Cooperatives (Co-ops) are an increasingly popular living alternative in highly populated urban areas. ICC Mortgage Services recognizes the need to provide financing options for this unique type of home ownership so we offer a variety of Co-op eligible mortgage programs. Our Co-op Mortgages offer downpayment requirements of as little as 5% and mortgage amounts as high as $5 million. Co-op mortgages are available for properties in New York and Virginia
Purchasing a Coop!
Whether you’re a first-time homebuyer or purchasing a second home, this is probably one of the biggest financial decisions you have ever made. As rents escalate and private home prices reach new heights, a co-op apartment may be a great route to homeownership.
Cooperative living can be a wonderful experience – a comfortable apartment decorated to your own tastes, few
home maintenance responsibilities, known neighbors, and some possible tax benefits. Before you decide to buy,
you should know how to tell the difference between a financially healthy cooperative and one that is over-financed
or poorly managed.
ICC Mortgage Services can help get you prepared to help you ask the right questions and make informed decisions. The
information provided is of a general nature and may not be totally applicable to every cooperative or every potential buyer’s
individual situation. Also, it will not, and is not intended to, take the place of the type of advice that will be
provided by a real estate attorney or a tax advisor on matters relating to the possible deductibility of interest,
common charges or other expenses.
What is a Co-op?
When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually
purchasing the physical apartment. You are purchasing shares in the cooperative corporation which owns the building in
which the apartment is located. You will own the number of shares allocated for that apartment based on its size
and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock
certificate and a proprietary lease or occupancy agreement. The lease spells out the rights and obligations of the coop
and the shareholder for the use and occupancy of the apartment. The shareholder becomes part owner of the
building and has a proprietary lease on a specific apartment.
How are Co-op mortgage different?
When you get a mortgage to buy a house or a condominium, the property is collateral for the mortgage. Since
you’re not buying real estate property when you buy a co-op, you are not getting a mortgage in the traditional
meaning of the term. In effect, you are getting a loan to buy the shares and proprietary lease to live in the co-op unit.
Your shares in the co-op and the proprietary lease are collateral. They are not as valuable to the lender because they
can’t be sold or disposed of as easily as real estate. The co-op’s board of directors may put conditions on the sale of
its shares. It may also be difficult to sell the shares if the building is in poor financial or physical condition. Because
of this, the loan rate may be higher than a standard single family mortgage rate.
As it is with any home or condo, real estate taxes and mortgage interest on primary residences are usually
deductible on your federal income tax return. As a co-op owner, the real estate taxes and interest on the underlying
mortgage allocated to your shares may be deductible. The co-op corporation notifies shareholders of the dollar
amounts of these allocations annually. See your tax advisor regarding tax deductibility of interest and real estate
The common charges are the costs associated with the operation of the building, distinct from the costs of your
apartment. These charges may include payments on the building’s underlying mortgage, real estate taxes, water and
sewer fees, fuel costs, utilities for the common areas, salaries for building employees, insurance and the other
expenses of operating the building. These costs are apportioned to each shareholder as maintenance fees, usually
payable to the corporation on a monthly basis. The corporation then pays the bills.
What you should know about unsold shares and sponsor-ownership
When a structure is built as a cooperative or a converted rental, the builder or converter is known as the sponsor.
Initially, the sponsor owns all of the shares in the cooperative. The sponsor then starts selling shares for apartments
Owning a Co-op
Questions that you should consider prior to purchasing
The sponsor continues to own all unsold shares. The more unsold shares
the sponsor holds, the more control the sponsor has over the physical and financial management of the building. It
is also possible that the sponsor pledged the unsold shares as collateral for the underlying mortgage, so that if the
sponsor runs into financial difficulties the shares become the property of the lender and not the remaining
shareholders. Majority ownership by the sponsor does not produce a true cooperative and may not be in the best
interest of a purchaser. You should find out the status of the shares from the managing agent or the Co-op board.
Ask questions like, how many shares are owned by the sponsor? How many of the apartments are owner occupied?
If the building started out as a co-op or was converted a long time ago, chances are that all or most of the
apartments are owner occupied or occupied by tenants who moved in after the conversion period. Under these
circumstances, shareholders’ maintenance payments and tenant rents can be set to meet the financial obligations of
the building. If the building was originally a rental with rent controlled or rent stabilized tenants, some of these tenants may still
be in residence. Although their apartments may be owned by the sponsor or other shareholders, co-op conversion
laws generally permit rent regulated tenants to occupy the apartment for as long as they choose under the same
terms and conditions of their original leases. Their rent increases are determined by city and state agencies. Under
these circumstances, the shareholder of an apartment occupied by a rent regulated tenant is obligated to pay
maintenance fees to the co-op even if the tenant’s regulated rent does not meet the maintenance charge.
If you are considering buying into a building in which there are rent regulated tenants, you should know how many
and how the rents compare with the maintenance charges.
The Financial Condition of the buidling
When you become a shareholder, you share the assets and the liabilities of the whole building. For example, when
you buy shares allocated to one 2-bedroom apartment in a 4-unit building with three other 2-bedroom apartments all
with the same number of shares, you are buying ¼ of that building – 25% of its assets and 25% of its debt. If one of
the other three shareholders defaults on the maintenance payments which help pay utilities, taxes, and the
underlying mortgage on the building, you may have to increase your outlay before the legal status of the defaulting
shareholder is resolved.
