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The New York Co-Op Bible
Everything You Need to Know About Co-Ops and Condos: Getting In, Staying In, Surviving, Thriving
By Sylvia Shapiro
St. Martin's PressCopyright © 2005 Sylvia Shapiro
All rights reserved.
Which Regime Is Right for You?
EVERY CLOUD HAS A SILVER LINING
I know what you're thinking: You should have bought five years ago; ten would have been even better. Then for a couple of hundred thousand dollars (which almost anywhere else on earth would buy baronial splendor), you could have gotten more than a closet (otherwise known as a studio). When this book first appeared, the bull market in apartments was in the early stages of a relentless rise. Everywhere I went, people asked, "Should I buy now — or wait?" I took out my crystal ball, but alas it was cloudy. Coulda, shoulda, woulda — I say, forget about it and focus on the here and now. Market timing in co-ops and condos is no more reliable than the stock market.
So look on the bright side, and at all the catastrophes averted in the interim. You missed the opportunity to join Gwyneth Paltrow, Calvin Klein, and all those other A-list celebs who stampeded to buy into Richard Meier's downtown architectural wonder before it broke ground, and who, now that it's above ground, are all warring with each other. You didn't have to pay the stratospheric real estate taxes that we owners have been hit with over the past few years. And hopefully, you've had a chance to save a bundle while waiting on the sidelines.
Over the long haul, knowing what to look for (and the pitfalls to avoid) makes the difference. If you follow The Co-op Bible's lessons, you will learn how to buy smart. Then, if a downturn comes, your apartment will retain its value while others slump — and perhaps more important, you will have found your residential soul mate. But first you need to know which way to go.
No apartment is an island unto itself. Whether co-op or condo, you're not just buying a place to call home, you're joining a political regime. Before you start pounding the pavement, you ought to do some serious soul-searching. Do you subscribe to the Three Musketeers School of Government — all for one, one for all, prepared to link your fortune (and fate) with your fellow apartment mates? Then co-op may be the way to go. Or are you cut from the Marlboro Man mold — determined to go your own way, free from the ties that bind to communal ownerkind? Then condo may be right for you. Although the apartments you view may be deceptively similar in appearance (whether cavernous lofts or pristine penthouses), they can mask fundamentally different worldviews. That's why buying an apartment is a mind and (out of) body experience. In preparation for the task you need a little philosophical tutoring to be sure that both your inner and outer selves make the right choice. This chapter gives you straight talk on the great co-op/condo debate — what does each offer and which way of life is best for you — and why "condop" may be the way to go for the philosophically confused.
Unmasking the Truth
So what are you really buying — or, more accurately, buying into? In the case of co-ops, you may be getting that Classic Six (with Riv Vu), but what you are buying (in a legal sense) is not a home, not even a piece of property, but shares in a corporation. The co-op corporation owns the building and (usually) the property outright (what lawyers call fee simple). It sells shares to you representing your proportionate ownership in the corporation (the tangible manifestation of which is your apartment). The number of shares you get is a function of the total number outstanding in the corporation and the percent of that total your apartment represents. I am the proud owner of 404 shares in my co-op representing my duplex two-bedroom penthouse with terrace. In another building that same apartment may entitle me to a totally different number of shares. It's not the number but the proportion that counts. Together with those shares, you get a long-term lease (called a proprietary lease) from the corporation that entitles you exclusively to occupy those digs you may have thought you were buying outright.
As a result of this arrangement, you have a schizophrenic status. Even though you may have emptied every last piggy bank — and then some — to buy a place of your own, you're still a tenant under the proprietary lease from the co-op corporation, your new landlord. But you're also an owner — of a part interest in the corporation — which gives you a right to a say in the management of the property (through election of directors and exercise of your vote).
In a condo, you're more directly realizing that American dream of having a home of one's own. Although the apartment of your eye may be stacked high in the sky, it's real property — and if you buy it, you'll own it outright (in fee, as they say). In addition to individually owning your own unit, you also get an undivided proportionate interest, together with your fellow dweller-owners, in those common areas that you all traverse (but don't live in) — halls, corridors, lobbies, basement, and the like (they are called common elements). As proof of your ownership you get a deed (though not a white picket fence) like your suburban home-owning friends. The deed describes the unit and your share of the common elements — the better for the taxing authorities to find you out.
