TOWNHOUSES & HOW THEY DIFFER FROM THE REST OF NEW YORK CITY RESIDENTIAL REAL ESTATE Continuing Real Estate Education Seminar November 18, 2015 Pierre E. Debbas, Esq. Romer Debbas, LLP 275 Madison Avenue Suite 801 New York, NY 10016 212-888-3100 PDebbas@romerdebbas.com www.romerdebbas.com I. Introduction As all of you know, the bulk of our transactions pertain to co-op apartments, (which are not considered actual real estate, but rather stock shares in a corporation) and condominium apartments (which are considered real property). Coop and condo transactions have many similarities in terms of contract negotiations, due diligence and banking regulations. However, there is a third and less common type of real estate transaction that we come across and that is townhouses. II. How Townhouse Transactions Are Different 1) Characteristics: a. A townhouse is similar to a condominium or a house in the suburbs being that it is real property. b. However, townhouses are generally not part of a housing association like a condominium and are not limited in terms of conversion possibilities like a regular house.
2) Engineer s Inspection: a. An engineer s inspection is not common in co-op s and condominium s due to the fact that the building is responsible for most of the mechanical systems appurtenant to a property. In a townhouse, the owner of the property is responsible for all aspects of the property. Thus you need to conduct an engineer s report to be aware of any issues that must be addressed and the condition of the property. 3) Legal Aspects: a. A townhouse will have its own certificate of occupancy ( CO ), unlike a condominium unit or a co-op unit where the CO covers the entire building. You should always check the CO to determine what the permissible use of each floor is in the townhouse. b. A townhouse also has its separate tax lot, is billed separately for water, oil and/or gas and may even have its own water, oil and/or gas tanks on the premises. You will want to be aware of the annual costs of each item in conducting your transaction. c. With the separate lot is also the separate tax bill for the house. A common issue is the assessed valuation for taxes from one townhouse to another which we will cover below. III. Due Diligence on a Townhouse The two main due diligence points in a townhouse pertain to a) zoning issues and your client s intended use and b) title issues. 1) Zoning Issues: a. Several townhouses in the City were once multi-family homes, mixed use properties or commercial properties. In converting any of these types of properties into a townhouse, you will have to obtain new CO and get the City s approval. b. If the building is a landmark building, you will have to get approval from the landmarks department for a conversion. c. Purchasers who intend on buying a property and converting it to a residential townhouse or simply expanding an established residential townhouse need to be aware of zoning issues, which primarily consist of: i. Air Rights: how many floors can you add to the current structure? 2
ii. Floor to Area Ratio ( FAR ): If your client plans on expanding either the height of the building or the width, you will need to know what the permitted FAR is. Is the ratio of the total floor area of the building on a certain location to the size of the land of that location, or the limit imposed on such a ratio? iii. Set Back Lines: you will need to know how far you can expand your property. Each property has different rules for how close it can be to the boundary lines of the property. iv. Classification: if your client ever desires to convert a property, you will have to be aware if it is zoned in a commercial district, if the building itself has a unique classification such a religious institution (please see the attached article from the Wall Street Journal and the transaction summary) or other unique classification which you will have to apply to the City to convert. 2. Title Issues: Title issues for real property are predominantly the same; however, townhouses being their separate entity bring about title issues similar to those of buildings or houses as opposed to condominiums. 1) Violations: a. Townhouses often have various violations attached to them, like ECB (environmental control board) violations, sidewalk violations, etc. These violations need to be cured before a closing can take place. As a seller s broker, you should contact your title insurance company to confirm what violations currently exist on the townhouse, the magnitude of those violations and what is required to remove them. This way you ensure that your client has or will have the sum required to remove them and there is enough time to remove them prior to closing. 2) Certificate of Occupancy: a. You need to make sure that all alterations that have been conducted to the property that require a change to the certificate of occupancy have been completed. Also the certificate of occupancy must be current at the time of closing. b. In townhouse transactions (if recently renovated or newly constructed/converted) if a permanent certificate of occupancy is not 3
in place and rather just a temporary certificate of occupancy; several purchasers will refuse to close as they do not want to assume the responsibility of completing the work to the townhouse required to obtain the permanent certificate of occupancy. 3) Survey: a. The purchaser will need to conduct a survey reading on the property to confirm that the property does not encroach onto any other properties and is contained within its legal boundaries. b. A seller should always retrieve their survey to deliver to the buyer prior to a deal going into contract. This avoids the delay of the buyer conducting the survey prior to the contract being signed and the contract signing being delayed as a result. 4) Party Wall Agreements: a. Party wall agreements are common in townhouses due to the fact that they usually are adjoining another property. They stipulate the responsibility of the shared wall between adjoining properties, which is important in the event there are any structural issues with the townhouse that need to be addressed. b. Once again, you should confirm if there are any party wall agreements and your attorney should review them prior to signing the contract. 5) Tax Assessment: a. You should always retrieve the tax bills for the townhouse for the past couple of years and see if there have been any sharp increases. At times the City is inaccurate in their assessment if the property has recently been renovated or the market conditions have changed. b. The reason for reviewing this is that if the real estate taxes for your property appear to be higher than other similar properties, you can perhaps apply to the City (through a tax certiorari attorney) to have them reassessed and possibly lowered. This would make your property more marketable. 4