The same scenario can apply to larger co-ops, particularly if the sponsor owns a majority or even a significant
number of shares. If the percentage of shares held by the sponsor is high, a default could jeopardize every
That’s why lenders look at the level of owner occupancy and the ratio between occupant and sponsor-held shares.
Generally, a lender may not consider granting a loan to purchase a co-op in a building which is less than
80%owner-occupied or in which the sponsor still holds the majority of shares after a significant amount of time has
passed since the conversion plan was approved.
The Building’s Underlying Mortgage
Before investing in a co-op, you should ask for the terms of the underlying mortgage. What is the amount of the
mortgage? What is the term? Is it paid off in installments or is it a “balloon” mortgage, the entire principal
becoming due at one time? What is that date?
As a shareholder, you pay your pro rata share of the underlying mortgage and interest in your monthly maintenance,
and your annual federal tax deduction is related to the mortgage interest payment. If the mortgage on the building is
long term and at a favorable rate of interest, then you and the lender to whom you have applied for a co-op loan can
be more comfortable with your ability to make your loan and maintenance payments for the term of your co-op loan.
Also, there is greater certainty that your maintenance payments will not increase and therefore you will probably be
able to make your agreed co-op loan payments.
Owning a Co-op
If the terms of the mortgage call for full payment in four or five years, the co-op’s board of directors will have to
secure new financing without assurance that they can get favorable rates or similar terms.
What is the Pro Rata Share?
As a shareholder you are not only responsible for the maintenance and co-op loan on your apartment, you also have
a share of the assets and liabilities of the building.
The pro rata share is your apartment’s share of the building’s underlying mortgage. In most cases, that share is
determined by dividing the amount of the underlying mortgage by the number of shares in the building and then
multiplying the per share amount by the number of shares for your apartment. The lower of either the appraised
value or purchase price then divides that number. As a general rule, a lender may not consider approving a loan
where the unit’s pro rata share exceeds 30% of the purchase price of the apartment. The reason for this is that the
purchaser is assuming liability not only for the purchase price of the apartment shares but also for the additional pro
rata share of the underlying mortgage. If the building is over financed, the pro rata share could exceed the appraised
value of your apartment. If the co-op’s financial condition deteriorates and there is a default on the underlying
mortgage caused by non payment from other shareholders or the sponsor, you may be assessed additional charges to
cover payments due on the underlying mortgage.
What is a Reserve Fund?
The reserve fund is a designated amount of money set aside and kept separate from the operating expenses of the
building. A co-op’s annual operating budget should include adequate provisions for ongoing maintenance. However, major
capital improvements or unexpected repairs or replacement of building systems may need to be funded from the
building’s reserve fund. If the fund is large enough there may be no need for increased maintenance fees,
assessments, or new loans, if, for example, the heating system needs emergency repairs. If not, shareholders might
have to absorb increased maintenance costs or pay the interest and principal on a loan covering such repairs. Some
co-op boards pass on the expense to shareholders through assessments rather than maintenance fee increases. This
can take the form of a one-time set amount or can be an addition to the monthly maintenance fee for a period of
time or in any manner decided by the board. In general, the lender looks for a reserve fund that is adequate to cover any major capital
improvements. Typically a lender would like to see a reserve fund of at least $1,000 per unit with a minimum of $25,000 per building.
The Board and the Corporation Bylaws
The bylaws are the rules and guidelines under which the board of directors is elected and runs the corporation.
In a true co-op, where the sponsor is no longer the majority shareholder, the board of directors is made up of your
neighbors – shareholders who function on a volunteer, part-time basis and, in all likelihood, have no training in
building management or real estate financing. In most co-ops, once elected, boards have broad authority to approve
or disapprove sales of stock, authorize expenditures, hire and fire staff and adjust maintenance charges as the need
arises. The board can also change policy, rules, and regulations as long as the changes don’t conflict with the
bylaws or proprietary leases. They can determine issues such as: prohibitions on the ownership of pets and the right
of a proprietary lessee to sublet an apartment. The co-op board can also change the terms of the sale of shares by
requiring the seller to secure a waiver or pay a fee before a sale is approved. The cooperative corporation’s bylaws and the board
which administers them can affect the quality and security of your investment. They set the rules for the physical and financial
operation of the building in which you are a shareholder and of the home in which you reside.
These are the types of questions you should consider asking when shopping for a Co-op. You may want to ask to
examine the minutes from recent board meetings to determine if any major problems were discussed - such as the
need for a new roof or possible refinancing. Also, you can ask for several years of financial statements. You may
want to check on the physical upkeep of the building. Are the public halls and compactor rooms clean? What is the
condition of the windows? Are there cracks in the walls? Are the elevators working? Whether you’re dealing with a
real estate agent, the apartment owner or a managing agent, you should have your questions answered before you
buy. It’s possible that the managing agent can generate a computerized form providing the latest information on the
building. The more information you have, the easier it is for you and your lender to make a sound decision on
whether or not this will be a comfortable home and a wise investment.
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