What exactly is a Pied-à-terre?
Pied-à-terre is a French term that translates to “foot on the earth” and is used in the New York City and other real estate markets to refer to what is typically a second home or vacation home. The main distinction being that a pied-à-terre is not considered to be a primary residence, but rather a place where you nonetheless wish to establish and maintain a presence, roots, or a “foothold.” When looked at it in this light, a less literal translation of the French to “foot on the ground” makes far more sense. In general, these homes are smaller and have a more minimalistic feel, especially compared to a primary residence. Often, they’re meant to be a convenient alternative to hotel accommodation.
Another interesting thing to note is that the correct plural form is not pied-à-terres, but pieds-à-terre.
Should You Buy a Pied-à-Terre?
Generally speaking, there are quite a few possible reasons to consider purchasing a pied-à-terre. The most common include the need for a second home for work or business, travel/vacation or leisure purposes, and investment purposes. Maybe you’re buying the home as you work in the city, but live a few hours away in the suburbs, and you want a place to sleep on weeknights. Or maybe it’s just for leisurely weekend getaways. In NYC, you’ll also find plenty of luxury pied-à-terres that are used as second homes by the rich and famous, including many Hollywood celebrities. Many wealthy foreigners also purchase them as investment properties, because owning real estate in New York City is not only glamourous but also a relatively safe investment. If you're a foreign investor thinking of purchasing investment property in NYC you'll want to make sure you're familiar with FIRPTA.
What do you need to know about Pieds-à-terre?
Now that we’ve covered the definition of a pied-à-terre, you might simply be thinking that it’s just another fancy marketing term used by realtors to help sell homes, but in truth, there are far-reaching implications to consider when purchasing a pied-à-terre. For example, not all buildings will let you use an apartment as a pied-à-terre, and you’ll also want to be aware of other policies your building’s board might have in place regarding your ability to sublet or rent out your apartment. Here’s what you need to know:
Condo vs. Co-op- Pieds-à-terre come in all shapes and sizes, from glitzy and luxurious getaway homes with 5-star amenities to small no-frills apartments. Pied-à-terre can technically refer to any property, be it a condo, co-op, or even townhouse, but frequently co-op buildings will prohibit pied-à-terre use. Some buildings may not strictly prevent such usage but may impose restrictions that make it difficult to rent out or sublease your apartment. Examples include restrictions on leases and subleases for 1-2 years after purchasing as well as restrictions on occupancy over a certain period of time (for example you may only be able to rent your apartment out for two years in any five year period). Keep in mind that there is no legal definition for what constitutes a pied-à-terre, so the matter is often left up to the interpretation of condo and co-op boards.
Financing: Buying a second home can be a tricky process and it’s important to know that obtaining favorable financing for a pied-à-terre isn’t always as straightforward as you may think. To start, interest rates for second homes are typically higher than for primary residences. Furthermore, to qualify for a conforming loan for a non-primary residence or second home, your pied-à-terre will usually need to be at least 60 miles away from your primary residence. If that’s not the case, lenders will consider it an investment property, and rates will be even higher. You can also expect more stringent requirements in terms of your credit score, down payment, etc.
Taxes: Owning or investing in a second home always has various tax implications (and yes, you can take a mortgage tax deduction on a pied-à-terre), many of which you can read about on the IRS website. In recent years New York City’s pieds-à-terre have been in the news as local politicians, and government officials have proposed various new taxes on them. The idea behind the proposed pied-à-terre tax is that wealthy buyers, particularly foreign investors, are purchasing pieds-à-terre and leaving them unoccupied for most of the year. In turn, this is costing the city hundreds of millions in tax revenues as these buyers do not pay NYC income tax. Nonetheless, it is highly unlikely that any such proposals pass (especially considering the potential legal implications*), any new pied-à-terre tax would be far-reaching and would likely adversely affect the luxury real estate market. So far, the only changes to real estate taxes have been increases to the mansion tax and New York transfer taxes.
*A tax on non-primary residents could be construed as being discriminatory as well as being unconstitutional under the Commerce Clause.
How and where can you find a Pied-à-terre in NYC?
If you’re ready to purchase, the simplest way to start searching for a pied-à-terre is to look at condo buildings as condo boards cannot control how you use the apartment. This means that virtually any condo will be a suitable option. Many NYC co-op buildings will also allow pieds-à-terre, but you’ll want to double-check to be sure. Additionally, if you plan on renting out or subletting your apartment while you’re not there, co-ops are generally more restrictive than condos. When it comes to where you can find a suitable apartment, the truth is that there are great pieds-à-terre throughout NYC, but it will often be easier to find them in neighborhoods with a lot of new construction, as most new developments are condos.
One important thing to note is that the less restrictive a building is when it comes to its sublet and pied-à-terre policy, the more expensive the apartments are likely to be. This is due to the fact that more potential buyers will be interested in purchasing at the property. You’ll also want to think about your New York buyer closing costs, which can range from 1.5-3.5% of the purchase price. One great way to mitigate closing costs on a NYC pied-à-terre is by working with an agent who offers a buyer rebate. This can save you as much as 2% and cover most of these expenses.