Understanding Coop Apartments in Chicago
This is the first in a three-part series about cooperative apartments.
In searching for an apartment, you might find some described as “condos” or “condominiums” and others as “coops” or “cooperatives.” While it is true that many (but not all) coop apartments are located in classically designed pre-War buildings, the term “coop” does not describe the style of the building but rather the ownership terms of the apartments.
With a condominium (or condo), you are buying a physical apartment (as defined by a legal description) as well as a share in the common elements of the building. A condo association, led by a board of directors, manages the building’s exterior and common elements, including landscaping, while the unit owners maintain the interiors of their individual apartments.
When you purchase in a cooperative (or coop), you are technically not buying real estate. Instead, you are purchasing shares of stock in a legal entity (usually a corporation) that owns real estate. Your shares of stock entitle you to occupy a specific apartment, as defined in the Proprietary Lease you receive with your stock certificate. So in the end, you have the same thing (a place to live), but how you achieve this is a bit different.
History of Coop Apartments
Some of the finest pre-War and Art Deco buildings in Chicago’s Gold Coast, Lincoln Park, Lakeview and Hyde Park neighborhoods are coops. My grandfather, Louis C. Sudler Sr., pioneered the conversion of many architecturally significant buildings from rental apartments to coops, mostly in the 1940s. Coops predated condominiums as the earliest form of apartment ownership in Chicago.
In the beginning, coops were popular among Chicago’s leading families. Each building had admission requirements, much like private country clubs. Their criteria included financial capacity and social stature. Because they were corporations, coops were exempt from fair housing rules and were able to discriminate. Bank financing was not available; purchasers paid for their shares of stock in cash.
In the late 1980s, banks started getting more creative, offering opportunities for coop purchasers to discretely obtain financing. However, as coop financing was not allowed, shares of stock could not be openly pledged as collateral. Thus, the earliest coop loans were unsecured lines of credit. I recall that The Northern Trust, which pioneered coop financing, took physical possession of stock certificates. As shareholders could not sell their apartments without first retrieving these certificates, they needed to remain on good terms with the bank.
By the time I started selling real estate in 1994, some coop buildings had started to openly permit shareholders to pledge their stock as collateral and obtain financing. This shift in policy made sense, as home mortgage interest deductions were (and still are) a valuable write-off against income taxes. As coops began to allow financing, it was with carefully designed rules that included:
– Limits on the percentage of the purchase price (or appraised value for existing coop owners) that could be financed.
– The requirement that the lender execute a “recognition agreement” acknowledging the coops rights, especially with respect to approving future sales.
Today, there are only a few coops left in Chicago that require purchasers to pay 100% cash. The rest allow purchasers to obtain loans for anywhere from 55% to 90% of their purchase price depending on the building. Another major shift is that coops can no longer reject a potential buyer for reasons other than their ability to afford the home. Consequently, the make-up of coop residents is more diverse than in the past.
Maintenance Fees and Real Estate Taxes
Buyers new to coops are often surprised by the fact that the monthly fees for coops are higher than for condos. However, this is usually because coop fees include two additional areas of expense that condo owners pay separately.
In both condos and coops, fees are collected from homeowners/shareholders to pay for building maintenance and insurance. In both cases, residents carry separate insurance for the interior components of their apartments including everything from the walls in.
But two other expenses are not handled the same way:
Real Estate Taxes. Both condo and coop owners pay real estate taxes. But how they receive and pay their bills varies.
– In condo buildings, each homeowner receives a tax bill directly from Cook County.
– In coops, shareholders do not receive individual real estate tax bills. Instead, Cook County issues a single tax bill to the corporation. Shareholders pay a proportional share of the total bill based on the number of shares of stock they own. In most coop buildings, real taxes are included in the monthly assessments, similar to the way some condo or single-family homeowners may pay their real estate taxes each month into an escrow along with their mortgage payments.
