Condo or co-op? What's the difference?
to the point where you just can't keep up with maintaining that single family
home? Or maybe your lifestyle is so busy and exciting there's no room in your
life for all that stuff.
If mowing lawns, trimming shrubs, shoveling walks, cleaning gutters,
painting and repairing the roof make you cringe, a condo or co-op may be right
up your alley.
"Millions of baby boomers are looking for alternative living
styles that will let them ease into retirement or just simplify their lives,"
says John York, a West Palm Beach CPA who has prepared tax returns for condo
and co-op owners for more than 16 years.
"By purchasing either a condo or co-op, you still enjoy some
tax relief and property appreciation, while someone else cuts the grass and
takes care of the pool and grounds. But there's a price attached to it, both
in dollars and your sense of independence."
The day-to-day life in a condo or a co-op is much the same and
the typical resident usually wouldn't notice any difference. However, there
are critical distinctions and what you don't know could cost you money and lots
David St. John, a Florida condominium attorney, says, "There
are significant differences between a condominium and a cooperative, but each
is considered a common interest development or CID. The terms 'co-op' and 'cooperative,'
are short for 'cooperative housing project.' Cooperatives were in existence
and common before the condominium scheme of ownership was fully developed in
the United States. They were especially common in New York City and the northeast."
In a cooperative says St. John, an attorney whose firm represents
more than 600 condominium, cooperative, and homeowner associations, the building
containing the residential units or apartments is owned by a 'cooperative housing
"In a condominium, each unit owner owns an individual apartment
in fee simple. In addition, the buyer owns an undivided interest in the common
elements such as the exterior walls, roof, pool and other recreational areas."
Both condo and co-op owners have monthly maintenance fees to pay,
but they can vary, depending on what expenses the fee covers.
"These monthly fees can be significant and should be taken
into account when figuring your ability to pay the mortgage or co-op payment,"
"As a practical matter, there is no significant advantage
or disadvantage to a cooperative vs. a condominium ownership.
"There are pros and cons with both condo and co-op community
living," adds York. "The good part for both is that most of the outside
work is done under a contract let by the condo or co-op board of directors.
Each unit pays a monthly fee for these services and many associations provide
all outside maintenance, including painting, along with water, sewer and cable
or satellite TV. Insurance to cover damage to the buildings and grounds -- but
not the contents of each unit -- is also standard.
"The downside is that the individual cannot cut back on these
expenses if times get tough. Owners on a fixed income may find these monthly
fees strain their budget. Any home requires a certain amount of maintenance
and if you can't or won't do it yourself, you have to pay someone else to do
it. But paying for someone else to do it is generally more expensive."
Here's a look at the key differences between condos and co-ops
to help you decide which may be best for you.
Form of ownership: The key difference
between a condo and a co-op. A condominium owner actually owns the apartment
in fee simple, like any other homeowner, and owns an undivided interest in the
common areas like parking lots, recreations areas, lobbies and hallways.
In a cooperative apartment complex you don't actually own any
real estate. Rather, you own shares in a not-for-profit corporation. As a shareholder
you get the right to lease space in the building. The corporation owns the common
areas. The effects of this are varied. Real property, for example, descends
to your heirs while the co-op's tenant-stockholder's shares pass as personalty
to your personal representative and may be subject to securities regulations.
Generally, a condo is considered real property and a cooperative is considered
intangible personal property.
Property taxes: Because condos
are owned individually, they appear in the property tax rolls as separate entities
and, accordingly, individual owners are taxed separately.
The entire property co-op is owned by the corporation, so it appears
on the tax rolls as a single piece of property. The corporation pays the property
taxes and passes along the cost to the tenant-shareholders, usually as part
of the monthly maintenance fee.
Property taxes generally run lower in co-ops than in condos. That
again goes back to the form of ownership. When condos are resold as separate
entities, the appraisals and higher sales prices are recorded individually.
This has the effect of producing higher assessed values and consequently, higher
property taxes. Co-ops -- as sales of stock -- are not recorded at all and the
only way a sale could be reflected in tax rolls is if the entire piece of property
were sold, which is rare. Therefore, the rising value of the property usually
lags in terms of assessed value and corresponding tax bills.
Financing: Generally speaking,
there are two issues of financing when speaking about cooperatives. First, there
is the underlying mortgage -- or blanket mortgage or master mortgage or corporate
mortgage -- that funded either the original construction or conversion of rental
apartments to a co-op form of ownership. Payments on that mortgage are paid
by the corporation and then are passed along in the monthly maintenance fee
to the tenant-shareholders. Secondly, there is the matter of whether the tenant-shareholder
had enough cash to buy into the building or if he had to borrow the money.
Attorney St. John points out that since there is no fee simple
ownership of the unit, it is sometimes difficult to obtain financing because
the security for the loan is the resident's shares in the corporation. Many
lenders will not lend money on a co-op at all. Consequently, most co-ops have
relationships with a few "approved" lenders who will finance sales.
But that means those lenders have an actual stake in the building and often
demand that they have a voice in how the corporation is run. These lenders also
generally offer far fewer mortgage options, normally require larger down payments
and charge higher interest rates.
Other important points: Most co-op owners cannot get a home equity loan or line
of credit and in a co-op each individual is dependent on the solvency of the
entire project. If the corporation were to go bankrupt, all shareholders would
feel the pinch. Individual condo owners are responsible only for mortgage debt
and taxes solely on his property.
Federal tax deductions: In the
condo situation, each individual is able, easily, to deduct payments made for
mortgage interest and property taxes if he resides in the unit and further deductions
for such things as depreciation and maintenance if the condo is used as a rental
property. The co-op tenant-shareholder can only easily deduct his proportionate
share of the property taxes and interest on the underlying mortgage. If other
monies were borrowed to finance the actual purchase of the tenant-shareholder
rights, deductibility depends on several different factors and is not done as
Monthly fees: Maintenance fees,
paid usually on a monthly or quarterly basis, generally are significantly higher
in a cooperative because the corporation is collecting mortgage and property
tax payments from each shareholder in addition to the periodic assessment for
things like lawn care, pool cleaning, security and insurance. The corporation
also frequently includes all utilities.
Co-ops have an advantage when it comes to special, costly repair
or capital improvement projects, because they can borrow funds, adding to the
amount of the blanket mortgage. The shareholders then pay off the cost of the
project in their monthly fees. Condos cannot borrow money as an entity and therefore
unit owners often face large assessments for similar projects.
Ownership Transfer: One of the
good things about not being considered real estate is when the lease rights
to a unit in a co-op change hands (because a seller sold his stock shares to
a buyer) there is much less in the way of state and local taxes on the transaction
and far less in settlement costs because there's no appraisal, survey or title
work to be done. This also comes in handy for celebrities who want to keep their
address and purchase price hidden from the public. Again, because it's a transfer
of shares and not real estate, the transfer is not recorded in any public place.
Powers of the board: Despite the
fact that many condo associations contend that they are empowered to either
approve or disapprove the transfer of ownership, the reality is that they have
almost no power at all. Co-ops, on the other hand have the right to approve
or deny the sale of shares on the basis, for example, of the buyer's perceived
inability to make the payments. They can also block the sale to celebrities;
for example, who they feel may disturb the peace and quiet of other shareholders.
Cooperatives, of course, are bound by federal fair housing laws and cannot discriminate
against buyers due to race, religion, sex, nationality, etc., but they can --
and do -- choose people based on financial resources and criminal background.
Condos cannot exercise that kind of control.
-- Posted: July 1, 2003