A Short History of Co-ops
Co-ops (short for “cooperatives”) are apartment buildings owned by a corporation, which has a block and lot number. Technically, they are not classed as real estate. Instead, a Proprietary Lease is associated with each apartment, and those leaseholders own shares of stock in the corporation. The shares are apportioned based on the size and floor level of the apartment and come with a stock certificate. The corporation pays all real estate taxes, maintenance expenses, and the underlying mortgage on the building. The amount a shareholder pays towards these expenses is directly related to the number of shares she owns in the corporation. At the end of the year, each tenant shareholder receives a notice detailing their share of the taxes and mortgage payments paid, which they can then apply against their income taxes.
In Manhattan, rental units make up 80% of all dwelling units. Of the remaining 20%, Co-ops are currently the most popular form of property ownership (65%), with the remaining 35% being condos, a small percentage of townhouses, and condops.
The first known co-op in the world was brought into being after a large fire created a serious housing shortage in Rennes, France, in 1720, as explained by Richard Siegler and Herbert J. Cooper-Levy, member and former member of the National Association of Housing Cooperatives (NAHC), respectively, in Brief History of Cooperative Housing, an article in a volume of NAHC’s Cooperative Housing Bulletin.
There is no clear-cut answer as to when the first housing cooperative appeared in the United States. According to Siegler and Cooper-Levy, the first American residential co-op was established over 150 years later in 1876 on West 18th Street in Manhattan. However, Andrew Alpern says in his book Luxury Apartment Houses of Manhattan that historian Christopher Gray has determined the site of New York City’s first co-op to be 152 West 57th Street. According to Alpern, the first co-op, the Rembrandt, was erected in 1881 and “was the prototype of a bevy of other cooperative apartment ventures brought to fruition over the ensuing years.” He continues, “Of these, the Gramercy, at 34 Gramercy Park, is the oldest one still extant and operating as a co-op.”
The first American co-op and several that followed were developed by well-to-do people who wanted the advantages of owning their own homes with fewer responsibilities. According to Siegler and Cooper-Levy, the buildings were deliberately hybrid; that is, only 40 to 50 percent of the occupants were owners (sponsors). The rest were tenants whose rent, in fact, covered most of the building’s maintenance expenses.
These buildings weren’t known as co-ops back then; they were called “home clubs.” There was a social aspect: people were getting together and creating camaraderie and would decide they wanted to build apartments together. Alpern explains the appeal of these cooperative arrangements by discussing the home clubs of Philip Gengembre Hubert, the architect of the Rembrandt (31 Jane Street): “Hubert dubbed his ventures ‘Hubert Home Clubs,’ capitalizing on both the aristocratic pretensions and snob appeal of the word ‘club,’ and at the same time emphasizing that his offerings were permanent ‘homes,’ rather than mere hotel-like accommodations or lowly tenement flats such as might be occupied by working classes.”
The next wave of popularity for cooperative living came in the 1920s, when the urban population boomed after World War I and individual houses became more expensive. There were many luxury co-ops, some of them incredibly expensive. A big drawing card for the wealthy was the exclusivity; they screened prospective tenants rigorously on personal, as well as financial, levels. There were also middle and low-income co-ops that sprang up, thanks to the New York Housing Act of 1927, which provided tax incentives for their creation. Labor Unions such as the Amalgamated Clothing Workers Union became active in building co-ops for workers.
The Depression proved disastrous for co-ops. Tenant-shareholders defaulted on their monthly payments, and the remaining owners found themselves unable either to sell their shares or cover the gap left by the defaulters. As a result, nearly all the buildings went under by 1934.
When co-ops next appeared on the scene, in the 1940s, it was again the result of legislation. This time, it was rent control provisions that led landlords to convert many buildings to co-ops. While rents were fixed, expenses continued to climb, and landlords had to find a way to deal with the situation. Conversion provided an answer. At the same time, trade unions renewed their creation of co-ops, and there were some consumer-driven developments as well.
Lots were converted in the 60s and 70s when ownership became more desirable, and there were city and state tax advantages to converting to a co-op. The advantage: instead of just writing off your interest expense on your own unit, you also get to write off the interest on the underlying mortgage of the building. Most buildings mortgage the building and take advantage.
In 1979, a further impetus to increase co-op conversion occurred. Binder explains, “With the Arab oil embargo, oil prices went into the stratosphere. The city was under tremendous pressure from people of moderate income to keep rents down. Landlords were between a rock and a hard place. They had to pay oil prices and 18 to 19 percent prime rates; yet the rent stabilization board didn’t allow enough of a rent increase to cover those costs.” Once again, many sought to use co-op conversion to come up with cash. While rising maintenance costs were definitely a factor, the impetus for the 80s conversion boom probably stemmed mainly from landlords’ sheer lack of ability to make a profit on their buildings. The huge discrepancy between the market value of co-ops and the substantially lower rents allowed landlords under rent stabilization led landlords to convert in droves.
