When Covid-19 first struck, many New York City residents who lived in co-ops and condos rented or bought homes in areas farther from Manhattan, including the Hamptons. These homes provided relative safety from Covid-19 coupled with the ability to work from home. A trade-off was that they were still responsible for the payment of maintenance and common charges as well as their loans and mortgages on their co-ops and condos. Many co-op shareholders and owners of condo units chose to sell their interests.
According to a Bloomberg Report, through June 16, 2021, 177 co-ops $4 million or higher went into contract as compared to 615 condos.
Before delving into some of the reasons the Bloomberg Report offers for the obvious preference of condo purchases as compared to co-ops, we have to define the most critical differences between the two.
With co-ops the building and the land under it are owned by the corporation. The residents are shareholders who own stock, personal property in the corporation for which they receive a proprietary lease, not a deed. The expenses of the corporation, an underlying mortgage, property taxes, insurance, funding of reserves, maintenance, etc., are collected through maintenance charges paid by the shareholders.
The board of directors has a fiduciary responsibility to manage the co-op in the interest of the shareholders consistent with the Offering Plan that has been approved by the New York Attorney General before the shares may be marketed.
With respect to the authority of the boards, in 1990 in Levandusky v. One 5th Avenue, the New York Appellate Division recognized the broad authority of the board to make business judgments that are in the best interest of the shareholders as long as those judgments are not unlawful. This includes the unfettered right to deny any applicant for the purchase of the shares without giving a reason, as well as board policies regarding sublets. If an applicant thinks that they have been a victim of federal, state, or municipal fair housing laws, their recourse is through the courts and Human Rights Divisions of municipal governments. Legislation is pending before the New York State Legislature that requires the co-op board to acknowledge, in writing, the receipt of applications, approve them within a certain time period, and if rejected, give a reason in writing for the rejection. Some municipalities including Suffolk County have already adopted laws regarding transparency in co-op applications.
With condos, on the other hand, the condominium is managed by a Board of Managers that has a fiduciary responsibility to manage the condo in the interests of the unit owners. The unit owners own the unit and an undivided interest in the common elements, pay common charges for the maintenance of the common areas, can mortgage the unit, pays their own taxes, and the Board, rather than an unfettered right to reject a sale by the owner of the unit, has a right of first refusal that could be exercised in the interest of the other unit owners that do not create an unreasonable restraint on alienation, violate federal, state, and fair housing laws.The ability to purchase the unit by the condominium is dependent upon the funds in its reserve account and its willingness to draw upon it.
Within that context, here are some of the reasons the Report suggests explains the preference for condos compared to co-ops.
Buyers who once sought the status that comes with acceptance into the city’s most exclusive co-ops are now favoring newly developed condos with better amenities and no lifestyle restrictions or intrusive financial questioning. Owners want to be able to buy and sell freely, not be hampered by co-op boards’ length and time-consuming process that make sales more difficult and therefore less liquid. And when boards reject buyers or sublets without giving a reason, it subjects the co-op to allegations of discrimination, which can be very costly for the share holders. A prime example is a New York Federal Court’s February 4, 1997 decision with respect to a sublet by one of the tenant shareholders, Broome v. Biondi involved Beekman Hill House, a Manhattan co-op whereby the jury awarded the plaintiff $640,000 in damages, including $410,000 in punitive damages. The jury also awarded $125,000 in damages against the president of the board, $60,000 against another board member, and $25,000 against each of the others. The jury also awarded a tenant shareholder $107,000 in compensatory damage and $57, 000 in punitive damages. In New York, it is unlawful for an insurance company to compensate the insured for punitive damages. Under the Federal Fair Housing Act, there is no limitation on the amount of punitive damages that may be awarded. Effective October 1, 2021, the New York State Division of Human Rights will no longer grant requests for discontinuance of complaints due to confidential private settlement.
These facts serve to demonstrate why condos have achieved greater market value as opposed to co-ops. The Bloomberg report states. “It’s a preference that has been building for years, along with a boom in luxury condo construction that makes more choices available. And that’s fast eroding the value of some of the most storied real estate in town, brokers say.”