A. Introduction. Cooperatives (“co-ops”) and condominiums (“condos”) share some important similarities and have some distinct differences. This column discusses several basic issues that buyers and residents should be aware of. (I refer to the entity as a whole as a “co-op” or “condo,” a unit within an entity as an “apartment,” and an apartment owner as a “resident.”)
B. Legal Relationship. Co-ops and condos are subject to different laws. The co-op relationship is governed by landlord-tenant law. A co-op resident is a tenant, and the co-op is the landlord. A condo resident is not a tenant, and the condo is not a landlord. The co-op resident owns co-op shares – not a deed – similar to the way that a shareholder owns shares in a corporation. Co-op shares are personal property – not real estate. In contrast, a condo resident owns a deed to real estate that is filed with the county clerk.
C. Due Diligence. Prospective purchasers should investigate the apartment and entity, including the entity’s debt, remaining useful life of the roof and expensive equipment, and assessments levied to fix chronic problems. Some co-ops do not own the land beneath the building. In that case, the co-op is a tenant and party to a ground lease. When the lease expires, it may be expensive to renew it. That rent will be passed on to co-op residents in the monthly charges. The entity’s inventory of vacant units and its cash flow will influence a bank’s decision to extend or refuse financing (i.e., a mortgage) to a purchaser.
D. Ongoing Charges. Residents of each regime must pay monthly charges. Co-op residents pay “maintenance charges,” whereas condo residents pay “common charges.” All things being equal, maintenance charges tend to be higher than common charges are, in part, because some co-ops have a mortgage. It must be amortized, and the costs are passed on to the co-op residents. Because the co-op’s mortgage interest is deductible, co-op residents tend to have larger tax deductions than condo owners do. Also, each regime may levy periodic assessments for special projects (e.g., to replace a boiler, renovate common areas).
E. Insurance and Liabilities. Co-ops own assets, whereas, generally, condos do not. Both types of entities should purchase property & casualty insurance to cover liability for injuries in common areas. If a co-op’s insurance is inadequate to cover claims or judgments, the co-op – not its residents – would be liable for the balance. If a condo’s insurance is inadequate, its residents are responsible for the balance.
F. Application. Co-ops are known for tough application processes. Generally, condo applications are becoming increasingly rigorous. They require personal financial information about applicants’ income and net worth to verify that residents can meet their commitments. Some investigate applicants’ backgrounds. Often, there is a personal interview, and the interviewers may want to meet applicants’ pets. Each development has its own culture and personality. Boards cannot discriminate, but aside from that, they can reject applicants for any reason or no reason at all.
G. Governance. Each regime is subject to bylaws and House Rules and has a board. Co-ops are subject to a proprietary lease; condos are not. Board decisions are not subject to judicial review. Among other things, boards can (1) set charges and assess fees, (2) enter contracts, (3) sue and defend lawsuits, (4) pass and amend House Rules, (5) hire and fire personnel, (6) retain a managing agent, (7) renovate, (8) make capital improvements, (9) borrow money, and (10) form board committees.
H. Renovations. Residents require board approval to renovate apartments but not to change décor. Boards require that contractors be properly licensed, bonded, and insured. Residents must post security before renovations begin. Boards are concerned that unpaid contractors will place a lien on the entire building. Everyone is concerned that a contractor will damage a common area or adjoin neighbor’s apartment through a common wall. For example, imagine having an expensive painting on your wall and watching an electric saw blade from your neighbor’s side of the wall saw down the center of it. (Repairs, which differ from renovations, are beyond the scope of this column.)
I. Meetings. Residents are invited to an annual meeting to elect board members. The law and governing documents specify what matters require resident approval and when special meetings must be called. Where a ballot or election is contested, residents may solicit proxies from neighbors. Residents with larger apartments get larger votes. A resident’s vote can be suspended for failing to pay charges and assessments.
J. Conclusion. Apartments are important, expensive purchases. Buyers should understand what they are buying and the community they will be living in. Boards and residents should understand their respective responsibilities and rights. If you require legal counsel with regard to co-ops and condos, real estate, or landlord-tenant matters, contact my Firm.
About the Author: Bryan L. Berson, Esq. is an attorney and mediator at The Berson Firm, P.C., a law firm that handles estate administration and planning, real estate, commercial transactions, and commercial litigation. His e-mail is firstname.lastname@example.org. His phone number is (631) 517-1055. Connect with The Berson Firm on Facebook and Bryan L. Berson on LinkedIn. The firm’s website is www.bersonfirm.com.
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