Why was the co-op structure used so commonly?

NYS law didn't permit condos until the mid-1960s.

For all those 1980s conversions, the sponsors had the choice of co-op or condo. There were some tax considerations for them that I don't understand, but some of the tendency toward co-op had to do with the market. Co-ops could sell cheaper because of their underlying mortgages (which tended toward much higher loan-to-value back then.) That would've been more attractive to tenants wrestling with a rent/buy decision, offset by the higher maintenance. Here's the example of 16 Park I yapped about a few years ago:

"For example, when the Goldsteins converted your building in 1986, they could've gone co-op or condo.

"They went co-op, so the co-op bought the building for $7,000,000 and assumed a mortgage of $1,680,000. Each shareholder therefore paid their share of the $7,000,000 and effectively assumed the carrying cost of their share of the $1,680,000. So an apartment that sold for $100,000 had a basis of $124,000.

"Had they gone condo instead, they would've sold the units for $8,680,000, paid off the $1,680,000 (since condos can't assume mortgages) and netted the same $7,000,000. The apartment that sold for $100,000 as a co-op would've sold for $124,000 as a condo, but the owner would have lower CCs.

"The buyers might've paid even more than the 24% extra for the condos, of course, but the co-op plan must've been better for the Goldsteins because of the tax situation at the time."

Another factor for the sponsors might've been the yield-maintenance provisions of their hefty mortgages. For the condo option, that'd be a lot of money going to the lender at early payoff.

Thanks nwt.

1. Condos were illegal until 1964 or thereabouts and it took a while after that for the banks to get comfortable lending based on unit ownership with no communal control.
2. Coops offer more protection against potentially financially troubled or disreputable neighbors, factors that were viewed as important in the period when the form became popular.
3. Coops are more easily able to discriminate, legally and illegally, against disfavored buyers (once, Catholics, Jews, Blacks and new money; today, celebrities, foreign money and part-time residents).
4. Historically, coops offered more privacy since board deliberations, shareholdings and UCC financing, unlike real estate holdings and mortgages, were ordinarily not matters of public record. This is less true than it used to be.
5. Coops can more easily finance the entire property. When credit is tight or buyers are capital constrained, this allows developers to move some of the purchase price into the monthly maintenance charge, reducing downpayments and (depending on the market) possibly reducing interest charges. This was a major factor in the 1970s-80s conversions. The underlying mortgage also makes it easier for the building to finance major renovations without large assessments, a major factor for older buildings or capital constrained owners.
6. Largely by historical accident rather than legal necessity, the forms offer convenient market segmentation. Some people want to live in more restricted neighborhoods; others are more laissez-faire. As a matter of law, either condos or coops can be set up to appeal to either group. However, NYC custom means that generally buyers can count on coops pitching to the gated community crowd, while condos (unlike in the rest of the country) go for the speculator/party/pied-a-terre group.

Those too.

As an aside to #4, at one point Albany was considering a recording tax on co-op share loans, as for mortgages. I wish that'd go through, as I'll never have another share loan but want to know how much co-op buyers are borrowing.

In the mid/late 1980s when many conversions happened virtually all apartments were rent stabilized/controlled. Since most conversions were "non-eviction", meaning current tenants could keep their apartments should they choose not to buy it was imperative that offering prices be kept as low as profitably possible so plans could be declared effective. The ability to be exclulsionary may have played a role in some high end buildings but I don't think it was much of a factor in the (what were) run-of-the mill middle class rental buildings that constituted many of the 1980s conversions.

mercer:

Coops were set up in the late 1800's to institutionalize discrimination by giving coop
directors unconditional power to reject prospective purchasers on the basis of race,
religion, disability, etc.

It has only been in recent years that discrimination on that basis has been prohibited.

That question of insider pricing back then is interesting.

At the time RC/RS were much more unfavorable to landlords. (No luxury decontrol, etc.)

A typical building would be either losing money or netting not enough. As NativeRestless said, the insider discount had to be enough to induce at least 15% of the tenants to buy, but not enough to give the store away. The final pricing, along with reserve funding, etc., would be negotiated between the tenants association and the sponsor. In my own building, where the conversion had been planned since the 1980s but didn't close until 1992, the discount turned out to be 50%, and 40-odd% of the tenants bought.

