Prime NYC Real Estate co-op board requiments

Each Coop has their own requirements and you may find 2 buildings right next door to each other with widely varying rules. However, the listing broker should know exactly what the requirements are for the particular building their property is located in.

Depends on your definition of prime. Based on my own reading of listings when I was looking, and chats w/ brokers who are familiar with that end of the market: At the top end: Purchase must be all cash (no financing permitted), and buyer must have post-purchase liquidity of 5-10 times purchase price. Much lower down: max 50% financing, and post-purchase liquidity of 2-5x the purchase price. Yes, it's entirely likely that the Basses paid all cash for their $42m pad at 834 5th.

To answer part of your original question: real estate is not considered liquid (along with business partnerships, restricted stock holdings, art collections, etc.). All that other stuff does count toward overall net worth, which boards do consider -- it's all a part of your ability to be a shareholder in a corporation which relies on its shareholders to pay the bills.

Please note that the objective of the Coop Board is simply to Maintain and to Raise the value of the property and the building.

There are three major areas in which the Board addresses this:

The amount of financing allowed by the Board.
Liquidity of the buyer after the purchase has closed.
The Cash Flow of Buyer

The amount of financing a Board will allow to purchase in the co-op can range from 80% to no financing at all. The average amount for most co-ops is 75%. Negative amortization and Interest only loans are usually not allowed.

After the closing of a purchase the Board will expect the prospective purchaser to have, in Liquid Assets, three to five years of their debt service. Debt Service is the mortgage, maintenance, and any other financial obligations the purchaser may have. This includes car leases or loans, school loans, other mortgages, home equity loans, credit cards and such.

The amount of this requirement varies from Co-op to Co-op and should be verified by your broker.

In the more affluent areas such as Central Park West, Fifth Avenue, and Park Avenue the liquidity required may be as much as several times purchase price. The majority of Boards require two to five years of debt service depending on the building. This also should be verified by the brokers.

Lastly, the monthly carrying cost of the apartment should be approximately 25% of the gross income of the purchaser(s.) The total debt service of the purchaser should be in the range of 28 to 30% of the Gross Income.

Because of these requirements, when an offer is submitted to purchase, you will be asked to disclose your basic financial profile. Unless the owner is confident that the prospective purchaser will pass the Board requirements they will not entertain the offer. In a coop the highest offer may not be the best offer. The best offer is the highest offer from the most qualified purchaser.

You will be asked to submit a complete financial statement with an application to purchase once there is a fully executed contract of sale for an apartment in a co-op.

There are exceptions to the numbers above therefore it is very important to discuss your particular financial situation with your Broker. An experienced coop broker can advise you best in these situations.

I would emphasize two points:

1) LIquidity is based on LIQUID assets, so real estate holdings, partnership interests, business interests, trusts, and other hard assets don't count. You would need to be able to liquidate these positions by close of business for them to count as liquid assets. Many boards will discount stocks, bonds and other semi-liquid assets to account for volatility and difficult to exit.

2. Brokers: Your broker should have a good understanding of each building where you are considering purchasing. Many buildings have subtle requirements that a broker can explain; no board can do justice to describing the requirements of 250+ buildings.

This is not a process for the faint of heart.

I need a reality check. If I see a building (1) increase its underlying mortgage on an interest-only basis, (2) raise the maximum financing allowed from 50-65% and (3) raise the flip tax from 2 to 3% all in the same year, that suggests to me that the building is on the decline. I very much want someone to explain to me how I am wrong. I admittedly am not a finance type and am a conservative investor, but it strikes me that the building is trying to increase the saleability of apartments at the expense of the stability of the building. I am guessing the moves will attract one type of buyer and deter another? Any insight appreciated. As always, apologies if the question is stupid; I know NY is filled with finance professionals. I am most certainly not one.

#2 is huge positive. #3 is negative. #1 depends on the total size of mortgage and how much percentage impact an increase of say 200bps (pretty far fetched but can happen over the 5-10 years) will have on the maintenance. Less than 5 percent maintenance increase due to 200bps rate increase is not material.

Thanks 300. Helpful. I am thinking the building is shifting to attract more young professionals rather than the older, more established crowd it has historically attracted. If that is the case, then I think the increase in the flip tax was counterproductive, so your assessment of that as a negative is in line with my sense.