Real estate taxes paid for condos and coops are tax deductible and qualify for both homeowner’s and senior citizen exemptions.
Capital Projects. In all buildings (condos and coops), capital improvements are needed from time to time. These projects vary depending on the age and condition of the building and may include the need for tuck pointing, a new roof, new elevators, upgrades to the building’s electrical service, replacement plumbing risers, a new boiler, or new windows. While most buildings are diligent about maintaining a reserve fund for capital projects, there can be a gap between reserve fund balances and capital requirements, resulting in the need to collect additional funds from homeowners.
The way that condos and coops customarily fund capital improvements can be another distinguishing feature.
– Condo buildings typically utilize “special assessments” to pay for capital improvements. They can be structured as a one-time payment or as a series of payments over months or even years.
– Coops, on the other hand, can pledge the building as collateral and obtain a mortgage (or line of credit) that can be used to pay for capital improvements over a longer period of time. In such a case, shareholders pay their pro rata share of the building’s monthly mortgage payment along with their regular maintenance fees. Obtaining a loan to pay for capital projects can be viewed as preferential over a special assessment, as the cost of the improvement is less burdensome. Any interest shareholders pay on the coop’s mortgage is tax deductible, just like interest on their home loans.
Board Approval / Admission Requirements
In condo buildings, homeowners have virtually no say in who moves into the building. Some condo associations (mostly older ones) have a provision in their by-laws that gives them the “right of first refusal.” This provision was designed to provide a back-stop to prevent someone from dumping their apartment at an excessively low price, injuring values in the building. However, the hurdles involved in exercising a right of first refusal (including the requirement that the association buy the unit from the seller at their price) make it nearly impossible.
Still, under the right of first refusal provision, condo associations may request copies of sales contracts, applications and/or credit reports. At Chicago’s prestigious Park Tower, for example, the condo association also requires letters of reference. Buildings that have a right of first refusal do not qualify for FHA or VA financing.
Coops have a more involved application process. The main reason that coops still “approve” buyers in this day and age is to confirm the buyers’ ability to afford their homes, including association fees, real estate taxes and potential future capital improvements. If someone buys a coop and stops paying their monthly assessments, neighbors would be on the hook for more than just their maintenance fees. Consequently, coop purchasers are usually required to provide the following: an application, a detailed balance sheet, and several personal and professional letters of reference. Some coops also ask to see tax returns. After the coop board has received and reviewed the buyer’s application, an interview is scheduled, and then the buyer is officially approved.
In my fifteen years of selling apartments in nearly every coop building in Chicago’s North Side, I have had only one sale fall apart because the buyer was not approved. In that one instance, the buyer had virtually no monetary assets (their primary asset was an antique doll collection). In addition, only one of the purchasers was employed and that was as an independent contractor with 100% commission based income. I recall that it was a difficult decision for the coop board, but given that it was a small building constructed in the 1920s, the board wanted to be sure that everyone in the building had the capacity to cover their fair share of future expenses. This couple did not qualify.
Most coops discourage flipping or buying purely for investment. For that reason, rentals are rarely allowed except under extenuating circumstances, and then, only with board approval.
Condo associations do not get involved in how purchasers finance their apartment. That is between the lender and the buyer. As I noted earlier in this blog post, most coops do have restrictions in this area, primarily as it relates to the amount a coop purchaser can borrow as a percentage of their purchase price. Most coops now allow buyers to borrow around 75% of their purchase price, some more and some less. However, a few buildings including 209 E. Lake Shore Drive, 1500 N. Lake Shore Drive and 2430 N. Lakeview still require buyers to pay for their entire purchase in cash.
The good news is that the portfolio of loan products available to coop borrowers is relatively diverse and competitive with condo financing options.
In the last decade, buyers have shifted away from coops. In my experience, this was for several reasons:
– A large number of new condominium buildings came online with amenities like private outdoor space and deeded, onsite garage parking – perks that are not often available in pre-War buildings.
