Saturday, May 21, 2011

What, exactly, is a "cond-op"? And what are the risks in buying one?

A true cond-op is a condominium with several units, all but one of which are commercial.  The one non-commercial unit is a co-op consisting of a number of residential units. 

London Terrace, the huge complex between 23rd and 24th Streets and between 9th and 10th Avenues, is a good example.  The condominium comprises the commercial units which house the stores on the ground floor plus one unit that is the co-op.  All 711 co-op apartments are part of this one condominium unit.

But the term is also used by marketers to mean what they call "a co-op with condo rules."

In what is called a "co-op with condo rules," you will most likely enjoy unlimited subletting, no board approval, and other attributes of many (though not all) condos*.  And the co-op can borrow money when it needs to, using the building as security.

But the red flag here is, if the developer wants to offer the relative flexibility of usage offered by most condos, why didn't they just build a condo? 

This kind of "cond-op" usually does not own but leases the ground it sits on. 

Condos can't be built on leased ground (the only exception to this is in Battery Park City, where the city owns the land and leases it to the condos).

So if the developer wants to build an apartment building on a piece of land he leases, he is restricted to the co-op form of ownership.  Buy in one of these buildings and no matter what they call it, what you're buying is shares of stock in a corporation, not real property.  And that's a co-op. 

But condos are very popular right now, and the developer wants to offer as many of the perceived attributes of a condo as possible.  Hence the misnomer, "cond-op."

If you really love the property and want to live there, go ahead.  But make sure you and your attorney both read the land lease carefully before you buy. 

How soon does the lease end?  What happens then--does ownership revert to the landlord?  What are the controls on increases in the rent?  When is the next increase?

And of course, as you must when you buy a condo, you need to know how many units are still owned by the sponsor, how many are owned by any other single entity, and how many are rented.  Not much point in spending a lot of money to live in what is essentially a rental building.  Also, if the proportion of rented units is too large, it may be hard to get financing.

A land lease is not necessarily a deal breaker.  But it's never a plus.

And it may be a hindrance when it's time to sell.  For one thing, the building will be that much closer to the end of the lease.

So when somebody wants to sell you what they're calling a "cond-op," the first question to ask is, "Is there a land lease?"

*Condo rules vary.  Towers on the Park, at the northwest corner of Central Park, does not allow owners to rent their apartments.  This condo also does not allow dogs.  The condo I live in does not allow rentals of less than a year.

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