New York's Cooperative and Condominium Community
A small number of co-ops are converting to condos. Is this the beginning of a new trend in the city's ever-evolving housing market? Or is it just a flash in the pan? And more importantly: Should your co-op go there?
Two buildings — one in the Bensonhurst section of Brooklyn, the other in Rego Park, Queens — are among the handful of co-ops that have made the switch in recent years. Their primary reasons are greater value and increased unit-owner control of the apartments.
Value was important to Sofya Golkhovaya, a native of the Ukraine, who moved into the 1930s-vintage Bensonhurst co-op in 1993 and has served on the 59-unit building's board for many years. Currently president, she felt that her cooperative apartment was not a good investment anymore: The maintenance was high and much of that went to pay interest on the building's $2.4 million underlying mortgage. Meanwhile, she says the value of her shares remained flat or had declined.
Over in Queens, The Delmar, a 36-unit co-op, also was concerned about declining value. Board president Connie Sokol, who was renting her apartment when the building converted in 1987, says shareholders began to get edgy even before the economy tanked in 2008.
Although the sponsor owns just five units, Sokol and other board members feared that even a few foreclosures on shareholders could be disastrous. "We'd heard of some co-ops in Queens where the board made bad decisions and the corporation went bankrupt and the building went back to a rental," says Sokol. "We thought that with our underlying mortgage of $500,000, the bank would auction off the building and the sponsor could pick it up and turn the building back into a rental. That shook us up."
The Bensonhurst board had heard a great deal about the higher prices condos could apparently command in the market, as well as the greater freedom individual owners had in dealing with their apartments — no board telling them what to do regarding sublets — and the absence of an underlying mortgage.
Turning the Wrong Way
But there were also hurdles, warns Arthur Weinstein, an attorney in private practice who specializes in co-op and condo law but who was not involved with these conversions. "There are many roadblocks, not the least of which is the repayment of the building's underlying mortgage," he says. "And that might include huge prepayment penalties." In fact, he notes, a former shareholder will probably end up paying more because of the need to take out a new, larger loan than the one currently in place, simply to pay off that former shareholder's portion of the co-op's underlying mortgage.
Then there are 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.
Unless, of course, you want to pay a conversion specialist fees in the $250,000 range to do all that work for you. Both boards found such an entity in Residential Ownership Alternatives Hutton, an Allendale, N.J., company that has handled more than 3,000 conversations nationwide.
After checking with two satisfied buildings in Queens that ROA Hutton had helped convert several years ago, the five Bensonhurst board members invited Jack Boyajian, the firm's president, to meet them in March 2010. Boyajian laid out what is required to convert from a co-op to a condo:
Getting shareholder approval
The Bensonhurst co-op needed the approval of at least 67 percent of the shareholders to proceed with the conversion. (The percentage, spelled out in the bylaws, varies from building to building.)
Paying off the underlying mortgage
The co-op had to pay off its underlying mortgage, and shareholders who carried personal mortgages would have to arrange their own financing for a condo unit.
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 obligation
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] are quite tricky," says Weinstein. "If you're surrendering your co-op stock and getting a condominium apartment in exchange, you are getting valuable consideration in exchange for your stock. And that's a taxable event."
If an apartment's value has increased at the time of conversion, shareholders who used the apartment as their principal residence and meet certain other requirements can declare an "exclusion of gain" up to $250,000 ($500,000 on a joint return). If the rise in value is larger, however, even such an owner of the new condo might have to pay some income tax, according to Joel E. Miller, a partner at the Flushing, Queens, law firm Miller & Miller.
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