Law Firm New Jersey

A real estate purchaser in an urban area needs to understand the difference between cooperative buildings and condominium buildings before they begin their property search.

Cooperatives

Cooperatives are mainly found in Manhattan and offer purchasers “shares” of a company rather than title to an apartment itself. In a cooperative, a non-profit corporation owns the building and all the units inside of it. Purchasers buy into the corporation by purchasing shares, which in turn carry with them the right to occupy a specific unit in the building. Purchase of coop shares is very similar to purchasing shares in a for-profit corporation, in that if the underlying coop corporation encounters financial difficulty, shareholders might experience depreciation in their investment, or, in the worst case scenario, lose their entire investment. Thus, coop owners are not only exposed to dips in the real estate market in general, but also must shoulder the risk of malfeasance and incompetence by the coop corporation’s management.

Financing a cooperative purchase

Interest payments on cooperative loans are usually not tax deductible. Many banks will not lend to cooperative purchasers or charge a higher interest compared to condo purchasers because of this underlying risk as well as the fact that the loan is not backed by real property.  That is, if you default on your loan, it is somewhat complicated for a bank to “foreclose” on your interest in the building.

Cooperative management

Since coop purchasers are legally shareholders rather than real property holders, they are subject to rather pervasive control by the “management” of the coop corporation—the coop board. Board approval is required for almost all material decisions concerning a shareholder’s assigned space. After all, the company owns the building, and shareholders essentially are “leasing” their space pursuant to a shareholder agreement. Renovation, leasing of the unit to non-shareholders and outright sale of shares all are decisions that are usually subject to approval by the board. Purchase of a coop unit also involves a stringent application and interview process.

Carrying costs

Carrying costs such as property tax and building maintenance fees are relatively similar to condominium buildings in that such expenses are apportioned to each shareholder based on the size of their assigned space. However, each shareholder does not receive a separate tax bill from the city or town; instead, the corporation receives a tax bill for the entire building and the building administration drafts individual bills for each shareholder. In a coop, shareholders usually foot a portion of the interest paid on any underlying mortgages that the corporation took out to purchase the building.

Special assessments for large projects are usually financed through loans applied for by the corporation rather than the individual shareholders. This is advantageous to shareholders, because the loan payments can be rolled into building maintenance charges that are paid down over time rather than all at once.

Cooperative sales are not reported to the town or city

Cooperative share sales are not a matter of public record and are not recorded by any centralized entity, making it difficult to compare the asking price of shares currently for sale against shares that have sold in the past. This lack of “comparables” means it’s sometimes difficult to assess market value of the unit you are looking at and thus, paying the asking price for the unit/shares means taking a bit of a leap of faith. It would be wise to ask the cooperative board to disclose the price shares in the past have sold at or compare the value of the coop unit to comparable condominium units in other buildings before taking the plunge.

One benefit to coop sales not being recorded is that the assessed tax value of the building stays low. Remember, property taxes are based on the assessed value of the property, which is in turn based on the market value of the property. In a cooperative, the only time space in the building is “sold” is when the cooperative his first set up and the non-profit corporation buys the building. After that, the space itself is never sold again–only shares that carry with them the right to occupy the space are sold. In a town that doesn’t reassess property values very often and instead relies on solely on the sale price of a property to calculate property taxes, coop owners often pay disproportionately lower property taxes than condo owners.

In sum…

When purchasing a coop, you need to approach the purchase as you would when purchasing a share of a business. You need to determine whether the building is generating adequate cash flow to cover mortgages, property taxes, utilities, maintenance, capital improves and insurance payments. You need to determine whether your partners—the other coop members—are meeting their obligations pursuant to the shareholder agreements. Finally, you need to determine whether the coop has adequate management and more importantly, that you are on the same page as management with regard to your rights as a shareholder.

Condominiums

Condominiums resemble single-family homes (e.g. stand-alone houses and townhomes) in that a prospective purchase of one entitles the buyer to ownership of real property. A condo owner has legal title to their unit and owns an undivided percentage of the common space within the building.

Condo management

Condo boards are much less restrictive than coop boards; a condo owner usually is free to transfer his property through lease and outright sale. Furthermore, the condo owner usually has free reign to perform renovation within the walls of his unit, provided that the proposed modifications do not become a nuisance to other condo owners.

Financing a condo purchase

However, condos are generally more expensive to purchase with regard to the actual sale price and closing costs. Although financing is more widely available for condo purchases, transaction costs usually are fairly significant and can set the purchaser back several thousands of dollars. However, while these upfront costs might seem excessive, a condo owner’s ability to make federal tax deductions on mortgage interest payments usually allows the prospective buyer to recoup the closing costs fairly quickly. However, depending on your income, these deductions may not be as large as you think—it would be wise to consult an accountant regarding these tax issues rather than take your realtor’s word.

Things to look out for…

Since a condo building is more loosely managed, a prospective buyer should take special care to determine the overall health of the building before committing to a purchase. Things to examine include:

Reserve Fund: As mentioned before, a reserve fund is essential to providing the building with on-hand funds for capital improvements and emergencies. In addition to finding out what the current balance of the reserve fund is, you should ask to see records indicating what portion of monthly maintenance dues go towards the fund. Many smaller buildings often collect just enough maintenance fees to cover monthly costs, with very little money going towards the reserve. In buildings with little or no reserve, condo management immediately passes on the cost of improvements to owners in the form of lump sum payment demands; in these cases, improvements will not be made until the majority of the owners have chipped in their share.

Building Management: Smaller buildings usually are managed by a group of owners. A fair amount of small buildings also use outside management companies who are often more effective at things like collecting maintenance dues, securing the best contractors for building maintenance and ensuring upkeep of the building’s common areas. Larger buildings are almost exclusively run by real estate management companies, as these buildings have demands that cannot be met by part-time management. A prospective buyer should talk to other owners in the building to find out if management is responsive to owners’ needs and if repairs and improvements on a relatively consistent basis.

Occupancy: Some questions you should asking regarding occupancy include:

1. How many of the units in the building are vacant?

2. Are there a significant amount of owners that are in default of their mortgages?

3. Are the other owners paying their maintenance fees?

When units in a condo building are unoccupied or in default, the maintenance fees associated with these units are accounted for by increased maintenance for the rest of the owners. Accordingly, it is wise to examine the prospective building’s occupancy rate when making the decision to purchase a condo.

In sum…

The purchase of a condominium or cooperative share can be a financially and personally rewarding experience. To ensure you are getting maximum value and minimum heartache, consult with your chosen real estate professional and attorney prior to committing to a purchase.