Co-op boards to explain rejections! if law passed

Great idea, but the practical effect will be coops making requirements even more ridiculous and then accepting people who don't strictly meet every criterion. A coop that wants to protect itself will say you need 10x purchase price in post close liquidity and then relax that rule case by case.

This bill needs to be accompanied by a rule limiting what coops can use to deny applicants. E.g. max post close liquidity requirement of 0.5x, require financing to be allowed up to 50%, combined income 80x monthly cost, no rejections due to purchase price.

Or just mandate that all coops be legally converted to condos where it's just a ROFR.

Disclosure is the first step. At least that would give shareholders and buyers something concrete they can reason with the board with. Let's say it is a million dollar apartment, and they ask for 10x purchase price in liquid assets. Shareholders could point how small the pool of buyers is that match the criteria, and more importantly, that this much liquidity isn't really needed for any business reason (what is the scenario when one needs 10x or even 1x in liquid assets???). Right now there isn't even any way to have a conversation.

In employment context, it is illegal to require education and experience beyond what is a "business necessity" for the job. Coop requirements should define criteria dictated by business necessity, and not the criteria that turn the building into a VIP club based on (usually inherited) financial assets and/or connections.

Lack of disclosure and accountability leads to discrimination, including illegal discrimination. No question about it!

Some established buildings with a few large apartments (think whole floors) that cater to the very wealthy run minimal reserve funds -- it's the view of the board that keeping large amounts of cash on hand for repairs isn't the best use of the shareholders money, becuase it cannot be invested to make general market returns - only the returns of Treasuries, or cash. So, the shareholders have lower maintenance, but they're hit up for assessments on an as-needed basis. A facade repair, roof replacement, and emergency elevator fix all in the same year could be pricey. To an owner of a $30m apartment with 10x assets, this is not material. As the decision to run minimal reserves and hit up investors with big fees is a business decision, it's prudent to accept only investors who can take the risk of being hit with big bills.

While I hear you about costly repairs, the numbers in the above post don't make sense. People with 300m in assets are not the only ones able to afford a new roof assessment. Plus, this logic is frequently applied to 200-unit buildings with reserves.

What a ridiculous argument. "We shouldn't tie up assets in a reserve fund because our resident masters of the universe can invest them for a far higher return." If that were really the case, they would allow 90% mortgages since who wants to tie up capital in an apartment? (Not me!)

Personally I would just force a legal conversion of all coops to condos, but they would surely squawk that the whole point if a coop would be ruined if they can't keep out people of the wrong color, religion, family status, etc.

As others have mentioned, not only is that justification the height of absurdity from a financial perspective, the “reasoning” itself materially depreciates the resale value of the apartment, rendering mute any potential corporate benefit of running low reserves. It’s purely an excuse for a co-op board’s elitism and self importance.

If there is a written record of rejections, then you figure that would serve as a deterrent by itself w.r.t. waivers. If you show a pattern of accepting or waiving requirements on XYZ but not on non-XYZ, then that opens you up to lawsuits.

I'm not defending the argument (much), but I've heard it given as a reason for not keeping a big capital account. And there are buildings with many units that have had assessments that have significantly crushed tenants. A pay-as-you-go model for capital improvements only works if the owners are relatively wealthy (i.e., liquid cash). Many people have to save up for their new car, roof rebuild, or furnace replacement. Investing in a boutique old building may have significant expenses, so unless the co-op's management style matches the buyer's finances, it's going to be a bad match. Co-ops run that way should be rejecting investors who can't write potentially large checks on demand.

Do I think it's an absurd way to run a building? Maybe. I'm not living in a building with those sort of financial requirements, but I do personally keep a relatively large cash cushion lying around (for example, I could write a check tomorrow to pay off my share of the building's mortgage without liquidating any assets).

Is this discrimination? Yes, in a similar way that regulations prevent unaccredited investors from participating in certain investments. Is it legal? Yes, because of the 'business judgement rule', and it's a broad brush that can whitewash other, illegal, discrimination. It certainly permits the rich to live next door to the rich, which they seem to like to do, and lets them set some rules about their quality of life, much as homeowner's associations do (which also have a track record as methods of discrimination).

I think co-ops should be required to publish their financial requirements, however 'absurd' they might be, and then see how many buyers there are, and at what price.

Aaron,

I agree that coops should be forced to publish their financial requirements and that itself will go a long way to address the discrimination issue.

