Co-op? Condo ? Condop? What’s the difference?

September 11th, 2013 | Posted by alexander in Uncategorized

Ownership of real estate in New York City can be one of four distinct legal types – traditional home ownership of a townhouse or three different  forms of ownership for apartments in multi-unit buildings: a co-op, a condo or a condop.

Townhouse (brownstone) ownership is no different from ownership of any traditional single-family or duplex home.  Legally, it’s called “fee simple” ownership and permits the owner ( a single person, a married couple, or a group of people) all of the traditional rights of owning property that you might think of – you can sell the property to whomever  you want (within the confines of non-discrimination laws) and can alter it as you wish (subject to zoning laws or landmark restrictions).

Co-op ownership was traditionally the principal way of owning an apartment in New York City until about 30 years ago when New York caught up with the rest of the nation and permitted the condominium form of ownership.  As a legal matter, when you own a co-op you do not own real estate.  Rather, you own stock in a corporation whose principal (and usually only) asset is the building in which the apartment is situated. Each apartment has stock allocated to it according to the size of the apartment.  As owner of the stock you have right to exclusive occupancy of the apartment to which the stock is allocated, and you are a tenant under a “proprietary lease”.  In many ways this lease is no different from any other residential lease except that it does not have a finite term of occupancy. Rather, the right to occupy the unit lasts for such time as you remain a stockholder in the co-op corporation.

As does any corporation, the co-op operates under its by-laws which in most cases requires the board of directors to approve any new owners of shares so that all purchasers need to be approved, most usually after submission of financial information and an interview. The board (answerable to the shareholders) generally sets the minimum financial requirements for ownership, although all of the stockholders could be asked to approve changes at a shareholders meeting.  A board can reject a purchaser for no reason or for any reason at all, except for legally prohibited reasons (e.g., race or religion).  However, since a board is not currently required to articulate reasons for rejection, it’s often difficult to determine if a rejection was, in fact, legal.

Because a co-op shareholder does not own real estate, he pays no real estate tax to the city. Instead, the co-op corporation as the building owner pays tax on it and then allocates the tax among all of the apartments based on shares owned.  The allocated charge is then included in the monthly maintenance charge for the apartment.   At the end of the year each shareholder receives a statement of the real estate taxes paid and obtains a deduction against income.    If the corporation has a mortgage on the building, it also allocates the interest paid on the mortgage to each stockholder/tenant.  These interest charges are included in the maintenance and reported to the shareholder at tax time so that he can take the appropriate tax deductions. The shareholder can, of course, also deduct any interest on his own mortgage.

Several financial consequences arise from the fact that cooperative ownership is not ownership in real estate.  First –and all else being equal – co-ops generally sell for less than condos because of the restrictions traditionally imposed on sales of co-op shares by the boards of directors.  These restrictions often result in a built-in market discount of price because the pool of purchasers acceptable to the board is somewhat restricted, and a portion of potential purchasers just won’t pass muster. Even those that may be acceptable to the board often self-select and don’t even shop for a co-op because of the intrusive nature of the approval process.  On the other hand this is not always the case as many purchasers actually seek the exclusivity of a co-op ownership.   Second, when purchasing a co-op a buyer need not purchase title insurance (although there may be reasons for doing so).  Instead, he relies on the title insurance held by the corporation which insures the entire building as a single entity.  Third, many banks charge a higher interest rate for mortgages on co-ops.  They do so because in the event of default and a foreclosure, the coop boards’ restrictions on sales may make recoupment of the bank’s loss that much more difficult than it would otherwise be.  Fourth, there is no mortgagee recording tax on co-op mortgages because these are not mortgages on real estate to which the tax applies. The tax savings can be substantial, especially on mortgages of $500,000 or more where it is assessed at $2.80 per $100 of mortgage amount (a small portion of the tax is actually paid by the lending institution).

As distinct from co-op ownership, condo ownership is, in fact, ownership in real estate.  The purchaser actually owns his individual unit.  As well, he owns a percentage of all parts of the building which are used in common by all unit owners, such as the lobby, elevators, hallways and amenities such as a gym, pool or rooftop terrace.  As a real estate owner you pay real estate taxes assessed directly on your property so that unlike a co-op there is no real estate tax element included in your monthly common charges.  This often results in lower monthly charges for condos than for co-ops.  Also,  for various reasons condos generally have no  mortgage or only a small mortgage on the underlying building so that there is  no  allocated mortgage interest charge included in your  monthly common charges.  An exception to this occurs where a condo association owns the superintendent’s apartment, in which case it may be mortgaged, with the debt service costs being allocated to the individual owners.

Like a co-op, a condo is managed by a board, but it is called a board of managers rather than a board of directors. The board is answerable to the Condominium (or Homeowners) Association in which all unit owners are members with an equal vote.

For the reasons alluded to in the above discussion of co-ops, market  prices of condo apartments relative to co-ops are often  higher, and closing costs include mortgage recording taxes and premiums for title insurance,  which can be costly items (especially the mortgage recording tax). Like co-ops, condos operate by their by-laws.  These are traditionally- but not necessarily- less restrictive on sales than are the by-laws of co-ops.  Condo boards typically do not have the right to reject a purchaser, but almost universally require the submission of financial statements and, sometimes, even an interview.  Instead of rejection, Condo boards can prevent a sale by what is known as a right-of-first refusal. This allows the board a period of up to 30 days to match a purchaser’s offer to buy a unit and, by doing so, prevent a sale to an “undesirable”.  But to exercise its right the board on behalf of the condominium association has to come up with the money to buy the unit at the same price and on the same terms and conditions as the applicant-purchaser. These rights-of-first-refusal are virtually never exercised because of the cost and complexities involved, but it has been known to happen.

A condop is a hybrid of a co-op and condo. The term is used to describe two different concepts. One is a purely legal description where a building is conceptually (and sometimes physically) divided into a condo portion and a co-op portion. Typically this occurs where there are residential units in a tower portion of a building and retail or institutional spaces (for example, a school) at the lower levels.  Ownership in the retail or institutional portion might be retained by the developer in a condo form while the residential units are owned by a co-op corporation all the shares of which initially are owned by the developer and sold to individual purchasers of units. The respective management boards of the condo and co-op portions are represented on a master board of directors of the two units.

The second use of the condop appellation is a short-hand description of an entity legally structured as a co-op which has adopted by-laws resembling those of a typical condo association.   Often, buildings with land-leases (i.e., the building actually sits on land owned by a third party and pays rent to the owner of the land) are condops because under New York’s condominium law  a condo cannot lease the land on which it is situated but must own it.  Where the underlying land is not owned the entity adopts the co-op legal structure but operates as a condo under condo rules.  The principal operating distinction is that the co-op’s rules relating to the resale of units are not nearly as restrictive as a co-ops and the board has no right to blackball a prospective purchaser.  Rather, the board instead has the right-of-first–refusal typical to a  condominium.

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