Rental buildings are buildings owned by a person or company in its entirety for the purpose of renting out each individual apartment to tenants. There is one deed to theproperty that is for the entire building and it is held by the landlord. Rental buildings can be doorman buildings, elevator buildings, or walk-ups – the distinction is based on the legal ownership of the building, not its design or amenities.
Owners of rental buildings sometimes hire Property Managers to operate the building for them. The scope of their services can vary based on the owner’s needs and the size of the building, but they typically include the marketing of open listings, the processing of rental applications and leases, the collection of rents, the maintenance of the building, the accounting for the building, and the handling of eviction proceedings. As a tenant, there will typically be no difference between your interactions with a property manager vs. your interaction with an owner. The property manager is simply functioning as the owner’s agent in all of their endeavors for the property.
Cooperative housing (a “Co-op”) is a form of common ownership that is used to effectuate the sale (as opposed to rental) of apartments in a single building. The ownership interest in a co-op consists of the Stock Certificate and the Proprietary Lease. Each owner in the co-op becomes a shareholder in a corporation. The corporation has stock certificates equal to the number of apartments in the building. The stock is not a real property interest (like a deed), but rather personal property (like stock traded on the NYSE). Ownership of the stock certificate entitles the owner to a proprietary lease which in turn entitles the lessee to the exclusive use of a specifically indentified apartment in the building. The lease defines the rights and obligations of the lessee just like a lease would do for a lessee in a rental building. It also provides for monthly Maintenance Fees that are used to fund the operation of the building. The Common Areas are defined as any area outside of the apartments named in the proprietary leases and are considered common corporate property owned by all shareholders. Because there is only one deed in a co-op – the deed for the building owned by the co-operative – individual owners do not pay property taxes. Instead, the co-op pays property taxes for the building and the taxes are paid for out of the maintenance fees billed monthly to the owners. Also, because there is no deed to be mortgaged, shareholders require special financing to acquire their interests. Instead, the purchaser must “pledge” their shares and proprietary lease to the mortgagee to qualify for acquisition financing.
The cooperative corporation has a Board of Directors that is responsible for the management and maintenance of the building. Shareholders vote to elect directors in accordance with the By Laws of the corporation. The Board has the right make decisions regarding the operation of the building and to make Special Assessments which are demands for contributions from the shareholders to the cooperative for the purpose of maintaining or improving the building. One of the defining attributes of a co-op is the Right of Approval. This right belongs to the Board of Directors and permits them to approve or deny all new prospective owners or lessees. Directors have the right to exclude prospective purchasers for “any lawful reason” which means refusals need not be reasonable, helpful to the shareholder, or even the reasons behind them disclosed to anyone outside of the Board. Many co-ops have stringent requirements for prospective lessees or purchasers that include but are not limited to minimum income and asset levels, strong credit histories, disclosure of histories with other landlords, condominiums, or co-ops, and sometimes even social standing. Often, the proprietary lease will restrict the shareholder’s ability to sublet their apartment. This restriction may be absolute (i.e. no sublets whatsoever) or partial (e.g. sublets permitted with Board Approval and for no more than two consecutive years). Because Board approval is almost always required, the application process for the rental of a co-op can take a month or more depending upon the requirements of the Board and how often the Board meets to review applications.
An important provision often found in the By Laws and propriety leases of modern co-ops is referred to as the “Flip Tax” or “Transfer Tax.” These provisions permit the cooperative to assess a “tax” when an owner sells their shares in the corporation. Typically, it is equal to a percentage of the purchase price (often around 3%). It may be assessed against all shareholders or only in certain circumstances (i.e. shareholders who sell their shares within two years of purchasing them). The proceeds from the “tax” are used to fund the continued maintenance of the cooperative.