The sponsor is now thankful that only that many bought, as the steady stream of bubble sales since then have much more than offset the few thousand per month maintenance-minus-rent loss.

NativeRestless - correct. It was about the developer, not about the shareholders / residents. financeguy's 2,3,4, and I suppose 6 are not reasons for why apartment buildings became co-ops.

Thank you all.

I love this stuff. More nuggets from my building:

In 1994 the sponsor still held 43 apartments. In 2005 that was down to 27. (Those were the years when he carelessly included individual-apartment rent and maintenance in the offering-plan amendments, rather than just the required totals.)

On those 27 apartments, he was making $260 per month in 1994, and was losing $2500 per month in 2005.

That was because maintenance had gone up 58.4% while rents went up only 40.5%. (29.8% on the RS and
50.3% on the RC.)

Those piddly losses were as nothing, though, as he sold 16 vacated apartments into a steadily-rising market. The most he ever spent on renovating an apartment for sale was maybe $100K.

Good for him, though could've been better had he predicted the boom and converted later. And peanuts compared to his partner's heirs at the Apthorp, who found a real sucker and are now the idle rich.

Great info NTW. Could not have written it up any better and I wouldn't expect anything less coming from you.

The coop was New York's special innovation in residential living that addressed the dilemma of residential housing for the wealthy; how can respectable people live in a multi family building ? In a single family house your neighbors could see who came and went in and out of your apartment which would not be possible in a large apartment house. The coop became the stamp of approval and an assurance that no prostitution was taking place; this was a big deal in New York in 1915.

Income tax in 1913, the lack of cheap immigrant labor and the new efficiency of modern apartments turned the recently constructted palaces of Fifth avenue into white elephants - many were torn down in the 1920s. Google the Clark mansion (Montana's Copper King) and notice how this place only stood for only a few decades.

Hey mercer - With your very obvious experience and body of work on this board I'm pretty sure you already knew the answers to this topic.

So, my question to you is - what's your incentive here?
hmm?

>So, my question to you is - what's your incentive here?

I'm racking my brain to even imagine what the possibilities could be. Maybe since you asked the question, you could let us know what possibilities you are thinking of.

This is some very informative stuff. Thanks, guys.

Andwin, Was just curious about the historical reasons. Google search did not give me much but nwt and fianceguy's comment were very helpful.

Except that financeguy is wrong on a number of points. Think about it.

no specifics.

just trash.

Co-ops are the ideal structure for a sane marketplace and a sane building with qualified purchasers and good people overall. I agree that foreigners arebuying more and more in New York but that is a less stable element for a building. Also since co-ops require larger down payments and wealth tests, they avoid many of the problems caused through 2008 that may be appearing once again with crazy bidding.
Overall you want in your own building to be with people with values you understand long term.

Co-ops pre-date condominiums by 30+ years. I think the first condos date from the late '50's. NYC being the first place with apartment buildings and shared ownership, they innovated with the co-op, and there are still some advantages (especially when you're looking for exclusivity), but the primary legal difference is owning real estate vs. owning shares in a company.

There are some other simple, common-sense reasons as well...

Remember that NYC is/was a bastion of liberalism, of community-ism, of left-wing, socialist ideals. The idea of residents bandying together to *collectively* own their housing, as opposed to individually buying private homes, plays into that notion.

Herd mentality and lawyers' experience/comfort with a certain model factors in as well. If every building in the neighborhood is going co-op, you, as a sponsor, are probably going to go co-op as well. Why buck the trend and stand out, particularly when the lawyers you're going to hire to oversee the (complex) conversion process are probably far more conversant in co-op conversion procedure than condo?

The board of a co-op also wields FAR more power and control than the board of a condo. The sponsor who converts his building to a co-op has free reign to do what he pleases with unsold shares that he continues to hold, and also maintains a powerful voice on the board that governs who comes in and out of his building. For a megolomaniac, that's quite an attractive combination.

Along those lines, remember that people are inherently nosy, provincial, and judgmental of others. While nobody likes the hassle of going through co-op interviews and disclosing all of their own personal financial information, many people relish the idea of putting others through the same hell. There's a certain thrill people get in 'legally' or 'validly' snooping around other people's personal information and standing in judgment of them. Only co-ops allow that dirty pleasure.

