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Everything You Need to Know About Co-Ops

The good and not so good
Co ops the boland team nyc

I always know someone is at the beginning of their search to buy an apartment in New York City when they tell me, “I don’t want to purchase a co-op because I am not doing the board package and I don’t want to be turned down. I am only looking at condos.”

If you began your search online like the vast majority of people, no doubt you read some scary stories about purchasing in a co-op. Headlines include, “My 11-year Co-op Nightmare”, “Bad Boards: Co-op Horror Stories” and “The Worst Co-op Stories Ever”. Fear sells media so there is no end to the stories written on the subject whereas the benefits are far less lauded. 

When I began my career back in 2002, I purchased Sylvia Shapiro’s book, “The Co-op Bible: Everything You Need to Know About Co-ops and Condos” which was published in 1998 and updated in 2005. 

What is so interesting to me in retrospect is that condos were a bit of an afterthought lumped in with the co-op book. Much has changed in the nearly twenty years since the book was written. The biggest change is there are substantially more condos as new condo buildings have been added to the Manhattan skyline over the past twenty years. While the mix was approximately 90% co-ops to 10% condos at one time, now that mix is closer to 70% to 30%. The change in the product mix has led to co-op boards to become more lenient in many cases to remaining competitive and surprisingly, some condos became stricter.

What is a co-op?

Put simply, a co-op is an apartment building, which is owned by a corporation. Everyone who purchases in the building, receives a stock certificate in lieu of a deed and a proprietary lease, giving them the right to reside in the apartment they have purchased. The shares assigned to each individual apartment were allocated when the co-op was formed, and that number never changes. 

Here’s a breakdown of the entities you can find in a co-op: 

  • The board of directors: Every co-op has a board of directors elected by the other shareholders in the building. The main purpose of the board is to hire the managing agent and set the strategic vision and operating policies for the building. The board is involved in setting the budget with the managing agent and reviewing the purchase applications from potential new shareholders. It is often forgotten that this is a volunteer position.

 

  • The co-op association: The co-op association is everyone who is a shareholder in the building. No one technically owns their apartment instead they purchase the proprietary lease and receive shares in the corporation entitling them to become part of the co-op association.

 

  • Shareholders: There are no property owners in a co-op. The corporation owns the building and those who have purchased in the building own shares, which is why the “owners” are referred to as shareholders in a co-op.

 

  • A management company: The vast majority of NYC apartment buildings have a management company. Their role is the day to day running of the building to keep it functioning. They typically oversee the building staff, keep the building in compliance with city and state laws, collect monthly charges and pay the bills. A good managing agent will always be looking out for ways to save the building money.

 

Shareholder vs. Owner: what’s the difference?

In a co-op, no one owns property, the corporation owns the building. Those who have purchased in the building own shares (they are shareholders). Whereas in a condo each owner owns the property within the walls of their apartment and they have their own separate tax bill. A co-op only has one tax lot which the corporation pays on behalf of the shareholders and a condo has multiple tax lots with each owner paying their own real estate property tax bill.

What’s the difference between a condo and a co-op?

When you own a condo you own a real estate parcel. It is assigned a tax lot and you receive a deed at the closing table. When you own a co-op you own shares in a corporation and not real property — at the closing table you will receive a stock certificate and a proprietary lease. The lease gives you the right to reside in the apartment you “purchased”.

Where the co-ops differ greatly from condos is in their financial requirements with the vast majority requiring a downpayment of 20% at a minimum and increasing in some buildings to the point where no financing at all is allowed. It is not uncommon to find buildings which only allow 50%-75% financing.

Over time many co-op boards gained and wielded a great deal of power, dictating who would or would not be allowed into their financial club. 740 Park Avenue, one of the most famous, had a sufficient amount of stories and intrigue that the author, Michael Gross, penned his famous book, “740 Park” which includes 569 pages of history, gossip and the titillating intrigue of the ultra wealthy and their residences in this storied building.  It is a fascinating yet dense read. For those more inclined toward lighter fiction, Candace Bushnell’s, “One Fifth Avenue” is a delightful romp through a famous downtown co-op which overlooks Washington Square Park.