The stabilization law enacted in 1969 regulated rents in New York City for buildings constructed after 1947 with six units or more and in previously decontrolled units in buildings built prior to 1947 of six or more units. The eventual outcome of these regulations was that the 80s incredibly suppressed buildings’ values. It was difficult, if not impossible, for landlords to make any money on regulated rentals. Converting these rentals to co-ops provided a way to get around the rent regulations. Landlords, or investors to whom they sold the buildings, realized the opportunity to split the difference between the market value of apartments and their rent-regulated value with potential owners. Bruce Cholst, an attorney with Rosen and Livingston in Manhattan, explains the negotiation: “Because tenants have a right to stay under rent laws, the sponsor offers discounts–insider prices–to tenants.” Since tenants have just as much of an opportunity to make money off the deal as sponsors do, buying the apartment at still less than the market value, many stayed with the buildings, and the conversions took place at a rapid level.
In the 1990s, there were very few new co-ops or conversions. According to Michael J. Wolfe, president of Midboro Management, Inc., “There was a movement a few years ago to convert cooperative corporations into condominiums, but the paperwork and legal costs far outweighed the advantages, and it never became a trend. It is also interesting to note that much of the new construction today is rental. And as long as these rentals continue to command high prices and steady income for developers, there will be little conversion.”
Even though financial motives seem to have increasingly become the sole criterion for deciding whether or not to create co-ops, it doesn’t mean that, in the end, members don’t appreciate the nature of their arrangement. It goes back to the early social reasoning that led to the creation of the co-ops in the first place. “Yes, you have to live with the rules that the whole co-op has made,” concedes Mary Ellen Goodman, who has lived in a co-op in Greenwich Village for 30 years, “but by the same token, when there’s a leak in the building, it’s viewed as everyone’s problem. You’re not alone.”
However, despite their socialist-intending origins, co-ops quickly transformed into a bastion of capitalism and exclusivity. Today’s co-ops own the entire building, rather than individual apartments. Boards have the right to reject any borrower whom they think does not qualify; however, they wish to define qualification.
Condos
The first thing to know before buying is that a condominium is real estate, real property—just like a home or other piece of property—and laws that apply to real estate sales, taxes, and financing generally apply to condos.
In New York City, each condo apartment in a multi-unit building has its own tax lot and block number. Areas not part of a particular apartment, like the lobby, hallways, laundry and utility rooms, outdoor areas, and the land the building is on, are called common elements. Typically, each unit owner owns a specified percentage of the common elements. As a result, the entire property is owned, collectively, by the unit owners. Therefore, the building itself does not have its own block and lot number. In addition, the unit owners collectively pay the building’s operating expenses through monthly common charges. Each owner is responsible for his or her own real estate taxes.
When a building is converted to or constructed as a condo, the owner or developer must file an offering plan with the state attorney general’s office, providing details on the condo’s operation, including the condominium declaration and bylaws. The declaration will specify the percentage of common elements assigned to each apartment. It will also contain details of just where an apartment ends and the common elements begin.
Under the bylaws, condos are run by a board of managers elected by the unit owners at an annual meeting. In some condos, each unit gets one vote; in others, the number of votes may be determined by the percentage of common elements owned, which is determined by a variety of factors, including the size of the apartment, its value, or its location. (Common charges are typically based on the percentage of common elements owned.)
A significant issue in recent years has been whether board members can be held personally liable for good-faith actions in performing their duties. At least one appeals court has ruled, basically, that they cannot. Issues that the courts have not definitively resolved include whether a condo association can impose a “flip tax” – a fee paid by the seller when an apartment is sold, usually a percentage of the sales price, a percentage of profit made on the unit, or a specific dollar amount per interest.
Right of first refusal: Generally, the only way a condo association can block a sale is to buy the apartment. This is known as the “right of first refusal” and is rarely used because it typically requires a vote of the unit owners, and the condo association must come up with the money—usually in 30 days. It’s a legal maneuver that allows condo boards to derail an impending sale by purchasing the apartment from its current owner. The condo must buy the apartment on the same terms and conditions that the seller is prepared to accept from an outside buyer, so that the seller is no worse off if exercised. This rarely happens.
Condop
A condop is a condominium building that has separate commercial and residential units, with the residential units controlled by a co-op corporation. The individual commercial units are typically retained or sold separately by the developer and can include retail space, office space, and a parking garage. New York City has fewer than 300 condops.