Definition:

A condominium is an apartment building in which each owner has a percentage ownership of the entire property and each owner receives a unit deed evidencing that ownership. Condo owners pay “common charges,” which are monthly payments covering their share of the costs of operating the building. Real estate taxes are paid directly to the city by each owner, and there is no underlying building mortgage. By legal definition, a condominium is considered real property, while a cooperative is considered personal property.

Generally:

Condominiums, as a form of homeownership, first appeared in the 1960s when Congress passed legislation permitting the creation of housing associations as taxable entities. They first became popular in the South and West, where large amounts of new housing were being created. Condominiums offer a means to maintain common property and provide common amenities within the framework of common ownership.

Condominiums became a force in the New York City market in the early 1980s. At that time, there was tremendous upward pressure on interest rates. Banks were literally paying more to borrow money than they were receiving as income on some or all of their long-term outstanding loans. To protect themselves, banks were willing to offer borrowers only short-term loans with variable interest rates. While the reduced the banks’ risk, it created difficulties for developers seeking long-term financing for their newly-developed properties.

Banks, therefore, proposed “end-loan unit financing.” In this framework, the banks replaced the all-encompassing construction loan, initially issued to build the building, with smaller mortgages, each associated with a condominium unit. To the banks, the condominium form was important, because these mortgages could easily be resold to brokerage firms on Wall Street, which in turn would create bulk packages to be sold on the financial markets. Developers were therefore compelled to choose the condominium form to obtain financing for their projects. Almost a decade passed before the financial markets offered similar outlets for coop loans.

Advantages of Condominium Ownership:

1. Right to rent: In contrast to the restrictions on renting commonly found in cooperatives, there is no, or there is only a limited approval process required in a condominium. When there is an approval requirement, it is normally in the form of a “right of first refusal.” This permits the board to reject a proposed renter but obligates the condominium to rent the apartment under the same terms and conditions expressed in a bona fide lease agreement. The board can not turn down a renter and leave the owner with no alternatives as a coop board can.
   
   
2. Flexibility in purchase: Normally, the sale of a condominium unit does not require the elaborative review process found in most cooperatives. However, many condos do require a right of first refusal review. This permits the condo association the right to purchase the apartment on the same terms and conditions offered to the purchaser in a consummated contract of sale. Where there is a right of first refusal provision in the condominium bylaws, a prospective purchaser may have to submit personal information, including financial data, for the completion of this review process. From the seller’s point of view, a sale will take place. Either the prospective purchaser or the condominium association will buy the property. Accordingly, the certainty on completing the sale after the contract has been consummated is greater in a condo than in a coop.
   
   
3. Lower interest rates: The interest rate charged for a condo mortgage is approximately 0.5% less than the rate charged for a coop apartment loan.
   
   
4. No equity requirement: In most cases, a purchaser is not restricted in the amount of debt he or she can use to finance the apartment. Normally, coops require a minimum of 25% equity capital.
   
   
5. Controllable Financing: Because there is no building mortgage (just the individual condo owner’s mortgage) and real estate taxes are paid directly to the city by the apartment owner, common charges consist of operating costs only. Therefore, if an owner is seeking to pay all-equity cash for an apartment, the monthly cost of ownership in a condo can be lower than it would be in a comparable coop apartment, because there is no debt service in the monthly payment to cover the building’s underlying mortgage.

Disadvantages of Condominium Ownership:

1. Transience: It is relatively easy to rent out a condominium apartment. As a result, there are likely to be more people moving in and out of the building. High turnover can diminish the sense of community, and there may be more wear and tear on the building’s common areas.
   
   
2. Control: Since the board-approval process in a condo is usually limited, it is much harder to restrict who moves in. When people with marginal finances fail to pay common charges, the cost of unpaid maintenance must be borne by the other homeowners. In addition, when an owner’s behavior is disruptive, the condo must seek to legally enjoin the behavior or initiate a foreclosure procedure, which must be based on a violation of the unit deed. In a cooperative, alternatives such as eviction are available via the proprietary lease. Foreclosure in a condo can be much more costly and time consuming.
   
   
3. Transaction costs: The closing costs for a condo are somewhat higher than for a coop. This is due in large part to mortgage recording costs and title insurance, which are not applicable to coops.
   
   
4. Lien risk: When purchasing a condo, the buyer is obtaining a mortgage on real property. If the common charges are unpaid, this obligation becomes a “subordinate lien” to the recorded first mortgage and to any unpaid real estate taxes. This effectively means that the condo association is last in line with respect to repayment of its unpaid common charges. In the event of foreclosure, the condo association runs the risk that proceeds received will not be enough to cover the first mortgage, the unpaid real estate taxes, and the legal fees incurred in the foreclosure process. In such a case, the condo’s claim can be effectively wiped out, and the association will never be reimbursed for payments made on behalf of the delinquent unit owner. This is not the case with a coop. The coop buyer is obtaining “financing” secured by shares of stock, not by real estate. In addition, the buyer signs a proprietary lease. Should a coop owner fail to pay the maintenance, the claim of the cooperative corporation continues, because it correlates to the lease on the property as distinguished from the property itself. Any action of foreclosure on the stock does not adversely affect the coop corporation’s rights under the proprietary lease. To sum up, a coop corporation’s right to make a claim for unpaid monthly charges takes precedence over the rights of a lending bank. In a condo, it’s the other way around: the condo association’s right to monthly charges is subordinate to the bank’s.