REE Ch. 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.

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

Maintenance and Assessment History Reserve Fund Underlying Mortgage

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

The purchaser's financial situation

A condominium owner's share of the common elements is typically determined by

The square footage of the owner's unit.

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

A condominium is

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

A condop is

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. There are some situations in which a conversion to a condop might be worthwhile.

A new building cannot be legally occupied until the building department has issued

either a final or a temporary certificate of occupancy.

A letter of intent is a written statement expressing the intention of the undersigned to

enter into a formal agreement to purchase a condominium.

Some cooperatives have a flip tax that is imposed when the unit transfers. A flip tax is not really a tax but a

fee for the sale of a co-op unit.

The IRS 80/20 rule is

a federal tax rule that requires residential co-ops to get at least 80 percent of their gross income from their tenant-shareholders and no more than 20 percent from other sources like commercial rents.

For the co-op corporation, the ownership of the building and all of the common elements is

a fee simple ownership. For the shareholders, their interest is a leasehold estate.

A recognition agreement is

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.

The sponsor appoints the

board members, appoints the managing agent, and puts a limit of his or her own control of the board.

Cooperatives that allow sublets have some potential negative issues to deal with. For example, if the percentage of sublets is high, the cooperative may not be able to

borrow money easily or refinance its underlying mortgage without paying much higher rates.

Each unit in a cooperative is allocated a number of shares of stock. When buying into the co-op, a person is

buying those shares in the corporation.

The Statement of Financial position contains everything except

cash flow.

Each month the shareholders pay a maintenance fee that

covers their share of the operating expenses of their cooperative corporation.

The transfer tax is the responsibility of the

seller, not the buyer.

In a co-op, since the purchaser is actually buying shares in a corporation rather than real estate, the purchaser gets a type of loan called a

share loan from a lender.

When the purchaser closes on a purchased unit, he or she will receive

stock certificates in his or her own name.

Who approves a prospective purchaser's purchase in a cooperative?

Board of directors

In New York, how much is the mansion tax?

1%

Once approved, the Application to Test the Market is effective for

120 days.

The Application to Test the Market will be effective for 120 days after acceptance but can be extended for

60 additional days if the developer provides reasons why the 120 days was not adequate.

A temporary certificate of occupancy is typically effective for ________ after the issue date.

90 days

When an apartment building is being converted into condominiums, how long do current tenants have exclusive right to purchase their apartments?

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.

What typically happens once the cooperative's board package has been accepted?

A face-to-face meeting of the purchaser with the board.

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.

A party who is not required to submit prospective purchasers to the board for its approval is referred to as a/n

A holder of unsold shares

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

A long-term proprietary lease

What have some property developers required to prevent too many investors/flippers

A maximum percentage that can be sold to non-residents and a one year occupancy requirement before reselling.

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

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

The document that describes the rights of the unit owners is called the

Articles of Incorporation.

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.

Now, a co-op can also qualify if, for the tax year in question, one of the following is true:

At least 80% of the total square footage of the co-op's property is used or available for use by shareholders for residential or residentially-ancillary purposes. At least 90% of the co-op's expenses are for the acquisition, construction, management, maintenance or care of the co-op's property for the benefit of its shareholders.

What are the monthly payments that cover a condo owner's share of the costs of operating the building, including building upkeep, insurance and salaries for building staff?

Common charges

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

Condop

What is the process by which an existing residential property becomes a cooperative or a condominium?

Conversion

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.

What important condominium documents are included in the deed?

Covenants, conditions, and restrictions

Condominium documents are generally divided into three parts:

Declaration, Articles of Incorporation, and Rules and Regulations.

What does the borrower purchase to protect the lender from potential losses if the borrower defaults on the loan?

Default insurance

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.

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

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

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

In the bylaws

What can happen if a buyer's temporary certificate of occupancy expires?

Inability to extend homeowner's insurance, or to sell or refinance home

Which annual financial statement tells what has been earned, what has been spent, and what is left over?

Income statement

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

NYS Attorney General's Office.

A letter of intent contains the following information.

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

What is contained in a letter of intent?

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

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

Recognition agreement

The Attorney General does NOT have the right to

Regulate the prices of condos.

The condo sponsor does not

Serve on the board.

The documents typically needed for a cooperative transfer include:

Subscription agreement Proprietary lease Articles of incorporation Bylaws House rules

What tax incentive convinces some co-ops to covert to condops?

The 80/20 rule

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.

What does a declaration do?

The declaration explains the nature of the development project, including the name of the condominium, the developer and the principal officers; a description of the units, the way the condominium is governed and how the dues will be assessed; an explanation of repair and maintenance responsibilities and a description of the ownership interest between the condo association and the owner.

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 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.

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.

Why did the state of New York create CPS1?

To allow developers to "test the market"

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

an alteration agreement.

The sale of co-op shares, condo units, or interests in homeowners' associations is subject to the Martin Act, as is the sale of other securities, such as stocks and bonds. The law requires that a complete description of these kinds of real estate interest be provided in

an offering plan.

The title search will protect the buyer against

any unpaid bills or liens against the condominium association.

Co-ops that do allow subletting often have restrictions on the

length of time for which the shareholder-owner may sublet the unit.

Co-op purchasers do not receive a deed to their property. Instead, ownership of the shares entitles the purchaser to a

long-term proprietary lease for the apartment or unit.

The condo is governed by a board of directors or board of managers that

maintains the common elements and enforces the regulations.

Co-op members are entitled to a tax deduction for their

portion of the building's real estate tax, their portion of the building's interest payment on its mortgage and the interest payment on their own apartment loan.

When a prospective purchaser wants to buy into a cooperative, the board will normally require a

private interview along with an application packet.

A lender will require title insurance to

protect its interest in the condominium unit.

The condo is for legal purposes

real property.

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.

Holders of Unsold Shares are exempt from many forms of board regulation. 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.

On December 20, 2007 President Bush signed into law

the Mortgage Forgiveness Debt Relief Act of 2007. The law contained an amendment to the section of the Internal Revenue Code that deals with the 80/20 rule.

An offering plan, also known as a prospectus or black book, 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 before the plan can be distributed to the public.

Flipping is

the act of buying a unit from a developer as soon as it comes on the market (often before construction begins) and then reselling the contract to a third party before closing occurs.

The bylaws are

the basic rules under which the condominium operates.

The condo owners own an undivided percentage of

the common elements of the building along with the other unit owners.

The condo sponsor is

the condo's owner or developer.

Flipping is a quick turnaround of the unit for a faster profit, but it may only be done with

the developer's permission.