Amidst the Big Apple’s condo and co-op conundrum, demand for the latter remains strong but not necessarily the most pragmatic choice for international investors
For roughly a century, co-operative buildings, or co-ops, have been a formidable force in the New York real estate market. Although the majority of urban areas around the world tend to favour condominium ownership, an estimate by Douglas Elliman Real Estate—the largest brokerage in the New York metropolitan area—reveals 70 percent of residential properties in New York stick to the co-op model.
This is even more true with highly coveted pre-war buildings in Manhattan and Brooklyn, which remain one of the city’s symbols of prestige and are almost exclusively co-ops. For tenants, a co-op also has the distinct advantage of offering a measure of control over other residents in the building.
“For consumers who want a community to be a part of, co-ops offer that mode of living to a far greater degree than condos,” says Steven James, president and CEO of Douglas Elliman New York City. “Co-ops tend to be smaller buildings with a more cohesive structure. The co-op is really a club. It’s a corporation governed by a board of directors elected by the membership or shareholders. The board makes all decisions about the day-to-day life in the building—especially who can join the corporation or not.”
Many residents find that the degree of control that provides is a comfort. For New Yorkers like Bonnie Gorlick, who has owned a share in a Manhattan co-op for years, the model offers a number of advantages. The comparatively affordable price played a role in her decision to invest, as did the presence of a maintenance crew on hand to ensure the outside areas of the property remain in good condition. She also likes the fact that “owners are pre-screened by the board.”
That desire to have a say in who lives next door has long been a determining factor in the New York real estate market.
“When the for-sale apartment market was created, for better or worse people wanted to be able to pick their neighbours,” says Jeffrey Schwartz of Schwartz Sladkus Reich Greenberg Atlas LLP, a legal firm with one of the largest practices of representing co-operative corporations and condominium associations in the New York metropolitan area. “The first co-ops were created in the 1920s. For many years, that was the only vertical ownership vehicle.”
Co-ops remained the only real option for most prospective property owners in New York until the Real Property Law in 1964 changed the rules of the game. Even then, the shift was gradual and condos did not begin to arrive in serious numbers until the 1970s and ‘80s.
While co-op ownership may be enticing to full-time New Yorkers, it makes far less sense for international investors. Part of this stems from the fact that co-op boards have rigorous, often bureaucratic approval processes. Most demand full access to an applicant’s financial records, a process James calls “very invasive,” in addition to an in-person interview.
“In approving their buyers, they look at financials, assets, annual income. If those assets aren’t domiciled in the U.S., that’s going to be a deterrent,” Schwarz says. “Co-ops want people who will use the property as their primary residence.”
AS MOST CO-OPS ARE OLDER BUILDINGS, MOST BUYERS NEED TO BE CLEAR ABOUT WHAT WORK HAS BEEN DONE AND WHAT WORK STILL NEEDS TO BE DONE. A LOT OF QUESTIONS NEED TO BE ASKED
For the latter reason, co-ops are notorious for being difficult, or in some cases impossible, to sublet. While an investor based in Hong Kong or Singapore can easily rent out their condo on the Upper East Side, attempting to do so in a co-op requires ploughing through a daunting amount of red tape. The same is true for making substantial changes or home improvements to a property, particularly in those beloved historic buildings, as co-op boards tend to be resistant to anything that might alter the character of the place.
“As most co-ops are older buildings, most buyers need to be clear about what work has been done and what work still needs to be done. A lot of questions need to be asked,” James says. “It’s important to note if there is enough money in a co-op’s cash reserve fund to cover those expenses. A financial statement must be available and all co-op buyers should ask to see that statement.”
That being said, for those to who wish to dive into the co-op market, there are options. When considering how and where to invest, the most prudent way to go about it, according to experts, is to think small.
“While a large portion of Manhattan co-ops don’t allow investor purchases, there are some that do. Those are what an investor should seek out with assistance from a local real estate broker,” James says. “The demand for smaller co-op apartments is consistently strong, because the population continues to grow and few small co-op apartments are added to the housing stock, because they are difficult to develop.”
In the end, condominiums are a significantly more pragmatic option for the international investor, a fact that is reflected in the current development trends. Although the vast majority of older buildings in New York are still co-ops, the new luxury properties cropping up in trendy areas such as the Williamsburg waterfront near the recently opened Domino Park are all condos. Such places at the upper end of the market offer state-of-the-art facilities and represent a stable long-term investment all but guaranteed to appreciate in value.
This article originally appeared in Issue No. 151 of PropertyGuru Property Report Magazine
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