A Tale of Two Buildings Co-op vs. Condo Management

 Physically, there’s really no difference between co-ops and condos. The savviest property manager  in the five boroughs could not walk into a lobby and say for certain if it’s one or the other. When co-ops are converted to condos, or vice versa, the  result is not visible to the naked eye. And yet, if two buildings that are  exactly the same in every way, and two identical apartments in those buildings  are listed, the condo will fetch a higher price than the co-op.  

 Night & Day

 “If two buildings are exactly the same,” says Maryann Carro-Caputo, president of Tribor Management in Flushing, “the condo’s value is higher because it really is real property.” Co-ops are essentially private corporations that happen to own a  brick-and-mortar building; ownership of shares in the corporation entitles the  shareholder to occupy an apartment within that building. Condos are real  property in the same way a free-standing house is; they're just all stacked one  on top of the other, with shared common areas in between. This makes it easier  for the latter to deal with the bank; to mortgage, to refinance, to extract  equity, to rent, to sell.  

 This discrepancy in cost might lead us to conclude that condos are “better” than co-ops—but this is not inherently the case. Indeed, the same factors that make condos  list at higher prices make them more difficult to manage.  

 Indeed, the difference between managing a co-op and a condo, Carro-Caputo says,  is “like night and day. Some things are very, very subtle, but some issues in condos  are more problematic than in co-ops.”  

 From a property management standpoint, there are two main differences between  the two. The first is control—the ability of the manager and the board to effect change. The second involves  violations—the resources open to the manager and board when an owner runs afoul of the  rules.  

 “The board of directors in a co-op has a higher level of control of the building,” says Anton Cirulli of Lawrence Properties, a Manhattan management firm, “because people own shares of the building rather than their individual  apartment.”  

 Thus, a co-op board has enormous authority within a building by virtue of  judicial caveat and a principle called the business judgment rule. Courts tend  to give co-op boards wide latitude in overseeing their own affairs. Boards must  approve all sales, all subletters, all changes to the apartment, and a host of  other, smaller concerns. A shareholder who wishes to sell his or her apartment  must not only find a buyer, but find a buyer of whom the co-op board approves.  Most of the time, this isn’t a problem—the lion’s share of rejected buyers are turned down because of financial concerns—but it does limit the crop of prospective buyers somewhat. Conversely, it can  help ensure that the buyer’s financial standing is sound, which is good for the overall health of the  building.  

 Higher Value, Fewer Powers

 Condo boards, on the other hand, have no such power. “A condo board can only purchase an apartment as a right of first refusal,” Cirulli says, and even that must be done within a month. At that point, “they can’t stop a sale.” Co-op boards can, and will, drag their feet, and effectively force the buyer to  wait it out.  

 The power of the board does not wither after a sale is approved. This has its  disadvantages, for sure, but it also has its perks. For a counter-factual  example, look at a situation Carro-Caputo had recently in one of her condo  buildings: the owner of an apartment installed an illegal greenhouse on his  terrace. The greenhouse leaked and caused major damage to the apartment beneath  the terrace. Because the building is a condo, the board is not even allowed to  enter the greenhouse owner’s apartment to fix the leaks, let alone remove it. “The building can’t take down the illegal structure,” she says, “and can’t make the necessary repairs.” In a co-op, this would not be the case—the super would have been in the offending apartment before the second drip of  water hit the hardwood floor on the downstairs apartment.  

 “In a co-op, the restrictions on sales, illegal sublets, and sublets are greater,” Cirulli says. “A co-op can set the number of sublets it allows.” What this means, in practical terms, is that people tend not to buy into co-ops  unless they plan on living in the building. Co-ops tend to have more families,  condos a more transient population.  

 “Condos have more renters than co-ops,” says Greg Cohen, president of Impact Real Estate Management with offices in  Manhattan, Queens, Westchester and Long Island, “because a co-op can refuse renters and sub-lessees.” This can alter the dynamic of the building. “You get a tenant’s mentality rather than an owner’s mentality.”  

 Cirulli agrees. “Co-ops tend to be more communal,” he says. “The shareholders tend to be more involved in the building. They have to get  along.”  

 Cultural Contrasts

 Despite their material differences, there is also a subtle and undeniable  cultural difference between co-ops and condos.  

 New construction for the last decade, especially in Manhattan, is almost  exclusively condo. This is about the bottom line. “From the developer’s point of view, they get more money per unit in a condo,” Cohen explains. But condo living is potentially more expensive in other ways, too.  

 When it comes to collection of outstanding maintenance charges, co-op boards  have rights condo boards only dream of. For one thing, disputes are settled in  Landlord/Tenant Court, which is generally a quicker and more inexpensive  proposition than Supreme Court.  

 Take Carro-Caputo’s illegal greenhouse. Because the greenhouse owner refuses to comply with the  rules, “This has become a Supreme Court issue: expensive, time-consuming, and exhausting  for all involved.” Although the month-to-month costs are generally less in a condo—common charges cost less than maintenance fees—“it costs more money on the legal side if there’s ever an issue.”  

 The ultimate legal issue, especially in these financial times, is foreclosure.  What happens when a unit owner stops paying common charges or maintenance fees,  as most certainly will when in that position? What recourse do the two kinds of  buildings have?  

 This is one of those areas where co-ops have special protections—in this case, an Aztec Recognition Agreement. This, Cohen says, is where the  co-op is given a superior lien on the equity of the loan. “In case of foreclosure,” he says, “the bank will pay maintenance fees to the co-op as a first priority.” This is an enormous advantage, and virtually guarantees that losses to  maintenance charges will be recovered. This technicality helps protect the  financial health of the co-op. That's just one of many reasons why co-ops are  one of the safest investments a bank can make (indeed, banks fail more often  than co-ops do).  

 In the event of foreclosure on a condo, Carro-Caputo says the collection of  common charges can become a lost cause. “The lien is secondary to the mortgage,” she says. If the apartment is underwater, there may not be enough left over  after foreclosure to reimburse the condo association—and, making matters worse, “the foreclosure could take years.” Just as Greece and Portugal can bring down the European Union, condos (smaller  condos especially) could go bankrupt if one of the unit's owners enters  foreclosure. Because of this risk, condo owners would be wise to make sure that  the people buying into their building are solvent—but, unlike co-ops, they don’t have the legal right to do so.  

 Despite the many advantages to owning and managing a co-op, the condo is here to  stay. New construction virtually all become condos, and will remain that way as  long as developers are in the business to make money. “I don’t see a trend where there’s more co-ops,” Carro-Caputo says. “It’s harder to get a starter loan.”  

 But condos are taking a page from their co-op counterparts. Many of the newer  buildings have adopted more stringent bylaws and house rules that are more like  co-ops, at least on paper. Also, condos are more regulated these days. Before,  they didn’t have to have, and therefore usually didn’t have, much cash on reserve. This lack of rainy-day savings contributed to some  buildings failing during the last half-decade. But new FHA rules mandate a  certain amount of reserve funds, to ensure that this risk is mitigated.  

 “Now that Fannie Mae has rules about reserve funds,” Carro-Caputo says, “condos will be more stable.” But other management challenges will likely remain.    

 Greg Olear is a freelance writer and a frequent contributor to The Cooperator.  

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  • With co-operatives the terms of a proprietary lease can be amended if the majority of the shareholders agree. The shareholders with the fewer shares stand to be at a disadvantage