– The sky was the limit on what banks would lend condo owners, so many took advantage of this. Some people obtained highly leveraged loans, borrowing more than their purchase price.
– Many felt the coop application process invaded their privacy, and they wanted to avoid it altogether.
Ironically, as over-leveraged condo owners and investors in certain buildings have failed to meet their obligations resulting in a drop in home values building-wide, the benefits of buying in a coop are making a comeback. While the coop approval process, caps on financing, and restrictions against buying for investment do not guarantee financial immunity for shareholders, they are a good hedge.
The next part in this series will explore the state of Chicago’s coop market.
– See more at: http://www.liveandplayinchicago.com/index.php/understanding-coop-apartments-in-chicago/#sthash.S7DNEVVv.dpuf
A Consumer’s Guide to Buying a Co-op
Condo vs. Co-op: Which Side Are You On?
Tuesday, March 27, 2012, by George Perkins
The old condominum versus co-operative debate. Many believe your real estate selection reflects who you are, and when choosing between a condo and a co-op, you’ve got to ask yourself some pretty probing questions. Do you want to turn the key, close the door, and have your domain be solely yours? Or do you see yourself as part of a larger community and want to be be able to say ‘yeah’ or ‘nay’ about possible new owners? Do you want to have the option of any mortgage lender or making tax deductions on your next tax filing? Everyone has their preferences, but we’re going to break it down into the pros and cons (without getting too deep into the legalities), so you can decided where you stand in this epic battle.
Basic Structure: Just like buying a house, a condo is when a buyer purchases a part of a building. It’s basically like owning an apartment, but instead of paying rent, the buyer is paying a mortgage. A condo owner also has an undivided interest in certain common elements of the building, such as the lobby, lounge, and/or gym facilities.
Pros: The assessed value of a condo is usually higher than a co-op that is of similar size, design, etc. Applying for a mortgage is typically easier than for a co-op because the owner of the condo will own it outright. It is also easier to make deductions on taxes for condo mortgage payments.
Cons: Because the assessed value is usually higher than a similar co-op, property taxes are also usually higher. Condos often cannot acquire financing as an entity for large capital improvement projects, thus making it difficult to do major remodeling projects or other similar ventures. Condo boards have little power to prevent the transfer of property to other (possibly undesirable) owners.
AKA: Housing Cooperative
Basic Structure: Without getting too deep into all the legalities, basically a co-op is when a buyer purchases a share (or shares) of a corporation that actually owns that building/residence, and the shares reflect his equity in that corporation.
Pros: Property tax is generally lower for a co-op than for a condo, and the taxes are usually included in monthly payments. The building’s corporation can acquire capital for large projects, and the repayments can be spread among the many co-op residents. For celebrities, the transfer of ownership can be kept hidden because it’s technically a transfer of stock and not real estate and therefore not on the public record. Co-op boards have legal power to prevent the sale of shares to others for a variety of reasons, such as concern over someone being able to make payments or celebrities who might tarnish the co-ops reputation.
Cons: First and foremost, you have to deal with co-op review boards that determine if you’re a good “fit” for the residence. Because the property is really owned by a company, some financial institutions will not provide mortgages for co-ops, which leads to smaller lender selection pools and overall higher mortgage costs. Monthly fees are generally higher because they include taxes, mortgage payments, and fees for maintaining common areas and facilities. Co-ops are usually assessed at lower values than similar condos, so bragging rights usually lag compared to your condo neighbors.
And if you want more information on condos and co-ops, you can always turn to good ol’ reliable Wikipedia to continue your journey of real estate edification.
Condo or co-op? What’s the difference?
By Wayne Grover • Bankrate.com
Gotten to the point where you just can’t keep up with maintaining that single family home? Or maybe your lifestyle is so busy and exciting there’s no room in your life for all that stuff.
If mowing lawns, trimming shrubs, shoveling walks, cleaning gutters, painting and repairing the roof make you cringe, a condo or co-op may be right up your alley.
