction and taxes the borrower at 2.75%.
Since mortgage tax is imposed on "real estate" related transaction, the purchaser of uncombined cooperative units will not pay NYC mortgage recording tax when financing the purchase.
While the steps involved to combine apartments may seem fairly cumbersome, the completed project can be very gratifying. It is a way to increase living space as an affordable alternative to moving.
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|Title Annotation:||Residential: marketing & brokerage|
|Publication:||Real Estate Weekly|
|Date:||Jan 19, 2005|
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