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Condos versus Coops

January 10, 2018

 

Condominiums (Condos) vs. Cooperatives (Coops)

Condos and coops allow individuals to own units in apartment complexes or garden style apartments or townhouses where certain common areas and amenities that are shared by all residents are maintained by a board of directors or managing agent. For example, maintenance of a lobby, elevators, garden, gym and certain structural components of the building would be paid through the unit owners’ proportionate share of monthly maintenance charges. Condos and coops are suitable options for those looking to avoid the hassles and costs of maintaining a single-family home. Although both forms accomplish the same goal in providing homeownership, their legal structures present many notable differences.

A condo is an interest in real estate that is transferred through a real property deed like a single-family home, and therefore, the closing costs upon purchase, such as title insurance and mortgage tax will apply. A coop is an interest in shares of stock of a corporation that owns real estate, so the closing costs can be significantly less than condos, but a coop may have certain closing fees, transfer fees (“flip tax”) and move-in fees that are set by the corporation and vary from coop to coop. Coop owners are simultaneous shareholders and tenants of the corporation (through a stock certificate evidencing ownership and proprietary lease setting forth the terms of use and occupancy of the unit) that owns the real estate. Given that coops follow New York State’s Business Corporation Laws for governance, this allows the board of directors to tightly control who buys and how current owners may use their units, including rules for renovation and restrictions on subletting and pets. As a shareholder, owners are bound to follow the coop’s “house rules”, which can change at any time at the board’s discretion. Coops typically require prospective buyers to submit a formal application and to fully disclose extensive background information, including salary/employment, housing history, bank accounts, tax returns, and reference letters, among other things. Coop boards have much discretion in rejecting applicants and are not required to disclose reasons for rejection.

Condos are more attractive to buyers because they are not as strict with a potential buyer’s financial background. Except in limited circumstances, condos generally cannot reject potential buyers, although they do have the right of first refusal allowing the condo board to pre-empt the sale by offering to buy the unit on the same terms. However, condo boards rarely exercise this right. With fewer restrictions and more liquidity, condo units are more valuable in the real estate market compared to similarly situated coops. Due to the easier exit terms and other factors mentioned, condos can be used as investments and for those looking for a second-home or for foreign buyers.

The downsides of coops may be benefits for some. Their relative illiquidity makes the lower price point compared to condos more attractive for those looking for a primary residence. Coops strict rules also create a sense of community with full-time residents and less transience. Most notably, given that coop shareholders are also considered tenants of the coop, this gives them legal protections under landlord-tenant laws that condominium owners do not receive. For example, if a shareholder in a coop violated the “warranty of habitability” by neglecting plumbing repairs in its apartment that cause a flood in a neighbor’s apartment, the coop would have a responsibility to address the situation, similar to the role of a landlord. In New York City, where the new construction boom in the last decade has favored condo development, many existing coops have turned into “condops”. When a coop is referred to as a condop, there has not been any change in the coop’s legal structure—the corporation simply has more relaxed rules and qualities that make it more like a condo in its buyer approval process. These coops may make it easier for shareholders to rent out their apartments so that the building is more attractive to investors.

Historically, because of these different factors, condos generally tend to appreciate faster and have higher values in our experience although there are many exceptions.

Jonathan Mottahedeh, Esq.

 

 

 

 

 

 

Prior results do not guarantee a similar outcome. All information posted is general advice only, based upon the rules of NYS, and is not intended to be a substitute for personal legal advice. Although information provided here was accurate as of the date of posting, laws change frequently and rules in other jurisdictions may differ. Therefore, readers should not rely upon these postings but should consult an attorney to discuss their specific factual situation.

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