Jerome Strelov Esq.

FIRPTA stands for the “Foreign Investment in Real Property Tax Act” of 1980 (the “Act”).  Pursuant to US tax law, all persons, whether foreign or domestic, must pay income tax on sales of U.S. real property interests.  Domestic persons are subject to this tax as part of their regular income tax, but foreigners are not.  As such, the Act was passed to address how foreign sellers pay this income tax.  In order to ensure that foreign sellers pay the tax, the Act requires purchasers of real property to withhold 10% of the full sales price.   If the seller is a foreign corporation, the percentage increases to 35%.

Under the Act, a foreign person is a nonresident alien individual, foreign corporation that has not made an election under the tax law to be treated a domestic corporation, foreign partnership, foreign trust or a foreign estate.  It does not include a resident alien individual.

There are a few exemptions under which a seller may be exempt from FIRPTA, including:

1. If the purchase will  be used as a residence for a price $300,000 or less;

2. If the purchaser receives a statement from the seller that the seller is a not a foreign person;

3. If the purchase is of an interest in a non-publicly traded domestic corporation where the corporation provides the required affidavit; or

4. If the purchase is of shares of a publicly traded corporation.

The most common method of ensuring the purchaser that the seller is not a foreign person, and relieving the purchaser of the FIRPTA withholding, is by the seller’s delivery to the purchaser of an affidavit commonly called the “FIRPTA affidavit”.

If it is determined before closing that the seller is a foreign person, the buyer must report and pay over any tax withheld using IRS form 8288 and 8288-A.  In most cases, this must be done by the 20th day of the transfer.  When a title agency is involved in the transaction, the agency can verify the seller’s status and oversee the necessary paperwork.   If the transferor is a foreign person and the buyer fails to withhold the tax, that buyer may be held liable for the tax.  This potential exposure mandates particular attention to this often overlooked aspect of the real estate closing.

It goes without saying that a “foreign person” buying United States real estate should be aware that they will be subject to FIRPTA withholding when they eventually sell the property.

By: Nahum M. Palefski, Esq. and Jerome J. Strelov, Esq.

Prepayment Rights:  When lenders make loans, they expect a certain profit from the interest paid by the borrower over the course of the full term of the loan.  When a loan is paid off before the intended maturity date, the lender loses the benefit of its bargain.  In New York State, borrowers do not have a right to prepay loans except as may be set forth in the loan documents.  Therefore, borrowers should insist on an express right to prepay.  Negotiation will arise in the context of when the borrower may be allowed to prepay (at any time or only after a certain number of years into the term) and/or the amount of any prepayment (in whole or just in part).  Borrowers should also make sure that any prepayment penalty would not apply to the application of insurance proceeds as a result of a casualty or condemnation event.

Due on Sale:  With a loan that is secured by one property, it would difficult to challenge a provision allowing a lender to call a default if the borrower sells the property without the lender’s permission.  However, if the loan is secured by more than one property, the borrower will want more flexibility in this regard.  One way to make this provision more palatable is to ask that the lender’s consent to a sale not be unreasonably withheld, conditioned or delayed.  Another possibility is for the lender to allow one or more of the properties to be sold provided the proceeds are used to pay down the loan proportionately.  It is important to make sure these scenarios fall outside the general prepayment provision and will not be subject to prepayment penalties, if any.

Transfer Rights:  The provisions concerning the transfer of interests in the borrower are often difficult and highly negotiated.  A lender’s primary concern regarding transfers of interest in the borrower is really one of change of control.  The lender makes a loan to a company based on many factors, one of which is its comfort level with the principals of that company.  However, a borrower should always campaign for a bit of wiggle room.  Specifically, a borrower should be allowed to make transfers that do not violate the lender’s primary concern.  For example, transfers that do not result in a change of control or transfers to affiliates or to family members in connection with bona fide estate planning should be permitted.

Guarantors:  A principal of a borrower that is asked to give a personal guaranty of the loan should tread cautiously.  Lenders will always prefer broad liability, but these individuals should strenuously resist.  Ways to reduce liability include setting a maximum amount of exposure or limiting the guaranty to interest only.  Another way is to provide for a release if the borrower meets certain conditions (e.g., operating income or debt-to-equity ratios).

Escrows:  Many loans will call for certain funds to be held in escrow.  Typically, these are for real estate taxes and insurance payments.  Obviously, a borrower should try and eliminate these accounts entirely, but if the lender insists, a borrower could try and have the accounts set up only if there is an event of default.  A borrower should also oppose the Lender’s preference to hold the funds in non-interest bearing accounts.

Closing Costs:  Although the borrower generally does not have much leverage to negotiate many of the bank fees and expenses, it is important that the commitment letter detail all the costs and fees that the borrower is going to be expected to pay and their due dates.  Typically, these include any origination fees, the cost for the environmental site assessment, the appraisal, flood zone certificate, lender’s counsel’s fees and other miscellaneous bank service fees.  If the borrower is expected to pay for the bank’s legal fees, perhaps a cap can be negotiated so that the borrower’s exposure is limited.

As mentioned above, a loan commitment letter merely provides a general outline of the understandings between the parties that will be developed in greater detail in the loan documents themselves.  However, much time and effort (and legal fees) can be saved if those understandings are sufficiently laid out in the commitment letter, ensuring that there are no surprises as the parties move further into the process.

