Q: I am the president of a small tenant group, and we have the opportunity to purchase our building. There is a lot of internal dissension over whether we should go condominium or cooperative. What is your advice?
A: Those of us who have been involved in tenant-related matters have learned that democracy -- although extremely important and valuable -- does not always work. Your decision may be base not on what the majority wants but on the practicalities of the marketplace.
There are differences between condominiums and cooperatives that should be called to the attention of the tenants. However, the bottom line is always money. In your negotiations over which legal form to take, the availability of mortgage financing should be placed at the top of your list.
Oversimplified, in a condominium, each unit is owned "fee simple" by the unit owner. Fee simple means absolute and clear title.
If the condominium unit owner does not pay all cash for the unit, a mortgage is obtained. In the event of a default on that mortgage, the mortgage lender has the legal right to foreclose on the property.
The condominium unit owner pays a percentage share of the common element expenses to the condominium association, which makes the ultimate decisions afffecting the living standards of all the unit owners. Often, where the condominium has many units, a board of directors is elected by the unit owners at an annual meeting, and the board is directly responsible for the daily operation of the complex.
When you buy a condominium, you have to pay closing costs, just as if you are purchasing a house. There are recording fees, transfer taxes, title search charges, title insurance fees, lender's points and many other settlement charges.
Before making the decision on whether to go condominium or cooperative, it is advisable to get a comprehensive list of all of these settlement and closing charges.
In a cooperative, the building is owned by the cooperative association. Only one mortgage is necessary. Unit owners do not actually own their own apartment but rather own shares of stock in the cooperative corporation.
These shares of stock -- also referred to as ownership contracts -- permit the co-op apartment owner to have the exclusive use of the apartment. Of course, both the cooperative owner and the condominium unit owners are legally obligated to follow the rules and regulations of the apartment complex. l
The cooperative expenses are shared in just about the same fashion as a condominium. The major difference in the budget between a condominium and a cooperative is that with a cooperative, each apartment owners pays his or her percentage share of the overall co-op mortgage, which is paid by the cooperative corporation.
In a condominium, each unit owner pays his or her own mortgage in addition to the condominium fee.
Tax benefits, for all practical purposes, are identical for condominium and cooperative living.
In a cooperative, settlement costs are -- or should be -- quite nominal. There are no transfer taxes nor title search charges, insofar as the co-op owner is not obtaining title to real property. Shares of co-op stock are considered in law as personal property.
There is one major distinction, however, that should be called to your attention. In recent years the resale potential of condominiums has been considered greater than for co-op units. Perhaps this is more fiction than fact, but most real estate professionals will suggest that selling a co-op is harder than selling a condominium.
Perhaps there has been some truth to this in the past. With a condominium, mortgage financing was available. If prospective purchasers qualified for the mortgage, they could quickly go to settlement and take ownership of the unit.
With co-ops, on the other hand, since there is no mortgage financing, either a prospective co-op purchaser had to come up with a lot of cash, find a private source of financing or rely on the seller to take back some of the financing.
A number of developments have occurred that lead me to believe that cooperatives are now just as desirable as condominiums. Among them:
Interest rates for taking back financing on co-op units have significantly increased.
Modern co-ops have relatively high mortgages on the buildings, thereby not requiring purchases to have to put down very sizeable own payments.
The Federal Home Loan Bank Board has recently authorized savings and loan associations throughout the country to issue loans on cooperative units.
While the implementation of this regulation is still being worked out, there is hope that co-op purchasers in the near future will have the same range of financing alternatives as are available for condominium unit onwers.
Although the final answer to your question will depend on the availability of mortgage financing to your tenant group, you should make an effort to advise all the tenants about the pros and cons of condominium/cooperative living.