Sponsors who really wanted to retain their apartments/buildings as rentals often converted to 'faux-coops' in order to escape rent-stabilization laws. By converting to a co-op, instead of remaining as a rental building, an apartment became de-regulated as soon as the pre-conversion tenant died or moved out. Had the building remained a rental, the apartment would remain stabilized even after the tenant vacated. Many unscrupulous building owners thus converted to co-op and sold only a nominal number of apartments, keeping the rest to rent out themselves. The reason this was terribly dishonest is that those few 'suckers' who bought apartments found themselves unable to re-sell or finance them, inasmuch as banks are generally averse to lending in buildings where one entity (i.e. the sponsor) owns a majority of units.

One more reason for sponsors who intended to hold on to a substantial number of units post-conversion to go co-op rather than condo:

In a condo, the common charges are determined on the basis of the percentage of common elements that a unit owner has, which, in turn, is determined on the basis of the square footage of the apartment. That square footage MUST be reported to the state by the sponsor, and, in theory, the count must be exact. No cheating allowed.

The formula for co-ops is far more nebulous. In co-ops, maintenance is determined on the basis of the number of shares allocated to a given unit. Although the number of shares, too, are *SUPPOSED* to reflect differences between the size of various units in a building, there's a lot more leeway for unscrupulousness. Additional shares can be added for, say, height within a building, the quality of the view, etc. As a result, a sponsor who intended to keep certain units could more easily manipulate the share counts so as to ensure that the units he kept had fewer shares (and thus, lower maintenance) while the units he sold had more. While not ubiquitous, it's not all too uncommon to see blatantly disproportionate allocations of shares in buildings throughout the City. I personally know of one building, for example, where units with the same number of rooms are all allocated the same number of shares, even if the size of those rooms are vastly different. Thus, a 475 sf one-bedroom is allocated the same number of shares as a 750 sf one-bedroom, and thus, has the same maintenance. If you were a sponsor intent on keeping a large number of 750 sf one-bedrooms post-conversion, you'd set up a system like this so as to ensure that owners of smaller units pay a disproportionately higher share of the maintenance than you do.

Your "many" and "all too common" fit in nicely with a sponsor-as-demon point of view, but don't take into account the oversight of the state and the purchasing tenants. Before and after Albany's increasing regulation of the 1980s, the tenants themselves would keep the sponsor in line. "Why should I pay as much as the bigger C line?"

Both require that the share (or PCI, since this all applies to condos too) allocation bear a reasonable relationship to market value. Reasonable, not precise. A few sponsors did try to predict and control which lines would buy, and allocate accordingly, but didn't get far. The only example I've seen where share allocation was based on the number of rooms regardless of their size and other factors is 230 WEA. What's the 475 vs. 750 example? It's too late for them now, but it'd be good to know.

Agreed that conversion was the only way out from under rent regulation in the 1980s. For the "faux co-op" and "faux condo" claim, though, you must mean "a few" rather than "many" sponsors. In these 30-odd years, it's always made more sense for a sponsor to sell apartments as they're vacated. The market rents were tempting, but not more than the sales prices to be had.

Some of the few exceptions (co-op and condo) were gone over the other day at http://streeteasy.com/nyc/talk/discussion/34166-sponsorsunsold-shares

Also, remember that the insider prices paid by tenants were based on share/PCI allocation.

Giving the same weight to the 475 and 750 one-bedrooms would make the 475s less and the 750s more attractive, so the sponsor's scheme of keeping the 750s wouldn't have worked.

Great comments continue to come. Getting around rent regulation had not occurred to me. I have seen sponsors giving themselves roof rights etc without adj maintenance accordingly, if they wanted to live in the building.

I'm not sure it was getting around rent regs so much as inability to make money with regulated rents. Remember, at that time (1980s) almost every apartment was rent stabilized or controlled and inflation was rampant in many sectors that effect property management costs, especially energy. This was the much of the same rationale that led to abandonment and even arson in lower income neighborhoods but in more stable areas, especially Manhattan but also parts of Brooklyn, Queens and Riverdale the coop option allowed landlord/sponsors to make money from the transaction.

The sponsor keeps the 750-sf one-bedrooms and sells off the 475 sf ones, leaving the purchasers of those smaller units with the burden of paying a disproportionate share of the maintenance. When the sponsor is ready to sell his larger units, the relative affordability of the maintenance makes them seem extra-attractive.