“Millions of baby boomers are looking for alternative living styles that will let them ease into retirement or just simplify their lives,” says John York, a West Palm Beach CPA who has prepared tax returns for condo and co-op owners for more than 16 years.
“By purchasing either a condo or co-op, you still enjoy some tax relief and property appreciation, while someone else cuts the grass and takes care of the pool and grounds. But there’s a price attached to it, both in dollars and your sense of independence.”
The day-to-day life in a condo or a co-op is much the same and the typical resident usually wouldn’t notice any difference. However, there are critical distinctions and what you don’t know could cost you money and lots of aggravation.
David St. John, a Florida condominium attorney, says, “There are significant differences between a condominium and a cooperative, but each is considered a common interest development or CID. The terms ‘co-op’ and ‘cooperative,’ are short for ‘cooperative housing project.’ Cooperatives were in existence and common before the condominium scheme of ownership was fully developed in the United States. They were especially common in New York City and the northeast.”
In a cooperative says St. John, an attorney whose firm represents more than 600 condominium, cooperative, and homeowner associations, the building containing the residential units or apartments is owned by a ‘cooperative housing corporation.’
“In a condominium, each unit owner owns an individual apartment in fee simple. In addition, the buyer owns an undivided interest in the common elements such as the exterior walls, roof, pool and other recreational areas.”
Both condo and co-op owners have monthly maintenance fees to pay, but they can vary, depending on what expenses the fee covers.
“These monthly fees can be significant and should be taken into account when figuring your ability to pay the mortgage or co-op payment,” adds York.
“As a practical matter, there is no significant advantage or disadvantage to a cooperative vs. a condominium ownership.
“There are pros and cons with both condo and co-op community living,” adds York. “The good part for both is that most of the outside work is done under a contract let by the condo or co-op board of directors. Each unit pays a monthly fee for these services and many associations provide all outside maintenance, including painting, along with water, sewer and cable or satellite TV. Insurance to cover damage to the buildings and grounds — but not the contents of each unit — is also standard.
“The downside is that the individual cannot cut back on these expenses if times get tough. Owners on a fixed income may find these monthly fees strain their budget. Any home requires a certain amount of maintenance and if you can’t or won’t do it yourself, you have to pay someone else to do it. But paying for someone else to do it is generally more expensive.”
Here’s a look at the key differences between condos and co-ops to help you decide which may be best for you.
Form of ownership: The key difference between a condo and a co-op. A condominium owner actually owns the apartment in fee simple, like any other homeowner, and owns an undivided interest in the common areas like parking lots, recreations areas, lobbies and hallways.
In a cooperative apartment complex you don’t actually own any real estate. Rather, you own shares in a not-for-profit corporation. As a shareholder you get the right to lease space in the building. The corporation owns the common areas. The effects of this are varied. Real property, for example, descends to your heirs while the co-op’s tenant-stockholder’s shares pass as personalty to your personal representative and may be subject to securities regulations. Generally, a condo is considered real property and a cooperative is considered intangible personal property.
Property taxes: Because condos are owned individually, they appear in the property tax rolls as separate entities and, accordingly, individual owners are taxed separately.
The entire property co-op is owned by the corporation, so it appears on the tax rolls as a single piece of property. The corporation pays the property taxes and passes along the cost to the tenant-shareholders, usually as part of the monthly maintenance fee.
Property taxes generally run lower in co-ops than in condos. That again goes back to the form of ownership. When condos are resold as separate entities, the appraisals and higher sales prices are recorded individually. This has the effect of producing higher assessed values and consequently, higher property taxes. Co-ops — as sales of stock — are not recorded at all and the only way a sale could be reflected in tax rolls is if the entire piece of property were sold, which is rare. Therefore, the rising value of the property usually lags in terms of assessed value and corresponding tax bills.