And since you own outright you are your own residential lord and master — those days as a lowly tenant forever gone. No need to worry about the confusion caused by divided selves, so you can save some shrink bills and rest assured that your residential sanity will remain intact.
From these different worldviews flow numerous consequences for the institution, and for you, as one of its members.
Co-ops and condos come into being — and exist — under different legal systems. The basic system of condo life and law in New York State is set out in what is creatively called the Condominium Act. It tells the requirements for establishment of the condo state, the system of taxation, and how and by whom it shall be governed. The act decrees that each condo shall be administered according to its own bylaws and presided over by a board of managers elected by the owners. We'll revisit the act and see what it says in specific contexts later, but for now you can give yourself a pat on the back that you know of its existence. The Constitution serves as the cornerstone of our government and our way of life; if you're planning to buy a condo you should remember that the act will be fundamental to its governance and your existence.
Co-ops don't have a Rule of Law they can call their own. Their form of government is based on a legal pastiche. Because they're corporations, they're formed under New York State's Business Corporation Law and have to abide by its provisions. These include a requirement that the affairs of the corporation shall be run by a board of directors, as well as specific rules for the election and removal of board members and for shareholder participation. But since these provisions, specific though they may be, were passed to suit the needs of Wall Street corporations, not Main Street co-ops, they're not always a perfect fit. So, as we'll see, sometimes we have to look beyond the strictly corporate to real estate or landlord-tenant concepts to get the answers to our questions.
Taking their lead from the requirements imposed by the law, co-ops and condos set up their own internal form of government. In co-ops the basic system that you'll live under is spelled out in a documentary triumvirate. First, there's what's called the certificate of incorporation, which brings the co-op into existence. It sets out the bare essentials for legal life: the name of the co-op; the purpose for its formation; the total number of shares — and since with life comes lawsuits, the name of the agent to be served when (not if) the co-op gets sued (preferably not during your watch). Now that you know what this document is, you can (for most purposes) forget about it (unless you want to sound like a lawyer when co-op small talk comes up at the next cocktail party). What really count in co-op operations are the other two: the bylaws and the proprietary lease.
The bylaws set out the structure of government: the size and power of the board of directors; the powers and responsibilities of the corporate officers; procedures for the election and removal of corporate officers; procedures for shareholder and board meetings; voting rights and requirements — even procedures for bylaw amendments, which often can be accomplished by shareholder vote or unilateral board action.
If the bylaws establish the form of government, the proprietary lease puts government into everyday action. It is the compact that defines the rights and obligations of shareholders as tenants and the co-op corporation (acting through the board) as landlord. Most of the things you care about (before and after buying) are here for the looking. Want to know what restrictions there are on selling or subleasing? What control the board has over alterations? Who's responsible for repairing what? What limits exist on the use of your apartment? How cash requirements (and your maintenance) are to be determined? What your respective rights are in case you default? The nuts and bolts of the co-op regime are in the lease.
But the nitty-gritty, quality-of-life details (on matters mundane but essential) are in the House Rules, which are made part of the lease. Unlike the lease, which in most co-ops takes two-thirds of you shareholders to change, the board can amend the rules on its own — leaving open the possibility of power grabs if you shareholders are not mindful.
Condos have a duo of governing manifestos: the declaration and the bylaws together establish the entity and set up and activate its government. The declaration delivers the condo into the world as a legal entity. It announces its creation: describing the building and the land on which it sits; the common elements that you'll share; and the individual units that you'll buy, as well as their respective uses — whether residential or professional or commercial. It names the obligatory contact person if anyone wants to sue and sets out the method of amendment, which usually requires a two-thirds vote by owners. But from your perspective, what matters most is that the declaration assigns each apartment a percentage interest in the common elements. While you can forget about the other legal mumbo jumbo, this designation is important because it determines your relative voting rights and financial obligations for common charges and assessments.
As with co-ops, bylaws in condos establish the governmental framework: the size and power of the board of managers; the designation and duties of condo officers; procedures for the selection and removal of condo officers; unit owner voting rights; and procedures for board and unit owner meetings. But unlike co-ops, condo bylaws don't just set up the government, they also regulate its actions and the relationship between you owners and the board of managers. Think of condo bylaws as combining the governmental functions separately served in co-ops by the bylaws and the proprietary lease. (Remember, though, a co-op board is your landlord, a condo board is not.) All the fundamental rights and obligations of unit owners are set out in the bylaws. Want to find out the policies of your condo on use restrictions, sales, subleasing, alterations, common charges? Here's the place to go for answers (as we will when we get to these and other specific questions).
