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Co-ops rent some units for the benefit of all

A lucrative ground-floor lease can add 10 percent or more to the value of an apartment, residential brokers say. A sprawling two-bedroom loft at 464 Broome Street in SoHo, New York, for example, is in contract for $3.22 million, nearly 10 percent over its asking price, in large part because the listing not only offers no maintenance but provides its shareholders with $20,000 a year in income.

"The building has just eight apartments," said Henry Hershkowitz, a broker at Douglas Elliman who represented the seller, "so the revenues from the two stores on the ground floor cover the real estate taxes, the building's upkeep, even a full-time super, and then there is money left over for an annual dividend."

An apartment of this size in SoHo would typically come with a monthly maintenance of $2,400, said Robert Dankner, the president of Prime Manhattan Residential, which represented the buyer. When $20,000 a year in dividends is added to the nearly $30,000 saved in maintenance, there is a net savings of close to $50,000 a year, he noted.

As Mr. Dankner put it: "Depending on how you model it, it would take $750,000 earning a 6.5 percent interest to get that kind of return. Or, if they live there for 10 years, they save themselves half a million dollars. If you think of it from this perspective, even with the bidding war and it selling for over ask, the apartment was undervalued."

Others that decided not to sell their retail circumvented the 80-20 rule by creating a long-term master lease of the ground-floor space, in which the owners of the master lease would be all building residents and some outside investors, who then would sublease the space to a retail tenant at market rates. This became problematic when sellers moved out of the building but kept their ownership stake in the master lease, preventing new owners from benefiting from it.

"Now that the 80-20 rules have been relaxed," said Margaret D. Baisley, a real estate lawyer with her own practice in SoHo, "those entities who formed these master leases want to take them back, but other investors have come to own them and they don't want to change the scheme, to the detriment of the building."

And even for those buildings that own their retail spaces outright, the effect on their bottom line may be somewhat muted. "Our storefront income is great, but it is not as romantic as you may think," said Karel De Boer, an agent at Douglas Elliman and the property manager for 17 East 89th Street. "While our rent has increased, so have real estate taxes, payroll taxes and utilities."


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