Chapter 27: Condominiums and Cooperatives

What must happen to an offering plan before it can be distributed?

It must be reviewed by the New York State Attorney General's office to be sure the information is accurate and complete according to NY State legal requirements.

Which document is used to reserve a condominium for purchase?

Letter of intent

Reading the board minutes can give specific help to a prospective buyer in what areas?

Maintenance and Assessment HistoryReserve FundUnderlying Mortgage

Condops

The legal definition of a condop is a building which has been divided up into mixed-use segments, with each segment receiving a condominium unit deed. The other definition of a condop, used by real estate brokers, refers to cooperative apartment buildings that essentially operate under condo rules - that is, they do not have board approval requirements or restrictions on rentals.

Primary Residency

The owner of the cooperative unit is the primary resident. Since primary residents tend to take better care of their units, most co-ops prefer that the units are not sublet to non-shareholder tenants.

What is the board primarily looking at when investigating any prospective purchaser?

The purchaser's financial situation

What privileges are granted to "holders of unsold shares?"

They are not required to submit their prospective purchasers to the board for its approval, nor are they bound by the board's sublet restrictions. They're also exempt from paying sublet fees, alteration fees, transfer fees and flip taxes which may be imposed on the typical tenant-shareholder.

A borrower's _____________ is calculated based on all of the monthly obligations the borrower has, including those items or payments the borrower must make for other debts, such as car payments or revolving charge accounts.

debt ratio

To qualify for a mortgage loan?

a borrower must meet the lender's qualifications in terms of income, debt, cash, and net worth. In addition, the borrower must demonstrate sufficient creditworthiness to be an acceptable risk.

80/20 rule

a concept that suggests 80 percent of a firm's sales are obtained from 20 percent of its customers

Declaration

explains the nature of the development project. identifies the name of the condominium, the developer, and the principal officers describes the units, the way the condominium is governed and how the dues will be assessed outlines repair and maintenance responsibilities and describes the ownership interest between the condo association and the owner is recorded in the public records of the county in which it is located, at which point it becomes effective

temporary certificate of occupancy (TCO)

has an expiration date. For buildings in NYC the expiration date is usually 90 days after its date of issuance. This means that even though the building department has established that the building is safe to occupy, the approval is only temporary and is subject to expiration.

recognition agreement

a three-party contract. Primarily, it is between a tenant-shareholder's lender and the co-op, which is then signed and approved by the shareholder.

Articles of Incorporation

a written legal document that defines ownership and operating procedures and conditions for the business

House rules

are usually more detailed than the items found in the proprietary lease and deal more with the day-to-day activities of the residents.

Co-op Lien Search

attorney for co-op buyer makes sure there are no open liens against the seller or seller's shares

Holder of Unsold Shares

investor in a co-op building who is not using it as a primary residence

condominium

is a building in which each owner has a percentage ownership of the entire property

Flipping

is a term used primarily to describe the practice of buying an asset and quickly reselling (or "flipping") it for profit. Though flipping can apply to any asset, the term is most often applied to real estate.

letter of intent

is a written statement expressing the intention of the undersigned to enter into a formal agreement to purchase a condominium.

Legal Ramifications

salespeople can say things that have legal ramifications. Four types of issues: 1. creastion on unintended warranties 2. Dilution of warning effectiveness 3. Disparagement of competitive offerings. 4. Misrepresentating own offering

Bylaws

are the basic rules under which the condominium operates

The Martin Act

(Article 23-A) The law requires that a complete description of these kinds of real estate interests be fully disclosed in an offering plan.

In New York, how much is the mansion tax?

1%

How long do tenants have exclusive right to buy their units in converted buildings?

90 days

What is a mansion tax?

A 1 percent tax paid by the buyer on any residential property that sells for $1 million or more.

To qualify for a mortgage loan, a borrower must meet the lender's qualifications in what four areas?

A borrower must meet the lender's qualifications in terms of income, debt, cash, and net worth.

What is the legal definition of a condop?

