Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

Yesterday we explored how parents are often willing to provide cash to their progeny, so as to facilitate a home purchase and family formation and expansion. But money, being digital, requires quantitative expression, and documentation.

 

Get the numbers into your head

What the borrower and the documents may think is hard debt, the lender may silently consign to the category of soft debt:

He suggests that they draft a formal document stipulating that they will make monthly payments on their loans, rather than paying their parents back when they sell the apartment. This way the children get an annual tax deduction for the interest paid on the mortgage, and the parents don’t pay all of the taxes that they would if they offered an outright gift.

 

The children’s contract might stipulate that if they sell the apartment, they must pay back their parents, just as they would pay off a mortgage to a bank. The children can keep the profits, if any, but if the apartment has declined in value, they still pay their parents back.

In other words, more financially sophisticated parents and children in fact negotiate a customized structured-finance transaction that mixes hard and soft debt elements.

In neighborhoods like Williamsburg, some parents are buying apartments outright for their children. Apartments there typically cost $700 or so per square foot, compared with more than $1,000 in the financial district in Manhattan, said Christine Blackburn, a Prudential Douglas Elliman associate broker at the building where the Agrawals bought.

 

She added that parents or children with trust funds are buying about 25% of the inventory in Williamsburg. In Ms. Agrawal’s new building, parents bought about 10% of the 36 units.

 

Not only do inter-generational buying entities represent a significant source of demand in some markets and some configurations, they also provide a means of moving wealth from overseas into the United States.

 

Quick, name the city

When many foreigners think America, they envision Lady Liberty and New York City, and so New York captures the money as it captures the imagination — as, for that matter, it captures aspiring immigrants.

 

Dr. Agrawal is a surgeon at Staten Island University Hospital’s South Site, and he and his wife, who live in the southeast Annandale section of the island, have investments in the stock market and in real estate.

 

The couple decided that an investment [in Williamsburg] was a good way to give Natasha a place to live and to teach her how to build equity.

We’ve previously seen that homeownership is a savings device; because it is a substantial financial commitment, it stimulates financial literacy, and inculcates the habits of savings:

 

She is contributing about 20% of the down payment toward the purchase, which translates into about $18,000, and $1,000 for the monthly mortgage payment plus utilities.

 

 

The intra-familial structured finance adds another layer of complexity: co-investment in hard equity as a means of motivating the borrower (sponsor).

The Agrawals also tried to balance their daughter’s requests to buy something understated and environmentally sensitive with what they saw as a potentially profitable investment.

 

Interesting dynamic of inter-generational objectives. Is green good, or merely green? J

The Agrawals do not plan to put the financial arrangements in writing

 

Bad idea, folks

Mistake, Mr. and Mrs. Agrawal — it is precisely with family that implicit expectations can wildly diverge. In fact, the closer the familial relationship between borrower and lender, the more likely it is that they will diverge over time, and become not a financial tension but a familial one. The chickens may come further home to roost when the home becomes a financial asset:

 

Because Ms. Agrawal is helping with the monthly payments, the deed to the apartment will be in her name and her parents’ names, her mother said.

Whether or not they wish to, the Agrawals are entangling themselves in contractual relationships.

She added that they would give their daughter 20% of the profits when they eventually sell.

If this is not written down, then it is guaranteed to become a source of friction.

 

No friction here!

Profits from appreciation? From equity buildup? What about the cost of improvements?

Ms. Agrawal said she did not expect her parents to share the profits with her. As she put it: “It’s extraordinary that they bought me an apartment. But it’s not what I expected. My parents have done enough for me.”

 

Ms. Agrawal’s current feelings do her credit, yet I suspect that over the ensuing years they will change, as that “20% of profits” embeds itself ever further into her subconscious and expectations.

 

These financial relationships can become far more complicated when the apartment in question is a Manhattan co-op, because boards have come up with rules that limit how much financial help buyers can get from parents.

 

Ownership and financing are not simply internalized bargains; they interact with the outside world, and that outside world relies on contracts, and writing. And it’s not just boards — lenders care too. Lenders seek representations that the borrower received no financial help to buy the apartment. No loans — and often, no gifts.

Brian Spence, a 29-year-old event planner in Manhattan at Deloitte, the accounting and consulting firm, discovered this late last year when he decided to live separately from his partner of five years, and he started looking for an apartment. He quickly found that many co-ops stated outright that they didn’t accept buyers who received help from parents.

 

“Help”, in this instance, means loan help.

While he had saved about $30,000 to buy a studio, he realized that he would need his parents to match that amount for him to come up with a 20% down payment.

Down payment help differs.

In December, Mr. Spence found a 300-square-foot studio at 457 West 57th Street for $299,000 and persuaded the seller to accept $265,000. The co-op board required that he get his parents to put in writing that their contribution was a gift and that he did not have to pay it back.

 

The co-op board is being entirely sensible. It is seeking to uncomplicate its financial exposure, because experience shows that overly complicated financial structures have impaired decision ability … which means they are riskier loans.

So he called his parents in Midville, Ga., explained that he had negotiated a deal, and asked them to give him $26,500 and write a letter saying that this was a gift. They agreed.

 

Thus converting the Bank of Family into the Family Foundation.

 

Not that there’s anything wrong with that!

“I was asking for an equity partner in this,” Mr. Spence said. “I felt like we were going into it together.”

The generations do reach back in time:

His father, Gary Spence, a contractor, said that in 1972, his own father gave him three acres of land to help him build his first house and move his family out of a mobile home.

 

Even the Family Foundation imposes performance obligations:

 

Brian Spence said that there are some implicit assumptions about accepting his parents’ help. Three to four times a year, his mother and her cousins or her friends visit New York and stay with him. He expects that in his new apartment he will continue to play tour guide for his relatives.

The performance obligations also runs in the other direction:

 

He also says that as their only child, he would be quick to move back to Midville (population: 457) if they ever needed his help.

The young use future-tense verbs: I will do this, I shall do that. Easy to say, easy to promise, harder to do when the time comes — but let’s think the best of Mr. Spence.

His broker, Jamie Breitman of Bellmarc Realty, said that the smoothness of Mr. Spence’s deal was highly unusual.

 

 

Will you still need me? Will you still feed me?

Family is personal, and personal is often private — in both directions:

Marilyn Kane, who has run Butler Kane Commercial Real Estate in Manhattan with a partner for 17 years, offered to help her 26-year-old son buy a $500,000 one-bedroom co-op in Murray Hill.

The son, who has a different last name, asked not to be identified because he did not want his co-workers to know how much his mother had helped him.

 

“Your mother should know.”

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