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To Convert or Not to Convert

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Is your co-op considering the transition to a condo?  These days the allure of living in a co-op just isn’t quite what it used to be.  It can be difficult to sell your apartment, buy an apartment, sublet the apartment, or pretty much anything else, as co-op life necessitates board approval for just about everything. Plus, where the average sales price of a condo unit jumped 21 percent from 2013 to 2014, the average sales price of the shares referable to a co-op unit only increased about 1.7 percent. With all of that in mind, why not just convert?  Converting from a co-op to condo isn’t as easy as one may think.  Below are a few, yet major hurdles to overcome if you want to successfully “shed the shackles” of co-op life.

 Get shareholder approval

Most proprietary leases require a “super-majority” of shareholders, as many as 80 percent, to make this sort of change, and persuading that many residents to vote in favor is the first hurdle.  For co-ops with shareholders who prefer an absence of renters in their building, it may be difficult to garner support.

Paying off the underlying mortgage

The co-op will have to pay off its underlying mortgage, and shareholders who carried personal mortgages would have to refinance, swapping their loans for more traditional mortgages.  Depending on your co-op’s mortgage underwriting, there may be huge repayment penalties.

Drafting new governing documents

A new declaration of the condominium and new bylaws would have to be written to replace the old proprietary lease and bylaws.

Pay your taxes

The conversion triggers a personal “tax event.”  That’s because it’s not actually a conversion, but a dissolution of the corporation, with the full capital gains taxes payable for that year as if a sale occurred.  For individual shareholders that have been in the co-op for years there may also be huge capital gains taxes when they trade their shares in for a deed to a condo unit if a unit’s value has increased at the time of conversion.

If the shareholders in your building are unwilling to deal with all of this, there are a couple of things that the building can do to make life in a co-op less restrictive.  For co-ops with high down payment requirements, the building can lower the down payment bar.  Co-op boards can also agree to loosen some of their policies, including the application process or the building’s policy regarding owner sublets.

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