In Defense of NYC's much maligned Co-op

[Steven Greenhill]

Copied from a fellow broker so i have to paraphrase but thought this was good info -- esp why we never crashed in the housing bubble.

MY WORKING FIRST TO @NICHOLAS B: I have an excellent article for you regarding why NYC never experienced the crash we avoided the downturn b/c 75-80% of our buildings are co-op -- MUCH more financial restrictions than a mortgage (typically 25-33% down but could be up to 75% down or cash only) -- higher down payment and 2-3 years of POST CLOSING LIQUIDITY (maintenance + mortgage) must be in your checking account AFTER closing in case of ANYTHING... some co-ops require full cash only and then post closing, be worth twice the value of the apartment-- some notably require you to have over $100 million in assets!! We had no downturn here.

ARTICLE:

There was a time when the only people who bought condominiums were those who couldn’t meet a co-op’s financial requirements. 

Now it seems that everyone wants a condo. And some of the most sought-after buildings in the city—15 Central Park West and 101 Warren Street, for example—are condos.

Some years ago I heard Barbara Corcoran tell an audience at the Harvard Club that they should all buy condos. She couldn’t come up with a single reason why anyone would want a co-op.

The legendary Dakota, New York's oldest co-op, at Central Park West and 72nd Street. Built between 1880 and 1884.

I was quite amazed to hear this as at least three quarters of the Corcoran listings at the time had to be co-ops. She must have felt very, very strongly on the subject to speak so badly of her own listings.
The perception is that if you live in a co-operative apartment, not only will your neighbors know all there is to know about you including your uncle's pajama size, they will also tell you exactly when you're allowed to blow your nose and when you're not.

There are, of course, advantages and disadvantages to both forms of ownership. It's just not as simple as many buyers think.So Barbara, in case you’re reading this, here are some good things to say about co-ops.

Today in New York, there are almost three times as many co-ops as condos, so right off the bat, if you're interested in co-ops, you have a great deal more choice.

You'll also find that, by and large, co-ops are significantly less expensive than condos. To some extent this is because so many of the condos are newly constructed or new conversions and have a lot of bells and whistles. But even older condos come with premium prices.

In the last twelve months, the average price in Greenwich Village for a prewar two bedroom co-op with a doorman was about $1,860,000. The average price for a similar condo was about $2,580,000.

Co-ops are the reason New York has had so few foreclosures, while the rest of the country has had so many. You just can’t buy a co-op unless you can comfortably afford it. The co-op board won’t let you. Everybody who buys in a co-op has to qualify financially.

That means that not only will you not run into financial trouble, but neither will your neighbors. It's unlikely that you'll ever be asked to absorb their share of the building’s expenses.

If a co-operative needs, say, a new elevator, it can borrow the money, using the building as security for the loan. The interest will be tax deductible. And the part of the principal that's attached to the shares you own can be added to your base when you sell, thus lessening the amount of capital gains tax you will pay.

Condos can’t do this. It’s very difficult for a condo to borrow money. So the condo association either has to already have the money in a reserve fund or must levy assessments.

Michael Gross's history of one of New York's most sought-after co-ops, "740 Park, The Story of the World's Richest Apartment Building" was published in 2005 (Broadway Books).

Another thing: co-ops generally frown on anyone but the owners living in a given apartment. That means little chance of living next to a 19-year-old whose parents bought him the apartment and whose parties start at 1 am. Or a stream of different friends of an owner who uses the apartment as a hotel room for guests.

Co-ops generally do not approve of investment buyers. Most have restrictions on subletting. So you can be assured that there won't be too much turnover among your neighbors, and that, as owners, they'll have the same concerns you do about maintaining the common areas in the building.

Co-op boards generally favor buyers who have the same interests they do, especially financial interests.

If you're very happy about your building's exceptionally low maintenance and don't mind that its lobby looks like a time capsule from the 1970s, you probably don't want new neighbors who want to spend the co-op's money to renovate it.If you’re an artist who needs a large, high-ceilinged space to make art but who isn’t rich and famous yet, you may not want to spend money on amenities like roof decks and exercise rooms. You'll be wary of new neighbors who do.

Some co-op boards may actually turn down buyers because they're too rich. They don’t want the building’s character to change. (Note that co-ops almost never give a reason for a turndown. They're not required to, their lawyers tell them not to, and they don't.)

On the other hand, when you’ve got actual Picassos and Turners on your walls and ancestral diamonds and emeralds in your safe, your apartment can be a target for thieves. You won’t mind paying extra for an attendant in every elevator in addition to a doorman and concierge, just to make sure your valuables stay yours.

If you're the type who designs your apartment with an eye to seeing it in Architectural Digest, you won't mind spending money to make sure the lobby has a similar look of affluence.
You may not like the idea of borrowing money. When the building needs a new roof, you may prefer just to write a check. And you would like your neighbors to feel the same way.

Thus, some buildings seek tenant shareholders with extraordinary resources. Not only do they require that apartments be paid for entirely with cash, not financing, but applicants must be able to show vast amounts—sometimes as much as $100 million—in liquid assets.

Of course there are a whole lot of co-ops whose requirements fall in between these two extremes. But chances are, if you're in a co-op, your neighbors will have the same financial interests you do.

All in all, there's a lot to be said for the co-op form of ownership. Next time I'll tell you the good news about condos.
(By the way, just in case you don't already know this, the main difference between a co-op and a condo is that a co-op "owner" actually owns shares in a corporation which owns the building. He has a proprietary lease for his apartment. A condo owner owns the real estate--the floors, walls and ceilings of his apartment.)