A condominium (“condo”) provides for ownership of a single unit in a multi-unit project, together with ownership of an undivided interest in the Common Elements (the areas and facilities shared by all of the owners such as the lobby, elevators, hallways, mechanicals, parking, etc.). The owner of the condo receives a Deed for the apartment that they purchase and the deed’s property description defines the boundaries of the apartment within the building. This means that a purchaser receives ownership of the interior space of the unit and the surface of the walls. Additionally, a purchaser received an interest in the common elements which is shared by all unit owners. This is a unique form of ownership because historically each building would have only one deed – meaning you could not sell an individual apartment inside a building (of course the owner of such a Rental Building could rent his or her individual apartments).
In a condo building there will be as many deeds as there are apartments. Because an owner receives the deed to his apartment, he is also responsible for paying state and municipal property taxes levied on his or her individual apartment by the Department of Finance of the State of New York or the City of New York. Similarly, because an owner has a deed, they can grant a typical mortgage using their deed as security just like the owner of a single family home would. This has the advantage over a co-op of making the loan origination process cheaper and easier. However, when a mortgage lien is recorded against the deed of a condominium or single family home, the New York City Register assesses a Mortgage Recording Tax of 1.8% of the purchase price for sales under $500,000 or 1.925% for sales over $500,000. Additionally, the mortgagee (the lender) will require that the purchaser obtain Title Insurance which typically costs about .5% of the purchase price. Thus the closing costs of a condo are substantially higher than in a co-op. However, historically condos tend to be worth about 10% more than a comparable co-op.
As previously discussed, historically there was no way to sell an individual apartment inside a building (other than through the Cooperative form of course). Puerto Rico passed the first Condominium Act in 1958. The U.S. Congress followed up with §234 of the National Housing Act which provided mortgage insurance for condominiums, thus making them far more marketable by making it easier to obtain loans for their acquisition. This lead to a flood of state condominium acts shortly thereafter, including New York’s. Now all fifty states have statutes governing the creation and operation of condos. Note that this means that unlike the many far older Cooperative or Rental Buildings in Manhattan, no condominium in the city predates 1960.
Condominiums are governed by an Owners Association or Board of Directors which promulgate the Rules and Regulations of the building (similar to a Co-op’s House Rules) and is responsible for the care and maintenance of the common elements. Officers are elected by the unit owners, with each unit having either one vote per unit or a number of votes proportioned according to the percentage of ownership of the common property. The Rules and Regulations govern the conduct of unit owners and cover things such as use of the common areas, material alterations to individual apartments, and the consequences for breaking the rules. However, unlike in a Co-op, the Board only has the power to charge a unit owner for the expense incurred for the breaking of a rule or to get a court injunction to stop the unit owner from breaking the rule again, but not to evict the unit owner from the apartment (because the unit owner actually owns their apartment).
The association bills each unit for Common Charges (similar to a co-op’s maintenance fees) which are used to fund the maintenance and operation of the building. You can compare the relative expense of different buildings’ common charges by dividing the Monthly Common Charge by the Square Footage of the Apartment. For example, if the common charge = $1,000 per month and the apartment is 1,200 square feet, the monthly common charge is about $0.83 per square foot. This number will go up with the number of amenities and services in the building and usually goes down when there are many units in the building because the building’s operation is divided amongst more owners. Prospective purchasers can use this equation to compare the relative expense of living in different buildings.
One important and unique feature of the condominium is the Right of First Refusal. This right belongs to the Condo Association or Board of Director and permits them to deny the sale or rental of an apartment if the Association is willing to match the price and terms of the contract with the prospective purchaser. This is very different than in a co-op – the Association does not have the right to approve prospective purchasers or renters – instead, they must purchase or rent the apartment from the owner if they wish to deny the prospective purchaser or renter.
“Cond-op” is not a legal designation, but rather a marketing term used to describe a co-op with By Laws that operate more like a condo than a co-op. It is however still a co-op with owners receiving shares and a proprietary lease. The term is commonly applied when a co-op has a lenient sublet policy, no requirement for Board interviews, or other lenient approval procedures.