A real estate attorney says the pied-à-terre tax has structural complications for co-ops and condos that brokers need to understand
New York City's pied-à-terre tax has drawn a significant amount of media attention since its implementation, from both inside and outside the mortgage industry.
According to those working with the new tax, it is also bringing some confusion that may be trickling down to mortgage brokers working with NYC buyers.
For brokers advising clients on NYC purchases, understanding the mechanics of the tax before the deal progresses matters, because the surprises that can come after closing are significant enough to derail the relationship with the buyer entirely.
One New York real estate attorney said the biggest problem he is seeing in the market right now is not the tax itself but the confusion around who is actually subject to it. The tax's structure creates different complications depending on whether the purchase is a co-op or a condo, and in some cases, a buyer can inherit a tax liability that predates their ownership by years.
Parag Parekh (pictured top), principal at Moritt Hock & Hamroff LLP in New York, said the co-op structure is where the confusion is sharpest right now.
"The way the pied-à-terre tax works on co-ops is that the co-op building itself gets one tax bill," Parekh told Mortgage Professional America. "If any shareholder is going to be affected by the surcharge, the co-op theoretically has to pay it first and then collect it after the fact from the shareholder, unless the shareholder complies and pays it upfront.
“Many co-op buildings are struggling right now with how to pay it upfront, and two, how to collect it from the shareholder on the other side."
What brokers should be checking
Parekh said the co-op complication gives brokers a concrete question to raise with clients before they get too far into a building.
"If they're going to be buying a co-op unit, I would be telling my client to really look at the building's financials, see where they are, and see if they can take a surcharge hit," he said. "If the shareholder does not pay, you could see the co-op issuing an assessment for all shareholders to pay to make up anything the co-op may have lost from the reserves."
For condo purchases, the complications are different and, in some ways, more serious. Parekh said the six-year look-back period the Department of Finance applies to the surcharge is where the condo risk gets serious.
"Did that selling owner live there as his or her primary residence? If not, even though we know that they did or didn't, we as the buyer could be subject to it because the Department of Finance has a six-year look-back period," he said. "So it could be a catastrophic charge that comes in years after the purchase is completed."
Critical broker communication
Parekh said the standard legal tool for managing the look-back risk, an indemnity from the seller, has real limitations.
"An indemnity is only as good as the person behind it," he said. "So if you and I sign a contract and we close, and then I as a seller now depart to some foreign country, and now the tax comes in, how are you going to get me? It's not going to happen."
He said sellers will typically agree to hold money in escrow for two or three years but not the six the look-back period covers, leaving buyers exposed regardless of the protections negotiated at closing.
Parekh said getting an attorney involved at the start of due diligence, not after a deal is already moving, is where the protection actually starts.
"Once you find an apartment that you're interested in purchasing, from then on, when you start your due diligence, you have to get your attorney involved," he said. "That way, when you're discussing with the seller's broker, you can put into a deal sheet any type of representations as to whether or not this seller lived there as a primary resident."
He also said brokers and attorneys should be communicating directly on deals rather than relying on the buyer to relay information between them, particularly when the buyer is inexperienced.
"Both the attorney and mortgage broker's interests are aligned in making sure the buyer is protected and able to close on their purchase properly," he said. "With how the tax is structured, it might be better for the mortgage broker and attorney to talk directly and not have the buyer be the intermediary."
For brokers outside New York City who may not have tracked the issue closely, Parekh said the deadline to contest any pied-à-terre surcharges has been extended to September 18. He added other cities are already watching to see how things work out in NYC before potentially bringing a similar tax to their city.
"I know right now this is a New York City issue, but like all things, someone can just be a copycat," he said. "If this turns out to be successful, it would not be surprising to see other cities do something similar as well."
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