Financing: Generally speaking, there are two issues of financing when speaking about cooperatives. First, there is the underlying mortgage — or blanket mortgage or master mortgage or corporate mortgage — that funded either the original construction or conversion of rental apartments to a co-op form of ownership. Payments on that mortgage are paid by the corporation and then are passed along in the monthly maintenance fee to the tenant-shareholders. Secondly, there is the matter of whether the tenant-shareholder had enough cash to buy into the building or if he had to borrow the money.
Attorney St. John points out that since there is no fee simple ownership of the unit, it is sometimes difficult to obtain financing because the security for the loan is the resident’s shares in the corporation. Many lenders will not lend money on a co-op at all. Consequently, most co-ops have relationships with a few “approved” lenders who will finance sales. But that means those lenders have an actual stake in the building and often demand that they have a voice in how the corporation is run. These lenders also generally offer far fewer mortgage options, normally require larger down payments and charge higher interest rates.
Other important points: Most co-op owners cannot get a home equity loan or line of credit and in a co-op each individual is dependent on the solvency of the entire project. If the corporation were to go bankrupt, all shareholders would feel the pinch. Individual condo owners are responsible only for mortgage debt and taxes solely on his property.
Federal tax deductions: In the condo situation, each individual is able, easily, to deduct payments made for mortgage interest and property taxes if he resides in the unit and further deductions for such things as depreciation and maintenance if the condo is used as a rental property. The co-op tenant-shareholder can only easily deduct his proportionate share of the property taxes and interest on the underlying mortgage. If other monies were borrowed to finance the actual purchase of the tenant-shareholder rights, deductibility depends on several different factors and is not done as easily.
Monthly fees: Maintenance fees, paid usually on a monthly or quarterly basis, generally are significantly higher in a cooperative because the corporation is collecting mortgage and property tax payments from each shareholder in addition to the periodic assessment for things like lawn care, pool cleaning, security and insurance. The corporation also frequently includes all utilities.
Co-ops have an advantage when it comes to special, costly repair or capital improvement projects, because they can borrow funds, adding to the amount of the blanket mortgage. The shareholders then pay off the cost of the project in their monthly fees. Condos cannot borrow money as an entity and therefore unit owners often face large assessments for similar projects.
Ownership Transfer: One of the good things about not being considered real estate is when the lease rights to a unit in a co-op change hands (because a seller sold his stock shares to a buyer) there is much less in the way of state and local taxes on the transaction and far less in settlement costs because there’s no appraisal, survey or title work to be done. This also comes in handy for celebrities who want to keep their address and purchase price hidden from the public. Again, because it’s a transfer of shares and not real estate, the transfer is not recorded in any public place.
Powers of the board: Despite the fact that many condo associations contend that they are empowered to either approve or disapprove the transfer of ownership, the reality is that they have almost no power at all. Co-ops, on the other hand have the right to approve or deny the sale of shares on the basis, for example, of the buyer’s perceived inability to make the payments. They can also block the sale to celebrities; for example, who they feel may disturb the peace and quiet of other shareholders. Cooperatives, of course, are bound by federal fair housing laws and cannot discriminate against buyers due to race, religion, sex, nationality, etc., but they can — and do — choose people based on financial resources and criminal background. Condos cannot exercise that kind of control.
Home sales show biggest drop since 2011
In a nine-county local area, 10,370 homes sold in August, compared with 11,963 in August 2013, according to the Illinois Association of Realtors. That drop, 13.3 percent, is the biggest since sales fell 17.4 percent in June 2011, according to data from the Realtors’ group.
In the city of Chicago, sales fell 15.3 percent, to 2,414 last month compared with 2,850 a year ago. The city also hasn’t seen a drop that big since June 2011, with a decrease of almost 28 percent.
Chicago-area sales have fallen every month this year except June.
The U.S. Census Bureau’s nine-county area comprises Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will counties.
– See more at: http://www.chicagobusiness.com/realestate/20140922/CRED0701/140929991/home-sales-show-biggest-drop-since-2011