IV. Recent Townhouse Transactions Which We Handled 1) Acquisition of a Commercial Property During Forebearance Negotiations with Lender and Conversion To a Townhouse We recently represented two famous authors in the purchase of a 10,000 square foot commercial landmarked building in Manhattan. The seller was a real estate developer that planned on converting the property to a condominium. Due to the change in the market, they were not successful in their conversion plans and their construction loan had expired. The seller s lending institution avoided foreclosure proceedings due to the uncertainty of the value of the building (the interior is destroyed and needs a complete renovation) and due to the fact that the seller was receiving interest from other developers and purchasers. Our clients wanted to purchase the building, but knew they would not be able to get financing for a transaction of this nature and wanted to convert it to a residential property and restore it to its original use as a single family mansion. The issue we encountered is that our client needed to pull equity from an asset it had overseas in order to purchase this property. The seller could not afford to wait an unspecified period of time to enter into contract because their bank was threatening to foreclose on the building. We therefore negotiated a triple net lease with a one year option to buy agreement. This way the lending institution saw positive cash flow coming in from the property which would cover all of its expenses and the potential for the building to be sold and for the bank to be paid their entire principal balance on the mortgage. Upon our review of the documents, it became apparent that the seller was going to give our 10% contract deposit to her bank as part of the forebearance and the sum would not be held in escrow. We would not consent to this and this lead to prolonged negotiations. During the negotiations, our clients were able to obtain the full sum necessary to purchase the building in cash, we avoided the option agreement and entered into contract with the 10% deposit being held in escrow. An issue that arose when the seller purchased the building is that it was purchased from a religious institution in Manhattan. The building had been used as a synagogue for several years. Under New York State law, whenever a religious institution sells a property, they must obtain a court order approving the sale. The synagogue did in fact obtain the court order and legally sold the building. However, members of the synagogue that were opposed to the sale have been contesting it for several years. Prior to our client entering into contract, there was a Lis Pendens on 5
the building (filed by the disenchanted members of the synagogue who were in fact barred from the building), which would block any sale. We made sure this Lis Pendens was removed before we signed the contract. The Supreme Court of New York ruled that the sale was done in accordance with State law and was sold to a bona fide purchaser. Two weeks before our closing date, the synagogue filed an appeal on the Supreme Court s ruling and took this matter to the Court of Appeals and has named the seller in our transaction as a defendant. We worked with our client s title company and the seller s title company (who is representing the seller in the lawsuit) to determine how long it will take to have the appeal thrown out of Court and to see if we can obtain indemnification from the seller s title company and enable our title insurance company to insure our claim to ownership and eliminate any risk to our client. After three weeks of negotiations with both title companies, we were able to obtain indemnification for our client s title company and therefore obtain title insurance on the property. We successfully closed a week thereafter and are currently working with our clients on the conversion of the building to a townhouse. Please see the attached article from The Wall Street Journal about this transaction from June 15, 2010 entitled Black Synagogue Dispute Snags Buyers. 2) Time of the Essence Letter Enforces Sale of an $8,000,000 Residential Property in Less Than 24 Hours We recently represented an architect who had purchased a 170 year old townhouse in the West Village and converted it from a 7 unit rental building into a townhouse. We had entered into contract over the summer with a closing date of on or about September 1, 2010. New York State case law provides that both purchasers and sellers are entitled to a reasonable adjournment of the on or about closing date in the contract. The precedent set by case law is that a reasonable adjournment is approximately 30 calendar days. We had scheduled the closing for October 4, 2010 and the purchaser had refused to show up to the closing and gave us notification of this less than an hour before the closing. The purchaser had attempted to arbitrarily negotiate a concession at the last minute. We had advised our client not to consent to this and gave the purchaser 24 hours to confirm a firm closing date for the same week and to wire the balance of 6
the purchase price (minus the 10% contract deposit) into our attorney escrow account. When the purchaser failed to do this and demonstrated the potential to drag this matter out indefinitely, we sent them a time is of the essence closing letter which states that if they fail to close on the date specified in our letter, they will be in default of the contract and risk losing their entire 10% deposit (approximately $800,000) which would be considered liquidated damages for our client. There are three main elements that courts look for in the validity of a time is of the essence letter. They are 1) notice must be clear, distinct and unequivocal, 2) it must inform the other party that if they do not perform by that date, they will be considered to be in default and 3) it must fix a reasonable time within which to perform. The time is of the essence letter had these three elements incorporated and set the closing date for 10 days from the date of our letter (10 days under our circumstances is considered reasonable notice). We had sent this letter at 7pm on October 5, 2010 and were able to use it as a negotiating tactic to get the buyer to the closing table less than 24 hours later. We ended up successfully closing in the evening of October 6, 2010. This townhouse was featured on the cover of Elle Décor magazine in 2009. Please find attached a copy of the cover and article. 2012 Romer Debbas, LLP 7