In New York City, many lofts are a cooperative or a condominium apartment. The co-op, or cooperative apartment complex, is by far the more common. Co-ops became popular in the postwar period as a way for apartment dwellers to acquire home equity and have some input into the way their apartment building was being managed. Many former rent-controlled and rent-stabilized buildings were converted to co-ops in the 1970s and 1980s and they are a popular and affordable way for New York City residents to have the benefits of home ownership.
When you buy a condominium, you are purchasing real property. When you buy a co-op you are not actually purchasing the physical apartment; you're buying shares in the cooperative corporation that owns the building. Once the deal is closed, you will own the number of shares allocated for that apartment based on its size and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock certificate and a proprietary lease, or occupancy agreement, on a specific apartment. As a shareholder, you become part owner of the building. In addition to the monthly loan payments on your individual unit, if any, you are responsible for monthly building maintenance and real estate tax payments to the co-op and you have a share of the assets and liabilities of the building.
When you own a condominium, you are a property owner, and you pay real estate taxes directly to the city. In a co-op, your building is assessed as a whole and the building pays the real estate taxes. You, as a shareholder, are charged a percentage of these taxes, which are typically included in your monthly maintenance bill. Therefore, in looking at average monthly carrying costs for a condo versus a co-op, you must determine the annual real estate tax estimate on the condo, divide it by twelve, and add it to the monthly maintenance charges.
Whether you are a co-op or a condo owner, real estate taxes and mortgage interest on primary residences are usually deductible on your Federal income tax return. As a co-op owner, the interest on the underlying mortgage allocated to your shares may also be deductible. The co-op annually notifies shareholders of the dollar amounts of these allocations. The value of the deduction is dependent on, among other things, your income-tax bracket and whether you itemize deductions.
Common charges are the costs associated with the upkeep of the building, which are in addition to the costs of your apartment. The common charges may include payments on water and sewer fees, fuel costs, utilities for the common areas, salaries for building employees, insurance, and any other expense related to the operation of the building. These costs are apportioned to each co-op shareholder or condo unit owner as maintenance fees, usually payable via the corporation or condo association on a monthly basis. In the case of a co-op, the monthly maintenance payments usually cover local real estate taxes on the building and may also include payments on the building's underlying mortgage.
When you get a mortgage to buy a condominium, the property is collateral for the mortgage. Since you're not buying real property when you buy a co-op, you are not getting a mortgage in the traditional sense of the term. In effect, you are getting a loan to buy the shares and a proprietary lease to live in the designated co-op unit. Your shares in the co-op serve as your collateral. Shares are not as valuable to the bank, because they can't be sold as easily as the real property of a condo. The co-op's board of directors may put conditions on the sale of its shares. It may also be difficult to sell the shares if the building is in poor financial or physical condition. Because of this, the loan rate may be higher than a condo mortgage.
The bylaws are the rules and guidelines under which the board of directors is elected and runs the corporation.
In a true co-op, where the sponsor is no longer the majority shareholder, the board of directors is made up of your neighbors--shareholders who function on a volunteer basis and usually have no training in building management or real estate financing. In most co-ops the board has broad authority to approve stock sales, authorize expenditures, hire staff, and adjust maintenance charges. The board can also change policy, rules, and regulations as long as they don't conflict with the bylaws or proprietary leases. They can determine such important issues to shareholders as prohibitions on the ownership of pets and the right of a proprietary lessee to sublet an apartment.
Your long-term goals will help determine whether a co-op or a condo is appropriate for you. It's important to understand that the basic purpose of a co-op is to be owner-occupied, with the assumption that owners have a direct stake in the quality of their surroundings and create more stability of residency. Therefore, many co-ops have restrictions on renting. The co-op's board of directors must approve whoever rents your apartment as well as whoever ultimately buys it. Aside from aiming for a compatible community of residents, the co-op has a stake in the financial reliability of each unit holder, since unpaid taxes and carrying charges ultimately fall upon the remaining shareholders if any unit holder defaults.
If you plan to live in the apartment for five years or more, a co-op is a good choice, since the purchase prices tend to be 20 to 40 percent lower than comparable condominium units.
There are some co-ops that still have a high percentage of sponsor-held units, or unsold shares. These co-ops tend to have fewer restrictions on subletting, although many banks will require a higher down payment on such a unit, and many will not offer loans on a building less than 60 percent owner-occupied. Also, if the sponsor pledged the unsold shares as collateral for the underlying mortgage and then runs into financial difficulties, the shares become the property of the lender and not the remaining shareholders. Majority ownership by the sponsor does not produce a true cooperative and may not be in the best interest of a purchaser.
If your plans are relatively short-term or if you do not plan to live in the unit full-time, you may choose the freedom and flexibility of a condominium, where there are typically no restrictions on renting or on selling to whomever you choose. However, bear in mind that the initial purchase price of a condominium can be substantially higher.