230 was the building I was thinking of. Of all the buildings in all the City...you came up with the same one. Interesting.

With regard to the prudence of selling vs. renting, remember that the real explosion in prices only began in the early-to-mid 2000s, a good 12 - 15 years after buildings converted. Sure, the sale of apartments in the early to late 80s could bring in a quick buck, but sponsors with vision (and no regard for the welfare of the unwitting marks that they foisted apartments on in an undersold building) recognized that waiting for the City to rebound would reap even richer rewards. Then, once prices started skyrocketing, it seemed to many that the party would never end (circa 2003 - 2007)...it's tough, psychologically, to sell anything when it appears that the value increases every day (how many long-time AAPL stockholders sold in 2012? Probably not too many.)

Remember that NYC of the late 80s/early 90s was a scary, dangerous, dirty place. Even perennially nice neighborhoods (UES, etc) were oases in a far more gritty whole...

And don't forget that prior to about the late '80s, it was difficult to get a mortgage for a co-op -- most banks just didn't do it.

more misinformation. this thread is loaded with it. getting a mortgage for a coop was simple throughout the 80's---why do you think so many people got burned in'87 in real estate along with stocks?

building owners converted to coops because they could turn around and put the proceeds into triple tax free bonds and make far more with considerably less aggravation.

and the thought that somehow coops as an ownership form were an extension of a liberal bias is hilarious.

>more misinformation. this thread is loaded with it. getting a mortgage for a coop was simple throughout the 80's---why do you think so many people got burned in'87 in real estate along with stocks?

>building owners converted to coops because they could turn around and put the proceeds into triple tax free bonds and make far more with considerably less aggravation.

>and the thought that somehow coops as an ownership form were an extension of a liberal bias is hilarious.

So you are agreeing with what I said above.

Adding to NWT -- Sponsors must sell a fairly high percentage of units to declare a coop/condo effective, and continuing tenants are rent protected. Banks are also reluctant to provide financing for owners/shareholders in buildings with heavy sponsor ownership or rental occupancy, so buyers resist buying in such buildings.
Under rent stabilization, renting is usually a better deal for most people anyway (renting puts repair and market risk in the hands of a diversified landlord better able to bear it).

So generally (pre-bubble) LL/developers had to offer tenants reasonable terms to convince them to buy. As a result, a plan to remain as LL but escape RS/RC would have been quite difficult to put into effect.

Re: SomeonewhoKnows:

I doubt that left-wing communal-ist ideology was a strong factor when Park Avenue socialites abandoned their single family houses to live together in coops (although saving money by communal hiring of (some) servants was, as the help began to demand a living wage and income taxes cut into elite cash flow).

Similarly, left-wing politics was not a key reason why UWS landlords converted to coops rather than condos several decades later -- that was driven almost entirely by the residue of red-lining. Bank reluctance to lend to tenant/buyers meant developers could charge far more if they provided partial financing via an underlying mortgage.

I don't know how much here is fact & how much is conjecture but it is a fascinating conversation ~ keep it coming.

The only important legal difference between condos and coops is that it is much easier for coops to have an underlying mortgage.

In the 70's and early 80's an underlying mortgage was attractive to developers and buyers because it reduces the buyer's downpayment requirement. In the bubble, as banks stopped having a downpayment requirement, that stopped being relevant.

Also, as buildings age and need large infrastructure repairs, the ability to take out an underlying mortgage makes life much easier for middle-class residents: instead of a large lump sum assessment that can be very hard on people with limited liquidity, the building can borrow and pay through increased maintenance.

Both these pro-coop factors are less important to developers today, who tend to sell fully renovated buildings and often are marketing to investors/flippers/pied-a-terre buyers who want loose rules and are not capital constrained.

Incidentally, nothing in the coop/condo laws requires coops to have restrictive rules and condos loose ones (indeed, in the rest of the US, condos usually are the preferred form for highly restrictive gated communities). However, the NYC custom of strict coops and liberal condos is self-perpetuating. Anyone looking for loose rules quickly learns to look for condos, so developers promoting loose rules organize as condos.

Clarification: Columbiacounty is correct that banks have been happy to lend on coops all along; it was condos that they didn't understand until mid-80s. The issue was slightly different.

