"As to a shareholder who is holding the apartment for an income-producing purpose (as, for example, by renting it out), different rules would apply," Miller says. "In such a case, the shareholder would very likely have to report no gain at the time of the exchange, no matter how much the apartment had appreciated, but what was the shareholder's tax basis in the shares would become the tax basis of the condo unit."
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.
Giving Up Control
Many co-op boards are wary of giving up controls that are built into the cooperative system, such as over who buys in and how to keep the property financially sound.
Attorneys argue that boards' wariness of condo conversions is not groundless. Most of them immediately point to the issue of collecting money from a resident who falls into arrears on monthly charges. With a condominium, the bank holds the first lien, and so in a foreclosure, the condo may ultimately see nothing from the defaulting owner — and have to eat the cost of the unpaid arrears. "A co-op, on the other hand, can go into nonjudicial foreclosure and auction off the shares that are in arrears," says attorney Seth Sahr, a partner with the Kew Gardens, Queens, firm of Novitt, Sahr & Snow, who was hired by the Bensonhurst building after its conversion.
As well, warns Sahr, a condo "has almost no ability to control who comes into the building, whereas a co-op board's only limitation is that it can't discriminate against any protected classes." This is important, he notes, because, "A co-op has the benefit of being able to control people — a noisy neighbor, say — through the proprietary lease, bylaws, and house rules. They can also take such people to landlord-tenant court, which is a streamlined process. With a condo, if your bylaws permit it, the only recourse is to go to state supreme court and go through an 'ejectment' proceeding. That's more cumbersome, lengthy, and more expensive — and your likelihood of success is lower."
Sokol dismisses the inability of a condo to see the financials of prospective buyers, saying, "That's not a big deal because a buyer is going to have to be financially sound to get approval for a mortgage. Not only that, our management company gives us a 'tenant data verification,' kind of like a background check, on potential buyers. At least we know who's coming in."
Weinstein argues one reason banks had more trouble than New York City co-ops in the 2008 financial meltdown was precisely because the boards were more conservative than the banks in approving buyers. And, he adds, banks have less incentive to be as scrupulous as they should be in condo approvals since they have the first lien on the unit.
The residents at The Delmar and at the Bensonhurst property apparently listened to all these arguments, then decided to give up a co-op's controls in favor of the condo's benefits of homeownership and enhanced value. For now, no one's having second thoughts.
"People in the building are thrilled," says Golkhovaya. She claims the value has gone from $260,000 as a co-op to at least $360,000 as a condo. The building-wide change in values has brought a change in attitude among many residents. "In the beginning," she says, "people were hostile and scared. Now they've talked to people in the neighborhood, relatives and accountants, and they get the impression this makes sense."
Sokol, too, likes what she sees. She says apartments in The Delmar that were worth between $140,000 and $160,000 before the conversion have seen their value jump by as much as $100,000 since the conversion.
So: Condo? Or Condon't?
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