FEMA Struggles To Understand New York Housing

The housing market in metropolitan New York is notoriously odd. While most other Americans own their dwellings, most New Yorkers rent. In the rest of the country, landlords pay brokers to find tenants; in New York, tenants often pay the agent who shows an apartment.

But perhaps the strangest twist is that in the New York area, many apartment owners do not actually own their apartments. This is a peculiarity of co-op living, a form of ownership that is common in New York, rare in most other big cities, and unheard of in rural and small-town America.

Another place where co-ops are an alien concept is the Federal Emergency Management Agency. This is proving to be a big problem as the New York region struggles to recover from Hurricane Sandy.

A co-op buyer does not obtain title to real estate. Instead, the buyer acquires shares in a not-for-profit corporation that, in turn, owns the apartment building and any common property. The shares come with an indefinite or extremely long-term proprietary lease, entitling the purchaser to reside in the apartment. Co-op residents, then, are not technically homeowners; they are shareholding tenants. They pay a monthly maintenance charge to the co-op corporation, which uses the money to operate and maintain the building, as well as to pay any mortgage the corporation may have taken out on the property.

Co-op buyers often get a bank loan to finance the purchase, just as home and condominium purchasers do. (In a condominium, buyers hold title to their own apartments.) Co-op owners typically think of their loans as mortgages, but they are not. Mortgages are secured by real property; co-op loans are instead secured by the co-op member’s shares and lease.

The issue for FEMA is that the Stafford Act, a law that governs federal disaster relief, says the agency can only give its discretionary grants for structural repairs to homeowners. (Like renters, co-op owners can receive limited federal assistance for damage to uninsured furniture or other belongings inside their units; the funds to which they lack access are those that would allow them to undertake larger reconstruction.)

FEMA is clearly correct in concluding that co-op residents are not homeowners. It is less clear, however, whether existing statute actually mandates FEMA’s narrow interpretation of its powers and, if so, what should be done about it.

FEMA takes the position that a co-op should be treated as a business, which is clearly not the case. Other than for very limited rentals to tenants such as doctors and dentists, co-ops do not engage in business of any kind. The law treats them as non-profit corporations, and it doesn’t make sense for FEMA to ignore their unique character.

Congress could easily produce a technical correction to clarify that co-op owners should be treated as homeowners for disaster relief purposes. An example of this sort of legislation already exists. Internal Revenue Code Section 163(h)(4)(B) allows co-op owners to treat interest paid on their loans as deductible mortgage interest, even though their loans aren’t technically mortgages.

A similar legislative patch for disaster relief ought to pass without controversy. If Congress can’t get its act together in the wake of as big a disaster as Sandy, residents of other parts of the country ought to contemplate how New Yorkers might react to future relief appeals when disaster strikes in their own neighborhoods.

About Larry M. Elkin 564 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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