I would argue that these measures are neutral to those who wish to stay, and probably on the whole more positive the older one might be and futher removed from interest rate risk years down the line. In the current interest rate environment, if the underlying mortgage is not bloated and capital improvements are needed, borrowing cheap money versus surcharging owners on a fixed income could be sound management. But too many people think of an i/o mortgage as one that does not reduce principal, but it should be thought of as giving flexibility when to pay principal. Reducing mortgage limits increases liquidity, the flip tax does the opposite, but i suspect were done simultaneously to increase turnover and capture revenue short term from the turnover. But this can temper values long term, and it is a slippery slope for those attached to the teet of low interest rates. If the object of lowering mortgage maximums and imposing flip tax was to use proceeds to pay down mortgage, that would be admirable, although likely theoretical until the boiler breaks and the money is spent.

I think 3% flip tax is unusual (1-2% is pretty common) and a big negative. Most people will be turned off due to unfairness of it and it is a bigger negative than lowering the down payment requirement. It only serves the people who intend to die there - most likely the coop board is made up largely of those.

Both increasing the underlying mortgage and flip taxes signals to me the Board thinks there is such a thing as "free money" and I would worry about their decision making process for long term rather than short term financial health.

The worry about long term decision-making is where I am. We are talking about the building we plan to make our retirement residence. All of this was helpful, particularly the bits about metrics to help put the mortgage increase into perspective. LTV on underlying mortgage is still low (5-10% depending on current market values - not sure exactly where bank's appraisal came in), and increase in interest rate of 200bps down the road would raise maintenance 3%, so it looks like the building is in good shape. As noted on another thread, we are changing the composition of the board to make sure it stays that way and does not slide down a slippery slope.

So flip tax is really the issue which will impact value and liquidity. Mortgage rate impact is very small.

Exactly. What is interesting, and time will tell, is the long term viability of our boutique full service prewar coop. As you have noted, labor costs and real estate taxes are never going to decrease, and that is the real issue that is deterring qualified new entrants. Because we are a small building with a full staff, our maintenance is significantly higher than that of the larger comparable buildings in our immediate vicinity. It is all fine and dandy for those of us who are established and don't necessarily ever "need" the capital we have invested into our apartments; indeed, the apartments have historically turned over largely only on the death of a shareholder. Time will tell, but our whole neighborhood seems to be at an inflection point. In other words, even if we want to force fiscal responsibility, if there is no market in our particular location for what we have historically been, we won't be able to guaranty that the building stays in solid financial shape.

I am a big proponent of lowering flip tax to say 1 percent or eliminate it, and doing assessments instead as the later is fairer and does not screw young families whose circumstances may change more than older people.

That is exactly how I feel and what our new board members will be advocating.

We are a perfect fit for dual-income young professionals while their children are young. They can afford and need/enjoy the full-service while both are working. If one stops working or if they later decide to exit the city for a different lifestyle altogether, they could then get their capital back. Given our proximity to financial and legal service powerhouses, we would even be okay raising max financing to 75% because we know many young professionals who would love our neighborhood, but down payment and post-closing liquidity requirements are prohibitive. By the time they can meet them, they are ready for the suburbs or head up to Carnegie Hill or Yorkville to be closer to their childrens' schools. Or if they are doing really well, they head downtown.

As a final note, apologies for steering this thread off the original topic because the neighborhood at issue in my posts is Beekman Place, which the market has deemed decidedly not "prime." We absolutely love it, but it is an entirely separate market from 5th Ave, Park Ave, CPW, etc. No idea what is going on with coop requirements in those areas, but our entire neighborhood is lightening up, which would seem to be being done out of necessity.

Great idea to raise financing to 75%. That is very positive and indicates that the building is not stuffy.

I think the only two buildings in Beekman that can afford to be stuffy these days are River House and 1 Beekman Place, and I am fairly confident that even they can no longer afford to be as stuffy as they'd like to be.

I think except for a few coops with more than $10mm price levels even prime park avenue and 5th Avenue coops will be forced to reduce high downpayment and liquidity requirements as old generation dies off.

Agreed. Parallels to all the old line country clubs that are merging and dying across the country. I look forward to the day when all that real estate is populated by a more diverse and vibrant group.

No one likes assessments politically, but financially they make sense. If you fund your capital reserves through maintenance, there is zero tax deduction for the part of the maintenance going to the reserve. But if you assess for capital work, that gets added to your basis and thus deducted from your capital gain. And while I don't have any studies to back this up, my gut feeling is that the hit in price from flip tax is greater than the amount of income from flip tax.
As far as underlying mortgages, I'd rather see the debt in increased share loans than in building mortgage. As costs increase I think we are going to see high and higher price penalties for higher maintenance charges. Plus coops are somewhat immune to defaults on share loans since maintenance is in first lien position so if a shareholder defaults the coop ultimately is made whole.

Of course the irony is that were are seeing more condos start to behave as if they are stuffy Coops than stuffy Coops becoming less so.