Selling a Co-Op Unit vs. Selling a Condo

The process of selling a co-op vs. selling a condo is essentially the same — until it is time to vet the potential offer. Every co-op will have its own guidelines for the financial requirements for potential buyers. The amount of the downpayment and the post liquidity requirements of a co-op can be far greater than a condo which only require 10% down without post liquidity requirements. Apart from requiring buyers to have more cash on hand to make a purchase, the process of scheduling the board interview and waiting for the board’s decision can add a few more weeks to the process of selling.

 

Advantages And Disadvantages Of Co-Op Living

As with any type of housing, co-op living has upsides and downsides you should know before buying one.

 

Pros Of Co-Ops

  • Because of their restrictive nature, co-op pricing can be 25-30% less than a condo. If you wish to avail yourself of this benefit familiarize yourself with the co-op board restrictions including their pet policy and make sure you understand your financial qualifications well in advance. Some owners may even ask their selling agent to financially qualify buyers before the property is shown.

 

  • Purchasing in a co-op offers you lower closing costs. For example, because you are not buying real property you will not be getting a mortgage instead you will be getting a “share loan”. As a result, you will not be paying the mortgage recording tax which can is 1.925% of the mortgage amount.

 

  • Co-ops potentially offer more financial stability. When an owner in the building stops paying their monthly share of the bills for any reason, the burden of covering the shortfall is on the remaining shareholders. It is also less likely that the building will have foreclosures. They are very rare in a co-op but I do know of one case where a shareholder died leaving many heirs all residing in another country. The amount of money any individual heir would have received as a result of the sale was far too insignificant to motivate them to sell. They simply stopped paying the monthly maintenance, the bank foreclosed and the co-op board was forced to work through the process in order to sell the shares and find a new owner.

 

  • Co-ops tend to have less turnover because of the hefty cash requirements for buying and selling. In turn there is less wear and tear on the building from move-in and move-out procedures. Additionally, if you are in a building with many rules, you may enjoy a much quieter living experience.

 

  • Many of the finest examples of pre-war architecture such as the magnificent buildings running along Fifth Avenue and Central Park West are co-ops. If you want a view of the park and a home with grand proportions you are likely to purchase in a co-op.

 

Cons Of Co-Ops 

  • Co-ops come with more rules than a condo. The most common restrictive rule is around subletting. Some buildings do not allow subletting at all while others will restrict it to no more than two years out of five. Many buildings also put a cap on the total number of years you can rent allowing no more than two years in total for the term of your ownership.

 

  • While you can purchase a condo with as little as 10% down, most co-ops require a minimum of a 20% downpayment but it is not uncommon to see 30-40% downpayments required.

 

  • The post- closing liquidity requirements to purchase in a co-op keeps the demand low and explains why co-ops typically trade at a lower price than a condo. A building may require purchasers to have 12-24 months of total housing payments in cash after the closing.

 

  • Some people don’t like the idea that they don’t own the apartment they live in and they are instead renting from a corporation. On a daily basis the practical experience of living in a co-op vs a condo is minimal but there are those people who feel more comfortable with the notion that they have more control over their physical living space.

 

  • It can take longer to sell a co-op than a condo and especially if it needs renovating and the building has strict rules around doing work on your apartment. If you are buying in a co-op with summer rules (meaning you can only do work on your home during the summer months) you could end up owning the apartment for two years before it is ready for you to move-in. Today fewer buildings have these strict timelines than in the past.

 

How does a co-op work?

The number of shares owned dictates not only your monthly maintenance charges but also the portion of the real estate taxes you owe and any future assessments. Because the corporation owns the entire building, there is only one tax lot and therefore one tax bill. The portion of the  taxes you owe as an owner are included in the monthly maintenance charge. This is usually the first point of confusion for the uninitiated as they attempt to figure out why there is only one monthly charge for a co-op and two for a condo (common charges and real estate taxes).

What is a board package?

