Converting to Condo Would It Benefit Your Co-op?

Converting to Condo

In New York City cooperative apartments outnumber condoM-miniums by about five to one, so apartment buyers sometimes feel

they have limited choices. Frequently they opt for a co-op because they can't find a condo they really love. The good news for New Yorkers who prefer condos to co-ops is that some real estate experts are predicting an increase over the next decade or so in the number of condos available to apartment buyers.

Right now, the condo marketplace is still much smaller than the co-op marketplace, but it has soared in the last few years as demand has grown, explains Anita Perrone, vice president and director of advertising for The Corcoran Group, a real estate brokerage firm in Manhattan. There are not many new buildings being built, Perrone adds, but, of these, many are condos, and the numbers of available condos will grow as new construction is completed. Another source of new condosone that's just beginning to gain recognitionwill be those units created as a result of conversions from co-ops and rentals.

Freedom of Ownership

Not everyone would rather own a condo. Perrone says it all depends on the buyer. She often works with clients who would be equally happy with a co-op because they're looking for a family apartment where they can settle down for the long term. But other apartment hunters, such as investors, certain foreigners, empty nesters, second home buyers and a percentage of first-time home buyers, would rather have a condo.

Ed Schiff, a partner with the Manhattan law firm Schiff, Turek, Kirschenbaum, O'Connell, LLP, adds, Because of the restrictions that co-op buildings impose on shareholders, in terms of subletting policy and approval of prospective purchasers, condos have become more attractive over the years. Foreign investors in particular are often more comfortable with condo ownership.

Financial Roadblocks

Right now, Schiff has a number of clients whose buildings are potential candidates for conversion from co-op to condo. They are very close to making a decision about whether or not to pursue the matter, he says. Schiff is one of the few in New York City who has had first-hand experience with the process. He helped a Teaneck, New Jersey cooperative convert to a condominium 20 years ago. For that building, the process was relatively painless because its underlying mortgage had already been paid off when the residents decided to convert. This is the ideal scenario. Second best is a co-op with an underlying mortgage so low that it can be paid off entirely, leaving the building free and clear of a mortgage. If the holder of the underlying mortgage is willing to allow the debt to be divided among the unit owners, this is another way to make the conversion work.

According to Schiff, any co-op considering conversion to condo should have an adequate reserve fund that can withstand the foreseeable capital needs of the building for the next ten or so years. Once a building becomes a condo, it's not a good vehicle for borrowing money for major improvements. Unlike co-ops, which can take out a mortgage or a second mortgage using the building as collateral, condos cannot.

A lot of cooperators dream of doing a conversion, but the process can only work in specific situations, adds Richard Mintzer, president of Brookside Mortgage Company in Manhattan. It's truly daun ffb ting. The underlying mortgage is often the biggest problem. Too much debt can be a big roadblock, but it's not necessarily fatal to the conversion process.

According to Mintzer, there are certain rules of thumb that apply to the conversion process. The lender has to be ready to cooperate. He has to be willing to take a haircut and accept less than the full face value. For this reason, private individuals are generally easier to work with than institutions, he says. The sponsor will have to forgive some of the debt, but he can end up with a better situation if the building converts to a condo, because the conversion would enhance the marketablitity of his own units. Another factor is that every resident has to be able to pay their pro-rata share of the remaining underlying mortgage. Some people will need a new condo loan so that they can close, pay off the sponsor and pay off their existing unit loans.

Mintzer has been working with Dalia Newman, a Corcoran Group sales associate who was called in to explore the conversion possibility by the board of directors at a 45-unit Upper West Side co-op. According to Newman, the residents and sponsor, who is also the managing agent, are in agreement about the potential conversion, because the building has very high maintenance charges and a large underlying mortgage in addition to a number of unsold sponsor units.

It's the kind of cooperative buyers stay away from, Newman explains, because the maintenance is so high. They're in a bind, because they can't rent and they can't sell either. According to Mintzer, This building shows promise because the sponsor never brought in an institutional lender. He held the mortgage himself. Only the sponsor and the co-op were involved.

A Simple Legal Procedure

While the financial aspects of making the transition from a co-op to a condo building can be very involved and time consuming, from the legal standpoint it's a very easy process. The legal issues are not profound. In fact, they're quite simple, Schiff says. Generally, the board of directors and shareholders decide (by a vote of 50 percent or more, depending upon the building's by-laws) to adopt a resolution to terminate all of the proprietary leases and dissolve the corporation. The assets are then transferred to the individual shareholders.

This scenario presupposes that there's no debt on the property, Schiff adds, and therefore no taxable event is triggered, because it's an exchange of like kind properties. If there is an underlying mortgage, the debt needs to be switched to the unit owners who will each assume a consumer loan for condos. Most banks offer a whole spectrum of residential mortgage products for condos ranging from one-year adjustable rate mortgages to 30-year fixed rate mortgages. A condo declaration will have been filed prior to the dissolution. The property would then be deemed a condo.

In theory, most banks like the idea of co-op to condo conversions because it would allow them to do a lot of business very quickly. Generally, banks are happy to be involved with and to fund these projects as long as all the criteria have been met. If a cooperative building can get its residents to agree to the conversion process, deliver an approved condo plan and line the buyers up, Mintzer says, most banks would be only too happy to show up at the closing the write the check.

Perrone and others in the industry predict that New York City will begin seeing more co-ops converting to condo in the future. I think that once a handful of buildings figure out how to do it successfully, says Perrone, we'll see many more conversions of this type.

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