There is a very simple solution to the fear of inability of new buyers to pay for high assessments. Bank Credit Line of say 50% of the total annual maintenance. Most banks do not charge a running fee for that. Just a small origination fee. If the coop indeed has to have a large assessment, they give the shareholders the option of paying upfront or over time (different amounts adjusting for interest payments). We use that in our coop and it works just fine.

I do not really foresee any reason why a coop would want more than - 3 year of mortgage and maintenance payments in liquid assets post-close, a conservative DTI call it 10% lower than standard requirements of 35%; and say 35% max down payment besides wanting to discriminate against less wealthy and typically younger people. I am sure we have seen stories that many of the formerly wealthy people living in these coops do not have the wealth any more and they can't be kicked out.

These are good points. Other than discrimination, why have the requirement of more than 30% down? I am really surprised why much of this is not illegal already. And why the strong preference for older residents?

The preference for older residents is a combination of desired behaviors and a belief that the oldsters have those behaviors, much of which I think boils down to a concern with 'stability':
- more likely to be financially secure and financially literate (pay maintenance on time, handle potentially significant assessments, understand the reasons and mechanics of reserve funds, mortgages, etc.)
- more likely to live there for the long-term (less turnover in building)
- better socialized to deal with the challenge of apartment buidling 'shared space' living (though I'm sure we can all cite a dozen counter examples).

These are generally traits we want in our neighbors, urban or suburban. And we see in the data of the housing crisis that co-op defaults were significantly rarer than condo defaults, I believe principally because the owners were more financially secure.

Home ownership is essentially a conservative investment -- it's physical and has slow/low appreciation. The fundamental traits of the asset are that it doesn't throw off cash during ownership (as opposed to stock dividends or bond coupons), and the only value is in the future: at sales time. Thus, the need for investors to conserve/maintain the physical asset, and have investors with that same mindset.

The current model of financialization is to turn everything into a shorter-term income producing assets (c.f. asset securitization, AirBnB). Co-ops were set up prior to the current model, and were more about ensuring stability, rather than pimping for your guest room. And yes, some definitions of 'stability' also included non-financial aspects that can be used for illegal discrimination.

Requiring a significant downpayment (or all cash) is about the only way to legally limit your investors to those who you 'want'. The tighter the constraints, the more conservative the view. (I'm not arguing here whether there's such a thing as too conservative [e.g., all cash, 5x assets].

What I find more interesting is that the condo form of ownership in NYC took so long to become legal. What were the historical reasons for not permitting it?

Let's take a 1M apartment, with a ridiculous requirement of 50% down and 1M post-close liquidity. That is 1.5M in cash that buyer need to have. Prime home buying age is 30-40 years old. Unless you go investment banking to private equity route and survive for 10 years (even in new york city, this is
a narrow path with few people), or were a successful startup founder who has had an exit event, there is almost no way to amass that much cash by 30-35. Buying apartment at 35? That's what mortgages are for. Any liquidity requirement beyond 25% down and 2 years of mortgage and maintenance is too conservative in my book.

As to the other age factors, I hear you about 25 year olds potentially still figuring life out. But a 35 year old accountant, consultant, lawyer, or probably any other educated adult should be perfectly understanding of the importance of paying bills on time. Want more certainty? Perhaps you can screen by credit score. At least this is something that the person you are evaluating has any control over.

Looks like these coops are targeting people who were born into wealth, which is outside of one's control and mildly infuriating in 2021.

It's also why many coops don't allow gifting. This cuts down on noisy kids being able to buy.

TRD has a good article about this topic.

https://therealdeal.com/issues_articles/not-our-kind/

My favorite is the comment from the coop lobby who says that there isn't a problem bc few allegations of racism have been proven.

The great virtue of a coop, from a coop's eyes, is the ability to discriminate without anyone knowing for sure. Racists love coops. With hate organizations on the same, a coop board is one of the last places for racists to practice their art form.

George = TROLL

George, I think Coops are far better than they were say 20 years back in terms of approving buyers but clearly many coops still have ways to go. A change in law regarding coop disclosures would really help. Is that bill mentioned in the link by Krolik still being passed?

Thanks for sharing, and how maddening!

Definitely heard from brokers during my house search that we were "more of a condo profile than a co-op profile". I was slow to catch on. Earlier this year, after paying nearly ~8k in coop application fees and spending a month collecting paperwork, we got turned down by the board of a "BHS" Sutton Place building, denied purchase of an apartment that costs less than 2x our annual gross income.

I guess I should not be surprised - my partner is brown, and neither one of us has a trust fund (so we have to do the vulgar thing and work for a living).

Well said George, coops host lots of nasty racists.

Good to see such brilliant commentary