Since any change in condo bylaws would alter the essential nature of government, the law says that at least two-thirds of owners have to approve. Because co-op bylaws are more restricted, many co-ops let the board change them on its own. This is an important difference. As you'll see, this means that in order to be valid, fundamental board powers have to be set out in a condo's bylaws, but usually they appear in a co-op's proprietary lease (which can only be amended by shareholders). So as we go forward, don't get confused by the term bylaws. It means one thing in co-ops, but something different in condos.
As in co-ops, it's the House Rules that prescribe the regimen of daily living. The Condo Act specifically authorizes their promulgation. Initially put in place by the plan's creator, called the sponsor, they can be changed by the board.
Agents or Authoritarians
Given the different legal systems that bring condo and co-op boards into being, it's only natural that they have different foundations for their powers (which we'll explore in chapter 9). But you should have a basic idea of what you're getting into before you commit your cash and yourself to the cause. Their names give you a hint. In co-ops, board members take on the directorial mantle — and title — of those bigwigs who sit in corporate boardrooms. In condos, they're more familiarly denominated as managers, descriptively (and, it is hoped, functionally) closer to the people they serve.
It's no accident. Co-op boards get their broad power to manage from the Corporation Law. They don't have to come to the shareholders for most of it. The concept in condos is different. Their boards don't have any law that independently energizes (and empowers) them. Instead, they act as agents for the owners. It's from you, the people, that they ultimately derive their power — a fact that should (but doesn't necessarily) instill some humility. Not only the theories but (as we'll see) the scope of co-op and condo board power differs on such key issues as borrowing and spending, sales and sublets — and more.
United or Independent
It's not just the relationship between you and the board that differs from co-op to condo; so do the ties that bind you and your fellow owners. As a shareholder in a co-op your economic destiny is inextricably intertwined with that of the other owners. Even though you each have individual apartments, you are all co-venturers and part owners in the corporation (in proportion to your respective interests). Each of you is responsible for paying your share of the total co-op expenses (through your monthly maintenance). Together you sink or swim — a scary thought, and one that should color the conduct of your affairs as a shareholder.
The interdependence is great because the communal expenses are mighty. Most co-ops have mega-sized underlying mortgages secured by the property. They also get hit with heavy-duty real estate tax bills covering the entire property. Together these two items (which often amount to millions) can make up significantly more than half of the co-op's expenses. You pay your fair share when you send in those monthly checks. But if someone doesn't pay, the co-op is still responsible, which means all of the remaining shareholders may have to pay more.
In condos, you're a relative financial maverick. It's your credit rating that counts more than your fellow owners'. There is no underlying mortgage because the Condo Act says there can't be one. Any mortgage or lien that may have existed has to be paid before the sponsor sells that first apartment. And while you do pay real estate tax, you go it alone. As owner of your individual piece of property, with its own tax and lot number, your tax bills are sent directly to you, not to the board included in one lump sum for the whole building. In co-ops, if the neighbor down the hall decides to stiff the taxing authorities, his problem may become your problem. But in condos the stiffer's headache stays his own.
Even in condos, you're not entirely free from the masses that surround you. Though you are spared the major shared responsibility of taxes and mortgage debt service, you're still linked with your fellow owners in shouldering the burden of the other (not inconsiderable) expenses of the enterprise — from labor to repairs to maintenance to management. (See chapter 3 for more.)
First or Last
Although the finances of co-op shareholders may be more intertwined than those of condo owners, ultimately it's the latter who may have to pick up the shortfall. In the event of a default and foreclosure by a fellow owner, the co-op takes priority over the lending bank. It's the reverse in condos, where the bank takes priority over the building. This means that the bank would have to pay the co-op any maintenance charges due before it could apply sales proceeds to its outstanding loan. In contrast, in these circumstances, condos get only what's left over after the bank has been made whole, which more often than not is nothing.
Excerpted from The New York Co-Op Bible by Sylvia Shapiro. Copyright © 2005 Sylvia Shapiro. Excerpted by permission of St. Martin's Press.
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