NY State Bar Ethics Opinion Doesn’t Go Far Enough

by Robert J. Smith on October 19, 2011

This week, the New York State Bar Association’s Committee on Professional Ethics came down with an opinion on the subject of a lawyer’s participation in the process of “grossing up” the sales price of a residential property in an amount matched by a “seller’s concession”. Here is a link to the opinion: http://www.nysba.org/AM/Template.cfm?Section=Ethics_Opinions&template=/CM/ContentDisplay.cfm&ContentID=55697. The conclusion of the opinion is that this practice does not constitute an ethical violation as long as there is full disclosure of both the grossing up and the seller’s concession.

This is a practice that is, by its very nature, intended to deceive someone, and I do not believe that full disclosure alleviates its potential harm.  Here is an example: Seller and Purchaser agree to a price of $500,000 for the purchase of a coop apartment unit. For any one of a variety of reasons, it is subsequently agreed that the sale price be increased to $525,000, with the seller providing a “concession” of $25,000 to be applied against purchaser’s closing costs.

Won’t the $525,000 value be the one used as a “comparable” by appraisers, thereby artificially inflating property values, misleading future purchasers and making it more difficult for them to get loans? What does the purchaser use as the basis in the case of capital gains reporting, the price that was actually paid for the unit ($500,000) or the grossed-up price ($525,000)? What about a coop that has a flip tax calculated on percentage of profit made on the sale. Which price is used as the basis – the “real” price paid when the apartment was purchased or the inflated price? This grossing up/concession process is nothing more than a fiction that has a boatload of potential adverse consequences. The fact that this is a practice that has gone on for many years does not provide any comfort or make this situation any more palatable.

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