One of my clients observed, after our day of Manhattan apartment tours, that living in a New York City co-op (cooperative apartment building), as opposed to a condo or condominium, is a little like choosing to swim in a pool, rather than the ocean!
t's an analogy worth considering if you're trying to decide which of these two Manhattan apartment-types best fits your lifestyle and pocketbook:
Pools have plenty of restrictions governing their use and enjoyment (diving limits, water treatment procedures, etc.). But like co-op living, a pool can be ideal if you prefer a more exclusive or controlled environment than a dip in the ocean, which clearly has much freer access & fewer restrictions.
Swimming analogies aside, both co-ops and condos offer equally great lifestyle benefits. Let's dive in & explore the 5 key differences between them:
1) Parting legal waves: The "Form of Ownership" difference
The first major difference between a Manhattan co-op apartment and a condo is in their "Form of Ownership":
Buying a condo means buying "real property". Comparable to buying a single family home, you own it outright and pay real estate taxes to the local municipality. After purchase, the "deed" you receive (which conveys title) entitles you to occupy, sublet or transfer (sell) it as you wish.
Co-op ownership however, involves owning shares in a private corporation that owns the building. Co-op "tenant-shareholders" must abide by the terms of a "proprietary lease", enforced by the Board of Directors, which strictly controls apartment use & shareholders' responsibilities.
Co-op residents also receive a stock certificate that represents the number of shares proportionate to the apartment's size (keep it in a safe place!!).
2) Different strokes: Lifestyle & governance issues
A co-op or condo Board of Directors governs day-to-day building operations. But a co-op's exercises far more control, and must approve apartment occupancy, renovations & transfers of shares. Many co-ops forbid or limit subleasing, though in tough economic times, some Boards have allowed shareholders to sublet, to help them avoid risk of selling shares at a loss.
Co-op Boards' extensive (critics say onerous) control dates back to the late 1800's, when they were first started as social clubs by the affluent who wanted to live in town. By co-owning buildings with those of similar means, they were able to have a say in how the building was administered, who their neighbors were, and what those neighbors could/could not do in the building.
Co-ops are organized as private corporations, governed by the New York State Business Corporation Law, so decisions can be made for any reason-or for no reason- as long as they serve the best interests of the corporation & tenant-shareholders, & provided that anti-discrimination laws aren't violated.
3) Opposite Tides: Ownership & liquidation
A co-op Board must approve a prospective shareholder's or sub-tenant's application as part of a detailed "board package" containing her/his financials & personal information, followed by an interview to determine final acceptance. If you're uncomfortable with disclosing a lot of personal & financial information, then co-op living may not be the best option for you.
The co-op review process may frustrate prospective buyers given the boards' intense scrutiny of applicants, but co-op supporters contend that these stringent rules largely fire-walled them from Wall Street meltdown aftershocks, and errant residents that could disrupt their quality of life.
On the other hand, condo's trade more freely & don't typically require Board approval. But condo boards can exclude a prospective owner by exercising a "First Right of Refusal": when board derails an impending sale by buying the apartment from its current owner at the agreed contract price, though this option is rarely exercised.
4) Sea of numbers: Pricing, carry charges & closing costs
Co-ops make up about 70% of Manhattan apartment resales. Their greater supply & more stringent requirements make them less costly than condos, accounting for the ~15%-20% discount. Their monthly "maintenance" consists of each owner's allocable share of the building's underlying mortgage, real estate taxes & operating expenses. Figure-in a non-cash buyer's mortgage, and a co-op's carry costs (however tax deductible) could exceed those of a comparable condo.
Condo's closing costs, however tend to exceed those of co-ops because as real property, condo closings require payment for title searches and of pre-paid expenses for monthly common charges & tax escrows.
5) Taking on water: Risk of foreclosure
If a condo's monthly common charges go unpaid, those obligations typically are subordinate to the first mortgage lien, which could send the condo Association to the back of the line in terms of debt satisfaction. Conversely, a co-op's "proprietary lease" claims on unpaid maintenance charges are likely to supersede a bank's claim against "financed" (mortgaged) shares.
Clear sailing:
All-in-all, condos & co-ops both offer terrific lifestyle options. Each choice has benefits & tradeoffs in terms of how they can meet your ownership needs within a community of likeminded individuals, so choose carefully and as always, let me know if you have any comments or questions!
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