Can Co-ops Keep Up?
Co-op prices lag condo prices. Year after year, the percentage increase in value for condominiums, which buyers own outright, has been higher than for co-ops, in which buyers own shares in the co-op corporation and most decisions related to their apartment (including whether or not they get to buy it!) are adjudicated by the co-op Board. As a result, more and more buyers are opting for the relative simplicity of condo purchases. Recently a group of top brokerage industry professionals from a number of different firms met to discuss this issue and brainstorm what mainstream co-ops could do to restore their value in the marketplace ( I am not referring here to outlier purchases like the $70 million recently spent for an enormous duplex at 740 Park, or the $60 million spent for the penthouse at 960 Fifth.) This group of experts came up with a set of clear practical steps which co-ops could take to try to level the field a little. They include:
• Modify summer work rules. A large number of higher end co-operatives only permit work to be done on apartments during the summer. What that means is that if an estate comes to market in the fall, chances are no one will buy it till spring since the new owner will not be able to begin construction till after Memorial Day. And if he is not finished with the heavy work by Labor Day he will have to carry the apartment for a full additional school year before he can begin construction again the following summer. This means a minimum year and a half time frame from purchase to move-in, with all the attendant inconvenience and expense of paying rent in two places while one sits empty for months at a time.
• Modify trust and corporate ownership rules. Newspapers, magazines, blogs, on-line columns – all are looking for expensive purchases to dish about. But many buyers don’t want their personal lives to be gossip fodder. Since most co-ops do not permit trust ownership, buyers must purchase in their own names, which become a matter of public record available to anyone with a computer. One reason foreigners buy condominiums is because they can create LLCs to purchase the property which don’t give away who they are. Co-ops can easily create the financial and social safeguards they require while allowing wealthy purchasers to retain their anonymity.
• Simplify financial disclosure requirements. Boards don’t really need to see the entire tax returns of purchasers, including all schedules. The front two pages are enough. Really the point of the financial disclosure should be to determine if the candidates are right for the building, rather than a completely exhaustive journey into every nook and cranny of their financial circumstances.
• Make the process more flexible. So many of the apartments which were clearly built for younger people all over the city are completely out of their financial reach unless they work in finance or the hedge fund industry. This makes for less diverse and interesting building populations and it is not necessary. Young people stretch for housing, especially when they have strong incomes. They always have and hopefully they always will. It makes them more responsible and enables them to create good lives for their families. We should be encouraging that as much as we can: through parental guarantees, through reasonable future maintenance escrows (reasonable means no more than a year or two at most, with a relatively short sunset for the escrow once the buyer has demonstrated her reliability as a shareholder), and through good will. Good will often seems in short supply in the co-op approval process.
• Create time parameters. It is cruel and unusual punishment for both buyers and sellers to have to wait months for a co-op Board decision. Once the package has been submitted, there is no reason why the Board cannot ask for any additional information they require within a week or two, and schedule an interview a week or two after that.
Increasingly we in the industry hear from buyers that they want to purchase condos, even if they are full time New York city residents (and that’s another thing: why do so many co-ops have rules against pied-a-terre buyers? They actually put less of a strain on building services and may be just as friendly and participatory as anyone else). Buyers simply don’t want to go through the invasive, often highly rigorous steps which a co-op purchase entails. As a former co-op Board president myself, I know that a building can feel secure about its buyers while permitting a more streamlined, more private, more time sensitive process. If co-op values are to keep pace with the rise in condo values, managing agents and the co-op Boards they serve may want to consider some of these options.