Co-op Crash Course

by Peter Thomas Ricci

Photo from a co-op unit in 1500 N. Lake Shore Drive

The housing boom temporarily changed many aspects of the real estate industry, and the stature of co-op buildings was one of them. Once a viable alternative to condominiums, co-ops gradually lost their appeal amongst the creative financing options and modern amenities that many of the newly constructed condominiums featured, and as a result, their presence in the market waned.

With real estate gradually beginning to revert back to its pre-boom standards, though, and many of those aforementioned promises in the condo markets failing to materialize amidst foreclosures and similarly distressed units, co-ops are slowly making a comeback in the for-sale marketplace; according to Midwest Real Estate Data (MRED), there were 388 co-ops on the market in 2011 in all nine of Chicagoland’s counties. However, all of the luxury co-ops that were sold in 2011 were in Cook County (15 total, according to our “By the Numbers” feature on page 20) and 90.72 percent of all Chicagoland’s co-ops are also in Cook County, luxury or otherwise.

Jennifer Ames, a top-producing luxury agent with Coldwell Banker Gold Coast, has extensive knowledge when it comes to buying and selling co-ops, along with the distinguishing features of a co-op property, and how they differ from condos.

One of the first differences is the nature of the property. Whereas purchasing a condo grants a client the ownership of a physical apartment and a share of the common elements of the building, with a co-op, a client purchases a number of shares of stock in the legal entity that owns and manages the building, which in turn affects what residence he or she ultimately lives in.

“Your shares of stock entitle you to occupy a specific apartment, as defined in the Proprietary Lease you receive with your stock certificate,” Ames said. “So in the end, you have the same thing – a place to live – but how you achieve this is a bit different.”

Another difference, Ames said, comes in the maintenance fees and taxes on a co-op. Though both condos and co-ops involve a collection of fees from homeowners/shareholders to cover any maintenance and insurance costs, there are two notable differences in how taxes and capital projects are funded.

For taxes, co-ops are not taxed directly by Cook County, as with a condo; instead, the county sends the entity owning the co-op a single tax bill, and the shareholders of the entity pay the bill based on the proportion of shares they own in the co-op.

“In most co-op buildings, real taxes are included in the monthly assessments, similar to the way some condo or single-family homeowners may pay their real estate taxes each month into an escrow along with their mortgage payments. Real estate taxes paid for condos and co-ops are tax deductible and qualify for both homeowner’s and senior citizen exemptions.”

There is an even bigger difference with capital projects. For condos, buildings typically collect a “special assessments” fee to cover capital improvements, and the fees can be structured as either a one-time payment or a rolling payment over several months (or even years). For co-ops, though, shareholders can pledge the building as collateral and receive a line of credit to cover the cost of improvement projects. Ames said that feature could be seen as one of the definite advantages to owning a share of a co-op.

“Obtaining a loan to pay for capital projects can be viewed as preferential over a special assessment, as the cost of the improvement is less burdensome,” she said. “Any interest shareholders pay on the co-op’s mortgage is tax deductible, just like interest on their home loans.”

Ames pointed out, though, that such flexible financing is a relatively recent development. One other key difference, Ames said, is the application process. Whereas condo owners have no say in who buys units in their condominium, and the process itself typically involves copies of sales contracts, applications and/or credit reports under the “right of first refusal” measure that some condo associations follow, the process is a bit more complicated for co-ops, mainly because co-ops still have the power to approve or reject buyers.

That power, Ames explained, has maintained its grip on the process because co-op owners have much more at stake than condo owners. Someone buying into a co-op must be able to cover all of the previously described fees (many of which run higher than in a condo situation), and if he or she is unable to meet the financial obligations of the original agreement, the fellow owners could be forced to absorb a considerable sum of money.

Because of the greater risk, the protocol for co-op documentation typically includes: an application; a detailed balance sheet; several personal and professional letters of reference; possibly tax returns; and, an interview.

Despite the extensive process, Ames said that with one exception, she has never seen any problems for co-op buy-ins.

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