A building, which has been divided up into mixed-use segments, with each segment receiving a condominium unit deed. Subsequently, one of these segments is identified as a residential component that is owned by a cooperative corporation.

Certificate of Occupancy (CO)

A document issued by a governmental authority that a building is ready and fit for occupancy. A CO is often required when selling a home or refinancing a mortgage.

Flip Tax

A fee imposed by the co-op board for the transfer of ownership during the sale of the unit.

What is a flip tax?

A flip tax is a transfer fee for the sale of a co-op unit, usually paid by the seller.

What do co-op purchasers receive instead of a deed to the property?

A long-term proprietary lease

What is a share loan?

A share loan is like a mortgage. It provides the purchaser with borrowed funds to buy the shares from the seller. The purchaser then makes monthly payments on the share loan to the lenders and monthly carrying charge (maintenance) payments to the co-op.

What are four critical parts of a financial statement?

Accountant's Opinion Letter Statement of Financial Position Income Statement Notes to the Financial Statement

Assets

Assets can be financial, such as stocks or bonds; they can be tangible or intangible - an intangible asset would be the cash value of a life insurance policy; or they can be physical, such as jewelry, real estate, cars or furniture.

Worth

Assets minus liabilities, which equals net worth, stockholder capital or equity

Under what circumstances might allowing subletting in a cooperative be a good thing?

At any given time, one or more individual shareholders in a building may have a change in circumstances that requires them to relocate. A sublet allows that owner to collect the rent needed to make the maintenance payment.

Name four items that are normally included in a board package.

An application with basic information about the purchaser, including financial condition One or two years of tax returns Two to four personal reference letters Two to four reference letters from work colleagues

What are the basic rules that a condominium works under and operates?

Bylaws

What do we call a building that includes condo and co-op ownership in the same structure?

Condop

Real Estate Tax

Condos are assessed for tax purposes just like all other types of real property. Each owner pays his or her real estate taxes directly to the city or other municipality.

What are covenants, conditions and restrictions (CCRs)?

Covenants, conditions and restrictions are limitations and rules placed on a group of homes by a builder, developer, neighborhood association and /or homeowner association. All condos and townhomes have CCRs.

Income analysis

Determining the ability of a business to generate income

What can developers do if they want to "test the market" before they offer a condominium development for sale?

Developers can do a market test as long as they follow the rules outlined in Cooperative Policy Statement #1 (CPS1).

What does the term "flipping" mean as it relates to condominiums?

Flipping is the act of buying a unit from a developer as soon as it comes on the market and then reselling the contract to a third party before closing occurs.

Who is present at the board interview?

Either the entire board or, more likely, some subset of board members designated to perform this task and then report back to the full board.

Condominium common elements can include which of the following?

Elevator

What is the fee for the sale of a co-op unit known as?

Flip tax

Greta has owned several condominiums in the last three years. She lives in them for a couple of months and then sells them for a profit. What is this called?

Flipping

Developer's Policy

Flipping is a quick turnaround of the unit for a faster profit, but it may only be done with the developer's permission. In a strong real estate market, if the development is a success, the price of the units will go up. the developer may act as a broker for the "flips" to increase profits.

What can happen if a temporary certificate of occupancy expires?

If a temporary certificate of occupancy expires and is not renewed, a new buyer may find it difficult or impossible to renew his or her homeowner's insurance policy or to sell or refinance the home.

When can the sponsor retain board control until all units are sold?

In a new development

sponsor shares

In some cases, the bylaws or rules of the cooperative will allow a sponsor who owns the shares allocated to a unit to sublet that unit, even though other unit owners may be prohibited from doing so. The rules for sponsor subletting are generally part of the offering plan.

Where would one find information about the number of members on the board and an explanation of their duties?

In the bylaws

Mortgage Recording Tax

Mortgages that are recorded in New York are assessed a mortgage recording tax. This is the same tax that we talked about at length in the unit on Title Closing and Costs.