First, the US mortgage interest deduction didn't apply to coop loans for many years (I don't remember when this changed -- late '70s?), and federal insurance was not available. So coop loans were relatively expensive to borrowers -- often the commercial loans that buildings take were at lower after-tax interest rates than individual loans.

Second, banks had redlined most of the middle class part of NYC in the early 50's and refused to lend at all until well into the 80s. Eventually, FNMA started insuring loans even in neighborhoods that were not 100% white, and later redlining became illegal, but the practice continued even after the law changed. This also favored underlying building (coop) mortgages, which were less subject to redlining.

Third, until the recent bubble, banks usually required 20% down. But that's 20% down of the cost of the unit. So if part of the cost of the unit is in the underlying mortgage, buyers don't need as large a down payment. For middle class NYers, who tend to have more income than savings, that meant that they could spend more on a coop (including the underlying mortgage) than on a condo (and most buyers were middle class until recently).

Even today, much of the price difference between coops and condos is just an optical illusion: in a coop, you need to add the unit's share of the underlying mortgage to get a comparable price to a condo. You are paying part of the purchase price through the maintenance.

Pre-bubble, developers thought that this optical illusion (and the very real result of a lower downpayment) made coops easier to sell than condos. Now, marketing to out-of-towners more familiar with condos than coops and with lots of cash, they mostly think the reverse.

70s not 80s for the effective end of redlining on the UWS.

SomeonewhoKnows, the sponsor couldn't offer one line for sale to tenants and not another, so skewing the shares/PCI to one line versus another wouldn't pan out. Underweighting the shares/PCI of the line you want to keep would have the opposite effect.

That's not to say that a sponsor couldn't take advantage of the demographics of one line versus another. If you'd planned decades ahead, so that the line you wanted to keep was tenanted by people who couldn't buy at any price, then skewing could work. It'd still require that the tenants, their association, and their lawyers just fell off the turnip truck and didn't see the ploy.

and don't forget that banks were lining up to finance resident insider purchases often with no money down because of accepted 50% discount on these sales plus sponsors delivered groups of insiders to a particular bank at the same time.

Which raises the 230WEA question. I'd love to see the conversion history there, and how the big vs little one-bedrooms sold. It seems unlikely that all the parties were so charmed (as I am) by the elegance and precision of the share-allocation formula that they overlooked the inequities.

>SomeonewhoKnows, the sponsor couldn't offer one line for sale to tenants and not another, so skewing the shares/PCI to one line versus another wouldn't pan out. Underweighting the shares/PCI of the line you want to keep would have the opposite effect.

>That's not to say that a sponsor couldn't take advantage of the demographics of one line versus another. If you'd planned decades ahead, so that the line you wanted to keep was tenanted by people who couldn't buy at any price, then skewing could work. It'd still require that the tenants, their association, and their lawyers just fell off the turnip truck and didn't see the ploy.

Someonewhononada?

I'm not that attuned to subleties of style to be able to tell. It takes the transparency of a mhillqt/chelapt/jacksonhole for my coin to drop.

Back to share allocation, my sponsor had two two-bedroom lines. A was allocated about 5.5% more shares on the starting floor than C, such that the lowest-floor A had a few more shares than the highest-floor C.

His theory was off, though, as the C sold much better than the A, such that a few years after conversion he still owned eight of the A but only three of the C.

Interestingly, he still has an A tenant who's 97 and paying $2K for her two-bedroom with a $2.5K maintenance. She wants him to cut her some rent slack to help her through her final years. He refuses, as those declining years have stretched to 20 and she bodes well to become NYC's longest-lived RC tenant and may outlive him. So much for machinations.

It's a sticky wicket, as they say.

At what point are landlords supposed to continue subsidizing people through their "final years"??

She needs to find a nice undergrad to marry, ASAP.

Money is the bottom line,as usuall. Whatever way at the time makes the most in the least amount of time with the least hassles is it.

alanhart, that's what she jokingly said in the laundry-room conversation where she volunteered her age and rent. (I'd figured her for only 70-ish.) She likes the sponsor and understands why he's not about to hand her money on a platter, but figured she may as well ask. They both take people and the system as they find them without too much agonizing.

Tenants who qualify for the Senior Citizen Rent Increase Exemption (SCRIE) Program can have their rent frozen at their current level and be exempt from future rent increases. For more information you can download the SCRIE/DRIE Brochure for Tenants/Landlords.

