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New York Times - Real Estate Section
Sunday, February 13, 2000

A Condo Or Co-op? Read On

JAY ROMANO

PEOPLE thinking about buying an apartment usually know that there are two kinds available   -   condominiums and co-ops   -   and that the main difference is that the owner of a condominium owns real estate while the owner of a co-op owns shares in a corporation.
What many do not know, however, is that there are other differences that range from subtle to quite significant.
"For many people, buying an apartment is like falling in love," said Dennis Greenstein, a Manhattan real estate lawyer. "The first thing that matters is the apartment itself, not whether it's a co-op or a condominium. But the bottom line is that people do have to make themselves aware of the differences so they know in advance exactly what they're getting into."
Aside from the different forms of ownership used for co-ops and condominiums, he said, the distinction most buyers will notice is likely to be the asking price.
"If you had two identical buildings, and one was a co-op and the other a condo, it's a good bet that apartments in the condo would be selling for more than apartments in the co-op," Mr. Greenstein said.
One reason for the disparity, he said, is the belief that it is more difficult to buy or sell a co-op than a condominium   -   a perception fueled by the fact that co-op boards generally have more power to block sales than boards of managers in condominiums.
Mr. Greenstein said that while condominium boards usually have a "right of first refusal"   -   the right to buy an apartment at the price agreed to by the seller and the prospective buyer   -   co-op boards have broad power to reject potential purchasers, subject to prohibitions against discrimination. As a result, he said, those who would rather not run the gantlet of a co-op board admissions committee might opt for a condo.
Another reason that some co-op apartments might be less expensive than equivalent condominium units, Mr. Greenstein said, is that there is a hidden financial obligation inowning a co-op. This is the unit owner's proportionate payment on the underlying mortgage on the building, the debt owed by the co-op corporation that is secured by the building itself.
"If you buy an apartment in a 10-unit co-op for $100,000, and there is a $100,000 underlying mortgage on the building, the purchaser's lender would view the total purchase price as $110,000 because it would take into consideration the borrower's proportionate share of the underlying mortgage," Mr. Greenstein said. "But when you buy a condominium, there is no underlying mortgage, so you are only paying the price you are paying for the unit."
With condominiums, he explained, no underlying mortgage on the building is permitted. But that could also be a disadvantage.
"If you have nothing to mortgage, it's harder to borrow money when you need it," said Marc Shernicoff, a Manhattan certified public accountant. "If you need $100,000 to replace the roof, and you don't have the $100,000 available, you're going to have to assess the unit owners to raise the money."
A co-op, on the other hand, has other options. For example, Mr. Shernicoff said, if there is already a mortgage on the building, that mortgage can be refinanced for an amount that includes whatever additional money is necessary. And while the shareholders will ultimately have to repay the money, they can do so over an extended period of time   -   by paying higher maintenance charges, rather than having to pay a one-time assessment.
It is also possible for co-ops that have unused space or commercial tenants to raise cash by renting out the vacant space or increasing the commercial rents when existing leases expire.
But while the ability to raise income from outside sources may be a good thing, Mr. Shernicoff said, some co-ops have to be careful not to raise too much outside income. Under current federal tax law, he explained, no more than 20 percent of a co-op's total income can come from "nonshareholder" sources. If that limit is exceeded in any year, he said, the co-op loses its status as a housing corporation for tax purposes and co-op shareholders lose their income tax deductions for property taxes and interest on their share loans. (There is no such problem in condominiums, he said, because condominium-unit owners own real estate rather than shares in a housing corporation and pay their taxes directly.)
At the same time, Mr. Shernicoff said, co-ops have an advantage over condominiums when dealing with unit owners who fail to make common charge or maintenance payments. When a shareholder stops making payments to the co-op and the lender, the co-op is first in line to get the money that it is owed upon the sale of the delinquent unit owner's shares. With a condominium, on the other hand, the lender who holds the mortgage on a particular unit would generally be first in line to receive money owed by a defaulting borrower. Any common charges owed to the condominium association, Mr. Shernicoff said, would be paid only after the mortgage lender has been made whole.
"You rarely have a situation where a co-op doesn't ultimately collect its arrears," he said. "But it is not uncommon for a condominium to take it on the chin when a unit owner defaults."
Marc Luxemburg, a Manhattan co-op lawyer who is also president of the New York Council of Cooperatives and Condominiums, said that there were some significant quality of life differences between co-ops and condominiums. For one thing, he said, since condominium boards have only limited power over the subletting of apartments, it is more likely that such buildings will have higher numbers of rental and transient tenants. On the other hand, he added, most co-ops have strict policies regarding sublets, thus exercising better control over the number of renters in the building.
In additon, Mr. Luxemburg said, it is much easier for a co-op board to deal with unit owners who violate the rules than it is for a condominium board of managers.
He explained that if a co-op shareholder violated the bylaws or house rules, the co-op board could terminate the proprietary lease and start eviction proceedings. And since the shareholder's right to occupy the apartment is dependent upon compliance with the proprietary lease, he said, co-ops are generally successful in evicting truly troublesome tenant-shareholders.
In a condominium, however, the board of managers does not have the power to evict a unit owner who violates the house rules, because the condominium does not own the apartment. And while some people prefer condominiums for just that reason, Mr. Luxemburg said, there are others who prefer co-ops because of the stability they provide.
"The ability of condominium-unit owners to do their own thing is attractive to some people," Mr. Luxemburg said. "But if you're the kind of person looking for a building occupied by people as their principal residence, and you don't want to see a new face with a suitcase in the hall every week, then you would probably want to live in a co-op."