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Differences Between Cooperatives and Condominiums

Article ID: 27
Last updated: 17 Dec, 2011
Views: 5543

What is a cooperative?
What is a condominium?
What form of governance exists under each structure?
Are coop board rules always more burdensome and intrusive than condo board rules?  Is there a way to have a coop without such burdensome rules? 
What are the relative benefits or drawbacks to a coop and condo structure in ST-PCV?
How will the decision be made about whether to pursue a coop or condominium conversion? 
What is the process for conversion to condo or coop?
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 What is a cooperative?

In a coop, the land and buildings are owned by a cooperative corporation. Individual unit owners are actually shareholders in the corporation which owns the land and buildings, with ownership of a particular unit evidenced by ownership of a specified number of shares in the coop corporation, together with the proprietary lease to a specified unit. Shares are generally allocated based on size and location of the unit. Because a single corporation owns the land and buildings, real estate taxes are assessed on the buildings as a whole, rather than separately to each unit, and the development is usually financed with an underlying mortgage. The maintenance payments made by each coop shareholder cover not only maintenance and operating expenses of the complex, and reserves for capital expenditures and cash needs, but also a pro rata share of real estate taxes on the complex, as well as debt service on the underlying mortgage.

What is a condominium?

In a condominium, each unit is individually owned in fee by the unit owner, who also owns an “undivided common interest” in the common elements of the condominium, equal to a specified percentage interest. The percentage common interest is allocated among units according to the same principles as coop shares. Because each unit owner owns separate fee title to its unit, which constitutes an individual real estate tax lot, each owner is fully responsible for its own real estate taxes and mortgage payments, and there is no underlying mortgage on the building. Common charges paid by each unit owner cover only maintenance and operating expenses of the complex, and reserves for capital expenditures and cash needs.

What form of governance exists under each structure?

A cooperative corporation is governed by a Board of Directors whose authority to operate the coop is detailed in both the by-laws of the corporation and each proprietary lease.

A condominium is governed by a Board of Managers whose powers are described in the condominium declaration and by-laws. Both entities are elected by the shareholders or unit owners, voting in proportion to the number of shares or unit percentage common interest held by each.  

Are coop board rules always more burdensome and intrusive than condo board rules?  Is there a way to have a coop without such burdensome rules? 

Coop boards are generally considered to be more intrusive on resales than condominiums. Coop boards often require detailed financial data on prospective purchasers, and are permitted under law to disapprove sales and purchasers without having to justify their decisions (but are not permitted to violate civil rights laws). The reason for the heightened financial scrutiny is because in a coop,  the obligations to pay an underlying mortgage and building-wide real estate taxes are shared among all unit owners as part of maintenance charges, so that an inability of any unit owner to pay his or her maintenance charges can lead to a default that affects all unit owners. While coop boards must be reasonably assured that owners will be able to pay monthly maintenance costs – also a concern for a condominium boards, although condo common charges do not include real estate taxes and underlying mortgage payments - there is no reason that coop boards need to be overly financially intrusive. A coop corporation can protect its financial interests through establishment of objective financial standards for purchasers, as well as by maintaining a substantial reserve fund.

In condominiums, the Board of Managers does not typically have approval rights over purchases, but can exercise a right of first refusal – i.e., the right to have the condo association purchase the unit on the proposed terms of a sale --  for any reason whatsoever (other than discriminatory reasons in violation of civil rights laws), including if the condo Board would not have otherwise have approved of the purchaser. A coop can likewise be set up with a right of first refusal to purchase a unit where it does not approve of sale terms, rather than simply having a right of disapproval .

What are the relative benefits or drawbacks to a coop and condo structure in ST-PCV?

There are many factors to consider in making a decision whether to organize the ST-PCV ownership as a coop or a condo, and there are benefits and drawbacks to each. Some of these factors include:

  • Financing

A coop corporation has the ability to take out an underlying mortgage encumbering the entire coop, which accounts for a portion of the purchase price. (The reason that coop prices are often lower than condo prices is because a portion of the unit’s value is covered by the share of underlying mortgage attributable to each unit.) If the coop corporation is able to borrow more cheaply than each individual unit owner, the overall financing costs on each unit owner, reflected in monthly housing costs, would be lower. Additionally, if the unit purchase price is lower because a share of the unit’s cost is in an underlying mortgage, the downpayment that a tenant would need to be able to purchase his or her unit would be lower as well, thus potentially making the purchase of units more affordable to more tenants. On the other hand, condominium unit end loans are generally available with a wider array of financing options (ARMS, 15 or 30-year amortization, etc.) than are coop end loans.

