Spotlight on Co-op-to-Condo Conversions: Is It Worth It?

It Ain't Cheap

It's possible for a co-op to convert into a condo, but there are serious hurdles, such as repaying the building's underlying mortgage, which might include huge prepayment penalties. Don't forget lawyers’ fees, filing fees with city agencies, approvals needed from the state attorney general’s office — it is an expensive and complex process, and many lawyers say the headaches outweigh the benefits.

The Steps

So what is required to convert from a co-op to a condo? The steps to take involve:

• Getting shareholder approval. The percentage varies from building to building, according to the bylaws of each.
• Paying off the underlying mortgage.
• Drafting new governing documents. A new declaration of the condominium and new bylaws would have to be written to replace the old proprietary lease and bylaws.
• Coping with tax obligations. Instead of owning shares in a corporation that owns real estate, owners of condos own a piece of real estate directly. The tax consequences of the exchange can get tricky. When you surrendering your co-op stock and get a condominium apartment in exchange, you are getting valuable consideration in exchange for your stock — which is a taxable event.”
• The corporation could also face taxes. When a corporation transfers property to a shareholder in redemption of his shares — which is essentially what happens during a co-op-to-condo conversion — the corporation is taxed as though it had sold the property at its then-fair market value, except if the apartment is the “principal residence” of the shareholder at the time of the exchange.

Is It Worth Converting?

There are controls built into the cooperative system — over who buys in, how to keep the quality of life high for every resident (through house rules and other protections), and how to keep the property financially sound. Converting to a condo means giving up those controls. And while fans tout that issue as a plus on the condo column, those controls that sometimes (unfairly) earn co-ops a reputation for being too nitpicky or nosy or difficult give them the ability of collecting money from a resident who has fallen into arrears on monthly charges.

What this means is that a co-op has first lien — first claim on money collected if there is a foreclosure action and the board takes over and sells the apartment. In a condominium, the bank holds the first lien and, in a foreclosure, the condo may ultimately see nothing from the defaulting owner and have to eat the cost of the unpaid arrears.

Still think it's worth making the change? If the answer is still yes, be sure to discuss the plan with your building's attorney, weigh all the pros and cons, and do the math. There's a lot of it! 

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