To understand the push back on co-ops you must begin with what is commonly called the Board Package. It is a dreaded exercise of gathering all of your financial documents over one month to show your total financial picture in one period of time. Anyone who has ever filled out such a package looks forward to doing it again much like they would welcome a root canal. 

The widely used master sheet outlining the details of your net worth is called the REBNY form (The Real Estate Board of New York form). While most buyers for a co-op or condo are expected to submit this form with their offer, when it comes time to submit a board package the numbers are expected to be exact to the penny, backed up by your bank and brokerage statements all collected in one thirty day period reflecting the same totals. Then there are letters of recommendation, employment letters, credit checks and more. 

The reason a co-op can and will request all this information is because you are buying shares in a corporation as a fellow investor and your overall financial health is how the board determines if your application to purchase is accepted or not. After the initial review of your financial picture and letters of recommendation, the board will then ask for a personal interview and those are now mercifully scheduled via a Zoom call for the most part.

A common misperception is that you will not have to go through this process for a condominium purchase. This is not true! A condominium will require a purchase application with much of the same information a co-op will ask for although letters of recommendation may not be required and there will not be an interview. A condo board only has the right of first refusal which means if they decide to decline your purchase application, they are required to purchase the apartment from the owner for the exact same price you agreed to pay as stated in the purchase contract. 

While the paperwork is the same as a co-op board package, there is far less anxiety. The outcome is practically guaranteed to be successful. Most condominiums not only don’t have that money on hand, but they are not interested in owning additional apartments. However, you will not get out of putting together the purchase application as you do need the board of directors’ approval to proceed to closing.

Apart from dictating higher down payments, co-ops also have post liquidity requirements which are typically 12-24 months of your housing costs (your mortgage payment and monthly maintenance charge) in your bank account after you have paid all your closing costs. This cautious approach to accepting co-investors into a coop will keep you in good standing until it is time to sell. The more famous buildings along Fifth Avenue and Park Avenue which do not allow financing also have much higher post liquidity requirements. 

For example, PH 17/18D at 740 Park Avenue sold in 2023 for $28,000,000. The buyer would not only be denied the opportunity to finance the $28,000,000 purchase price but must have also provided evidence that they still had well in excess of the purchase price in cash after the closing. To ground all of that in reality for a more typical Manhattan co-op buyer, remember that the median price of a NYC condo or co-op is $1,050,000 (as of the first quarter of 2024). The vast majority of co-op boards have very reasonable expectations of the potential buyer’s financial health which are commensurate with the price of the apartment.

As more condos have been built, widening the choices for everyone — but in particular the very wealthy — co-ops have loosened their grip in order to compete with the condo offerings. As recently as 2019 I was helping buyers find a three bedroom home on the Upper West Side. There are many beautiful pre-war co-ops in the neighborhood that offer better pricing than the new development condos. However, a particular building required a 40% minimum downpayment. The apartment also needed extensive renovations which cannot be financed. 

The listing broker, who happened to be a resident of the building, confided in me that the board was in the process of reducing the down payment requirement to appeal to a greater pool of buyers because the lower demand was putting downward pressure on pricing. The number one priority of boards is to protect property values prompting some of them to loosen their rules.

Yet on the condo side where the appeal comes from the ability to rent freely, suddenly over the past few years condos have found themselves in a position of needing to restrict rentals. When the investor ratio becomes too high, the building is likely to become non-warrantable making it harder for potential buyers to secure financing putting downward pressure on pricing.

There is still the issue of the board interview, which is a dividing factor between the condo vs co-op debate. In the intervening years since Ms. Shapiro wrote her book about co-ops, the board interview has remained an integral part of the process but non-discrimination laws are taken more seriously and there are more protected classes than there were in past decades.

One category is lawful occupation. Boards may not reject someone on the basis of their occupation, only on their financial standing. At one point in the not so distant past, boards had become fearful of making room for litigators in their midst. Adding lawful occupation to the list of protected classes diminished the possibility of rejecting those perceived to pursue potentially onerous occupations. Today it is generally accepted that if you have gotten to the point of the board interview your acceptance is highly likely and it is simply a formality.