  • Capital Improvements

It is easier to finance ongoing capital expenditures in a coop because underlying debt can be placed on the property, which can be serviced with coop maintenance payments over time. In a condominium, capital expenditures must be financed entirely with cash reserves, or by assessments on unit owners.

  • Marketability

In general, condo units are more easily transferred and financed than coop units and, as a result, tend to be somewhat more valuable.

  • Real Estate Taxes

In the case of a coop, because the land and buildings are owned by a corporation, they typically constitute a single tax lot for real estate tax purposes (Stuyvesant Town and Peter Cooper Village each currently constitutes a single separate tax lot.) Having a single tax lot, rather than a separate tax lot for each unit as in a condominium, makes it somewhat easier for the complex to take advantage of real estate tax abatements which may be made available.

  • Deductibility of Mortgage Interest and Real Estate Taxes

In both a condo and a coop, the real estate taxes paid by a unit owner, either as paid directly by a condominium unit owner or as the pro rata share of real estate taxes included in coop maintenance charges, is deductible from the unit owner’s federal income taxes. The interest paid on the mortgage(s) taken out to purchase a unit is also deductible, including, in the case of a coop, both the interest on the unit end loan and the pro rata share of underlying mortgage interest included in coop maintenance charges. In the case of a coop, there are organizational restrictions that must be met to ensure deductibility, including that at least 80% of the coop’s gross income come from the maintenance payments from shareholders.

  • Conversion Process

Both coop and condo conversions require the approval of the Attorney General of the offering plan. The offering plans contain similar information and disclosures. Because a condominium requires the complex to be subdivided into individual tax lots for each unit – which would be more than 11,000 individual tax lots for STPCV -- it requires more detailed architectural plans and survey work than does a coop, thus increasing the up-front transaction costs and time necessary to complete a conversion from a rental property.

  • Mortgage Recording Tax

Mortgage recording taxes, equal to 2.175% of the mortgage amount for mortgages over $500,000, and 2.05% for mortgages under $500,000, are payable by borrowers on mortgages to purchase condominium units. Mortgage recording taxes are not imposed under current NY law on end loans to purchase coop units.

  • Affordability Resale Restrictions

Affordability resale restrictions which are to be placed on units sold at the “affordable” price tiers can be enforced in either a coop or a condo. In a condo, the restriction is imposed through a deed restriction, and in a coop, through the proprietary lease and shares attributable to the unit. Enforcement will be done through an administrator which will be part of the managing agent’s function. 

How will the decision be made about whether to pursue a coop or condominium conversion?

The ST/PCV Tenants Association will consider all of the factors described above in making a decision about whether to pursue a cooperative or condominium structure. A key factor in the decision will be a comparison of actual market financing options available for each structure  --- both acquisition financing for the complex and end-loan financing for individual units -- to determine which will be the easiest to finance and most cost-effective structure for the tenants.

What is the process for conversion to condo or coop?

In either structure, an owner or sponsor must submit a preliminary offering plan to each tenant as well as the Attorney General. The Attorney General reviews the preliminary offering plan and, in the case of buildings occupied entirely or partly for residential purposes, may not accept the plan in less than four months after its submission. Within six months, however, the Attorney General must inform the sponsor or owner that the plan is either accepted for filing or is deficient and must be revised.  The Tenants Association will pursue a “non-eviction conversion”, meaning that tenants who wish to continue renting will remain as rent-stabilized tenants. Such a conversion will not become effective until tenants have signed contracts to purchase a minimum of 15% of all units in the condo or coop.

For more information please see he New York State Attorney General’s Cooperative and Condominium Conversion Handbook available at the link below in Adobe Portable Document Format (PDF)

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