By Nahum M. Palefski

These are some of the things to look for in a brokerage agreement:

1)      The term:  Just how long do the Sellers have to work with the broker?  How easy is it for the Sellers to end the relationship and sign up with broker No. 2?  While the Sellers first preference might be for a shorter term then the Broker wants,  Sellers should consider that if the term is too short or the Sellers can cut out the Broker on too short a notice, the Broker may not be as willing to put as much effort (think advertising money and time) into the deal.  So it may not work in the Sellers favor to have too short a term.  Brokering is hard work and takes a great deal of time, effort and expense and it may not be in the Sellers best interest to disincentivize their Broker by keeping him or her on too tight a leash.

2)      The commission:   This one is obvious but Sellers should realize that in an “exclusive arrangement”, they will owe the commission even if they sell the property to their Aunt Tilly UNLESS the agreement says otherwise.  The agreement should also spell out if there are any reduced commissions (i.e. “4% if I sell to my next door neighbor Bob in the next 30 days”).  The Sellers will naturally want to pay a lesser commission but should note that a lower commission may result in lost opportunities since buyers’ brokers (who share the commission) might prefer to steer their buyers to properties offering a higher commission.

3)      Post Contract Sales:  It ain’t over till it’s over.  Many brokerage agreements fairly provide for the Sellers to still pay the commission AFTER the term so long as there was a sale to a buyer whom the Broker found. Fair is fair but the Broker should provide a list of the people he or she introduced to the property and there should be some time limit.

4)      “If, as and when”:  The four most frightening words in the English language to brokers.  The agreement should be clear that the Broker only gets their commission “IF AS AND, WHEN” a contract is signed, the deal closes and the Sellers get paid!

5)      Indemnity: Sellers should be protected from claims by other brokers that the Broker they are dealing with brought to the property.  Brokers hate this but it is fair.  Many brokers will reluctantly agree to it at least up to the amount of commissions they are paid.

6)      Should the Broker get a commission if the buyer defaults and the Sellers wind up keeping all or some of the downpayment?  Some brokers want their commission on the downpayment if the deal falls apart after the contract is signed.  While this seems sort of reasonable it is also fair that the commission be based on the amount of downpayment the Sellers keep AFTER all the Sellers’ costs (think legal fees in a protracted fight over the downpayment) and expenses.

While there are other issues to think about (such as  the listing price and advertising) the above list is a reasonable start of the basic points to consider when entering into a brokerage agreement.  Good Luck with your sale!

The procedure by which transfer taxes are paid and transfer documents are recorded is the execution and subsequent filing of the New York City Real Property Transfer Tax Return and the New York State Combined Real Estate Transfer Tax Return (“TP-584”).

In 2003, the New York State Budget Bill added Section 663 to the Tax Law requiring nonresident sellers to pay estimated personal income tax on the gain resulting from the sale of real property in New York State.  The tax (currently 8.82% of the gain) is in addition to the transfer taxes to the City and State and is due at the time of closing by selling individuals, trusts and estates.

The TP-584 (State transfer tax form) requiresthese  sellers to certify that they are residents of the New York State at the time of the Closing.

Those who cannot certify they are residents must complete forms (the IT-2663, for condominiums, homes and other real property or the  IT-2664, for cooperatives) which detail the gain (or loss) resulting from the sale of the subject property and compute the estimated personal income tax due.  The tax must be paid at the closing.

There are three exemptions to the requirement to pay estimated personal income tax to NYS under Tax law section 663 as follows:

1)       If the “real property or cooperative unit being sold or transferred qualifies in total as the transferor’s/seller’s principal residence.”  Meaning, a nonresident seller may be exempt from the payment of estimated tax if the property has been used as the taxpayer’s “principal residence.”  The term “principal residence” has been understood to mean that the seller must have owned the property and lived in it as his or her main home for at least two years during the five year period ending on the date of the transfer;

2)       If the seller is a mortgagor conveying mortgaged property to a mortgagee in foreclosure, or in lieu of foreclosure with no additional consideration; or

3)      If either the seller or buyer is an agency or authority of the United States of America, the State of New York, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, or a private mortgage insurance company.

The IT-2663 and IT-2664 forms are somewhat complicated as they contain line items for improvements, closing costs and depreciation and are typically completed by the seller’s accountant.  As such, the appropriate IT form should be forwarded to the seller’s accountant well before closing to avoid a delay of the closing.

By Jerome J. Strelov and Nahum M. Palefski

Some suggestions for this otherwise great site: (1) Make the maps interactive so you can click on the “Red Button” indicating infestation and get the address: and (2) fix the address searching tools so that you can type in “East” or “E”, etc., and still find the building.

Take heed that this is not the end all solution. I have to believe that many people who have seen bedbugs do not post on the site and there are probably many who post sightings which are inaccurate. However, it is a good double check that can either calm or alarm you.

This site is not only for buyers. My suggestion is for sellers to also check the site to make sure they can address any bedbug problem in the building or which references their apartment before they bring the unit to market. By the same token, management companies and co-op and condo boards should routinely check the registry to make sure they can dispute false postings or their remediation efforts of accurate sightings.

By the way, you can also check hotels on the site.

Next up, movie theaters, coat check rooms?

The reason behind this shift is to address the growing trend among investors of incorporating sustainability in their evaluations of potential real estate investments.  A recent example of this was a survey initiated by a group of pension funds in the Netherlands to various real estate firms in New York to evaluate their sustainability operations.

With NYC’s new reporting requirements, there will soon be a plethora of available data on the sustainability strength of various buildings in NYC (the Department of Buildings has generated a list of all buildings that must make 84/09 reports).  This information will become critical to the economic and operational viability of property ownership in NYC.  It is safe to assume that lending institutions will follow this trend and incorporate sustainability in their due diligence before approving loans to commercial properties in NYC.

By Nahum M. Palefski, Esq.