Yet in the past few years we had a turndown which is very rare for The Boland Team as it has only happened twice in a twenty-three year stretch. A man who was well-qualified financially had a propensity to speak constantly and over other people. He was simply socially obtuse. After suffering through more than forty-five minutes of this man’s circular reasoning and odd line of questioning the board declined his application refusing to share why, yet we instinctively understood. It turns out personality is not a protected class.

Many New York City Co-ops will not only interview you, but also your dog! There are even buildings who insist on weighing your dog, so please be honest on the application. If you have a younger dog who is likely to become excited by the prospect of meeting (and sniffing) a room full of new people, try taking the dog for an exhaustive walk before you get to the interview and do not forget the treats.

Should I buy a co-op?

A co-op can be an excellent investment particularly if you plan on living there for an extended period of time. They can offer financial stability and a very pleasant living experience.

Can I finance a co-op purchase with a mortgage?

No, you will not get a mortgage, instead you will be getting a loan to purchase shares.

How are renovations handled in a co-op?

Then there are the stories about renovations. Alteration agreements, wet over dry, summer rules, charges for running over your allotted time and the waitlist! Every building is different but bear in mind buildings are not imposing arbitrary rules to be difficult. The rules are designed to protect everyone. The Alteration Agreement is required by all owners undertaking renovations in co-ops or condos. Every building must ensure that your proposed scope of work does not jeopardize the structural integrity of the building. This always poses the largest challenge if you are thinking of purchasing an apartment which needs upgrading. A managing agent will not even look at  your Alteration Agreement until you are an owner although it is reasonable to begin working on the application as soon as your offer is accepted to expedite the process. The application will require a full scope of work and insurance documents to be submitted by your architect and contractor.

The listing agent will be able to give guidance on the renovations typically accepted by the building. For example, when a washer/dryer or additional bath can or cannot be added. In many older buildings the plumbing cannot handle the strain of a washer/dryer in every apartment. Wet over dry simply means if you want to change the location of your bathroom or kitchen you cannot place it over someone’s living room. Vertical living can result in unintentional leaks. Placing the items most likely to leak (sinks, showers, tubs) over other wet rooms keeps the potential damage to a minimum.

Then there are all the rules around timing which are generally designed for everyone’s comfort. Many buildings will limit how many renovations may be undertaken at the same time. One building I know of only allows three at a time. Any more than three and the elevators would be overrun with contractors moving supplies. 

Summer rules are for buildings like 740 Park Avenue where the majority of the owners leave the city for cooler summer homes making it the perfect time to make a racket. But these summer rules stipulate that those months are the only time renovations are done so if your gut renovation isn’t finished one summer, you will simply wait until the next summer to finish up. These buildings are more the exception than the rule but many buildings will allot a certain time frame for your renovation and if you go over that time, you may be charged a penalty. Naturally you will have discussed this well in advance with your contractor to be certain a reasonable period of time has been allotted.

Can I sublet my co-op? 

Finally there is the sublet policy, not a rental policy but a sublet. As the owner of a co-op you are technically leasing the apartment from the corporation although the Proprietary Lease is specific to you for the duration of time you own the apartment. Sublet policies dictate when you can sublet your apartment and for what period of time. It is very common to see buildings with a policy requiring you live in your apartment for two years before you sublet it and then you may only sublet two years out of a five year period of time. This is strictly an example and there are plenty of variations from those buildings which strictly prohibit a sublease to those who are very lenient.

Potential board package turndown, large amounts of cash required to purchase, board interviews and restrictions on rentals all make a strong case against co-ops. Yet there are approximately 70% of the NYC housing stock and they remain popular because they are less expensive. In simple supply and demand terms, there are more buyers who wish to purchase a condo than a co-op. This may be due to the amount of money needed or the simple fact that they want the flexibility to rent at any time for any length of time. Determining if a co-op is right for you requires a deeper dive than strictly opposing the Board Application. Every building is different and many of them provide gorgeous homes in well run buildings ensuring you are happy for a very long time with your investment.

Julia Boland