Requirements

Must be at least 62 years old;
Rent an apartment that is regulated by the Division of Housing and Community Renewal (DHCR) (i.e. rent controlled or rent stabilized apartments or hotel stabilized);
Have a total annual household income of $29,000 or less and;
Pay more than one-third of the household's total monthly income for rent.

She can adopt me, if her next-door neighbor will sell.

That's a good idea; she could auction her bonus-mom rights.

I just checked up to see whether she was exaggerating the $2K rent. Since 2005, the last year I have a documented rent for her, the sponsor must've gotten the maximum 7.5% annual RC increase. Compounded, that puts her at just above the $2K she said.

One of the quirks of regulation is that a tenant can be better off with RS than RC. By 2005 the two-bedroom RC/RS tenants were all paying pretty much the same, from $950-$1150. Since then that 7.5% per year has really slammed the RC, while the RS increases have been much less, never more than 4.5%.

http://streeteasy.com/nyc/talk/discussion/27124-lease-options-in-a-rent-stabilized-apt

>One of the quirks of regulation is that a tenant can be better off with RS than RC. By 2005 the two-bedroom RC/RS tenants were all paying pretty much the same, from $950-$1150. Since then that 7.5% per year has really slammed the RC, while the RS increases have been much less, never more than 4.5%.

I think you are wrong, the 7.5% only then goes up to what would be allowed as the Maximum Base Rent which I believe is tied to a rent that would be allowed under Stabilization.

You're right, that MBR rings a bell. I once dug through all the forms and crap that RC/RS landlords have to go through, but the RC got too complicated and my head hurt.

Maybe she's overstating her rent, or the RS have also gone up the 7.5%, with the various improvement-based increases, or something.

One of these years the sponsor will slip up again, and put individual-apartment rents in his offering-plan amendment. That lapse in info since 2005 is making me guess too much.

10 years at 7.5% doubles your rent.

But see the criteria for the SCRIE. She makes too much money.

If the MBR is double the rent she's paying under Rent Control, and the Rent Stab regs go up 4.5% per year (and you note it is often less), then it would take 25 years of 7.5% before she catches up to the MBR. That's many years of 7.5% increases over which time her rent would have gone up 6-fold. I can understand her request to the landlord based on seeing the cumulative effects, but on the other hand, as I pointed out, if she's not eligible for SCRIE, then she isn't a poverty case. This of course exposes the other side of rent regs - perhaps 15 or 20 years ago when she was a bit younger she would have considered moving to a smaller apartment in the same building at a proportional monthly rent, but you can't just do that because there isn't that type of availability and you also lose your otherwise lifetime protections, so you become trapped and then in a difficult situation today.

Nine years at 7.5% would take her from the number I know ($1146) to $2044, about what she said, but that could be too tidy to be true. I need more real numbers.

Right, SCRIE is tough to get. Only one of the tenants gets it, but I don't know which.

I don't know whether she's really hurting. Her affect, and the way she kidded about asking the sponsor for a break, suggest not. Short of asking whether she needs help with her books, I'll never know.

>Right, SCRIE is tough to get. Only one of the tenants gets it, but I don't know which.

It isn't tough to get, she just doesn't meet the income criteria.

lets all line up to qualify. how great.

>lets all line up to qualify. how great.

Bitter idiot.

Do they even have SCRIE in C0lumbia C0unty?

non-responsive

It's not just the 7.5%. RC also gets hit with MCIs, fuel increase passalongs, labor increase passalongs et cetera.

Back to the RC old lady in my building, turns out she was exaggerating her rent. In the July 2013 rent roll from the offering-plan amendment I just got, she's paying $1810.

That can be a lot for a senior citizen on a fixed income.

I think it's a lot, too, but my 1990s mind-set isn't all that far off from hers.

alanhart, yes, the rent-roll has a separate column for fuel pass-along, just for the RC tenants.

Looking back in the thread, in 2005 my sponsor was losing $2500 per month on 27 RC/RS apartments. In 2013 he's losing $7500 on 19 apartments. Still a sustainable drain, given the money he got for the eight vacated apartments.

I like the part of this thread where Greensdale shines light on financeguy's nonsense and then when C0C0 agrees with Greensdale without being able to admit it.