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Time Equities Developer Looks Back
The chairman and CEO of Time Equities, a converter of cooperatives in the 1980s talks about the past and future of the cooperative housing movement.
When Habitat magazine first appeared in 1982, New York's residential housing stock was in a state of critical disrepair and disinvestment. The magazine played a vital role throughout the wave of cooperative apartment building conversions that helped remedy this situation. It educated and informed the first wave of new board members in a city that had a limited tradition of board management.
I myself got involved in the co-op business in 1979. At that time, rent stabilization laws had been in effect for roughly 10 years and rent control for nearly 30 years. Investors faced decreasing returns; they could not afford repairs and upgrades. Demand for quality housing was not being met in New York City, and many people who could leave, did.
Converting declining rental buildings into cooperative apartments allowed occupants to live in properties managed according to their standards. More importantly, the conversion process itself provided the funds necessary for needed capital improvements and provided an economic framework in which the buildings could be maintained over the long term.
It was a complicated "win-win" scenario, worth revisiting now. Two principal factors funded the conversion of rentals to co-ops. First, property values were determined by rental income, which was severely limited by price controls. Thus, buildings were selling for less than their replacement value; they failed to reward investors and artificially depressed potential city tax revenues.
Converting buildings to owner-occupied status allowed investors to recoup part of the difference between the properties' appraised value as a rental, and their actual market value if free of rent controls. This windfall was shared with the tenant who got to purchase his or her apartment for almost half of market value.
The second factor was the federal home ownership tax deductions, which acted as an operating subsidy. With Manhattan's high housing costs, individual deductions were substantial. An individual with $2,000 in home ownership costs was conceivably able to reduce his or her housing cost by $500 per month as a result of the deductibility of mortgage interest and property taxes. On a citywide basis, that amount acted as a significant multiplier — making money available to upgrade and convert the housing stock.
These fundamentals fueled a conversion boom that lasted about a decade. The boom dramatically improved the city's property tax base. It transformed a bankrupt housing system into one that used ownership to provide a basis for constant improvement. It also provided stable, high-quality housing to families from moderate to high-income.
The cooperative conversion boom ended with the decade of the 1980s, a victim of the consumption of eligible housing stock and the economic recession. Since 1990, cooperative ownership has become somewhat less popular in New York as apartment owners reacted against the powers granted to cooperative boards. These boards are often viewed as overly restrictive and arbitrary in their decision-making, especially in approving resales.
The condominium structure is now preferred in almost every conversion and new construction project because condominium associations cannot simply turn down a resale without offering apartment owners an alternative, i.e., buying the apartment back. Also, the absence of underlying debt — an enormous expense in most co-ops — makes owners feel more secure about their investments.
Today, Habitat continues to play an important role as a resource for board members and property managers, of both cooperative and condominium buildings.
Today, also, New York's housing stock is in better repair and managed more efficiently than it was 20 years ago. Most co-ops and condos have an economic system that is tied to the physical needs of the building, and residents are establishing priorities for maintenance. Overall, the system is healthier. New York City's housing continues to increase in value and, most importantly, New Yorkers are proud of the places they call home.