CRE-Finance Illuminates Some Issues with Co-Ops
There are special issues associated with financing a co-op unit
June 10, 2014 (Newswire.com) - Before condominiums became popular, co-ops were often used to buy real estate collectively, especially in New York City and Florida. A co-op is a corporation that owns a piece of real estate, usually an apartment building or a mobile home park, explains Todd Tretsky of CRE-Finance LLC.
The individual owner would not own the airspace (for apartments) or the land (under his mobile home) encompassing his residential unit. Instead, the individual owner would own a share, or several shares, in the corporation that owns the apartment tower or the mobile home park. Along with the share(s) comes the exclusive right to lease a particular apartment or mobile home park pad.
Each month the individual owner is responsible for paying his lease payment and his own mortgage payment, if the individual owner used bank financing to buy his shares in the co-op. In addition, the individual owner must pay his pro rata share of the common operating expenses, such as the doorman, common area utilities, common area repairs, real estate taxes on the entire property, and insurance on the entire building.
There are special issues associated with financing a co-op. One issue is that many co-op's still own a number of unsold shares (units), which are commonly rented out. If the co-op still owns too many unsold units or has "foreclosed" on too many shares (units), such properties are difficult to finance. As a general rule, if the co-op still owns more than 30% of the shares, few banks will finance the project.
So what happens if a balloon payment comes due at a time when the co-op has foreclosed on too many shares (units)? It's fair to say that there is "big trouble in River City".
There are other issues associated with owning and financing co-ops. One issue is that the Board of Directors of the corporation has the right to veto an owner's sale of his share (unit). Madonna once tried to buy a co-op in New York City, but the Board of Directors rejected her application! The Board of Directors can also forbid or limit a shareholder's ability to rent his unit out.
Another issue with co-ops is that if a number of shareholders are not paying their lease payments and assessments, the remaining shareholders have to come up with the extra money every month to cover the shortfall. Remember, the corporation owns the building, not the individual occupants. The mortgage is often huge, and the mortgage loan is in the name of the corporation. If the bank financing the entire building forecloses, every shareholder is wiped out. Yikes!
As a result, condominiums have become the preferred method of collective ownership of commercial real estate. Nevertheless, tens of thousands of apartment buildings and mobile home parks are still owned by co-ops.
If you have any questions regarding commercial real estate or are looking into commercial financing needs, please give us a call at 855-515-5585 and ask for Rich Tretsky at extension 504 or Todd Tretsky at extension 505. You can also visit our website at www.cre-finance.com