Underlying Mortgage

Most co-op buildings have one or more mortgages on the entire building. This is what is known as the underlying mortgage. The financing of the co-op's underlying mortgage is one of the most significant factors in the fiscal integrity of the building.

To market test a condo, the sponsor must file an application to test the market with the

NYS Attorney General's Office.

Earnings to Debt Ratios

Once the lender has established the applicant's monthly income, it will determine if that income is enough to pay a loan. they do that by establishing an income ratio and a debt ratio. We talked about these ratios in an earlier financing chapter, so we will just do a brief review here.

Sold Shares

Once the sponsor or a member of his family (or a subsequent investor purchaser or a member of his or her family) occupies the apartment as a residence, or an outside purchaser buys it as a residence, the stock no longer qualifies as unsold shares. The shares are now sold shares.

due diligence

Potential buyers should review the annual financial statement, with the help of their attorney or an accountant, before signing any contract.

Board Package

Presented to the co-op(or sometimes condo) board of directors and often includes financial qualifications, employment verification, letters of reference, and other material requested by the board.

What is contained in a letter of intent?

Price and deposits Completion date and closing date Use of the unit Non-exclusivity

Which of the following is NOT a typical interview issue for the board or the purchaser?

Professionalism

What is the agreement that outlines the responsibilities between the cooperative corporation and the lender?

Recognition agreement

Some developers have attempted to reduce problems related to condo flipping by

Requiring the investor to live in the unit for at least a year before it can be resold.

Which of the following is acceptable income to a lender?

Social Security

What are the three essential characteristics of a condominium?

The condo owner owns his or her individual apartment just as if it were a private home. The condo owners own an undivided percentage of the common elements of the building along with the other unit owners. The condo is governed by a board of directors or board of managers that maintains the common elements and enforces the regulations.

What is a subscription agreement?

The contract to purchase the shares in a cooperative corporation.

Condominium flipping requires

The developer's permission.

What is the main difference between a condo and a co-op?

The form of ownership. While a condo owner actually owns the unit, which is treated as real property, a co-op member does not directly own any real estate. The corporation owns or leases all real estate.

What is the right of first refusal and who typically has this right in a condominium?

This is the right of a person or entity to have the first opportunity to either purchase or lease real property. In some condominiums the association of unit owners retains the right of first refusal on the sale of any unit.

What information is not included in a proprietary lease?

Transfer of deed

Which of the following fees are NOT the buyer's responsibility?

Transfer tax

Liabilities

What it owes

Assets

What it owns

Stock Certificate

When the purchaser closes on a purchased unit, he or she will receive stock certificates in his or her own name. The certificates could be issued one-per-share or there could be just one certificate that states the total shares the purchaser will have.

Condominium documents

are generally divided into three parts: Declaration, Articles of Incorporation, and Rules and Regulations.

Offering Plan

also called prospectus or black book, is intended to help buyers make an informed decision about their purchase.

The Cooperative and Condominium Conversion Act

also part of the General Business Law, specifically regulates the conversion of existing rental buildings to cooperative forms of ownership.

The consent of the cooperative corporation is required for a shareholder to make any changes to his or her unit. This is done in the form of

an alteration agreement.

housing cooperative

an entity that owns real estate but allows a person to use the premises

Reserve Fund

money that can be made available for the future expansion of a business

board of directors

or board of managers that maintains the common elements and enforces the regulations.

Right of First Refusal

right of a party to meet the terms of a proposed contract before it is executed, such as a real estate purchase agreement

condo sponsor

the condo's owner or developer Appoints the board members. Appoints the managing agent. Puts a limit of his or her own control of the board.

Tax Deductions

the interest portion of the mortgage payment is usually tax deductible.

Subletting

when the tenant of a property leases all of the property to a third person for a period of time that is less than that remaining on the lease, or leases part of the property to a third person for part or all of the terms remaining on the lease

alteration agreement.

written agreement signed by co-op shareholder tenants, before any renovations, modifications, repairs, or alterations can begin