Tenants in thousands of apartment buildings nationwide are converting to condominium ownership arrangements, but the New York market lags far behind the rest of the country. Other areas, particularly in California, Boston, Washington, D.C. and New Jersey, are pressing forward with high conversion volumes, often in rental to condo shifts. In south Florida alone, some 10,000 apartment-to-condo conversions are planned for the next 12 months. But real estate in New York has long been measured by its own standards, and market conditions here will likely prevent the five boroughs from hopping on the bandwagon anytime soon.
New York is the only area in the country dominated by co-ops, and while advocates tout conversions from co-ops to condos as a path to increasing co-op shareholder equity, the trouble and expense involved will be unlikely to sway Manhattanites.
Though condos generally sell for more money, co-op prices are still high, and it appears few are willing to make the switch.
Ken Jacobs, a Manhattan real estate attorney, said only about 15 conversions one of them his own project, at 30 West 90th Street have occurred in the city in the past five years.
In a typical conversion, co-op shareholders trade in their co-op shares for fee simple ownership of condo units.
But those familiar with the concept cite an attitude among co-op owners that things are good enough as they are, especially in the booming market of the past decade.
“There’s the feeling that if it ain’t broke, why fix it,” said Jacobs.
Jack Boyajian, president of New Jersey-based Residential Ownership Alternatives Hutton (ROA Hutton), is an advocate of conversions and an optimistic predictor that most New York co-op boards will at least debate the question within five years. He said the process takes about a year to complete.
His own company has converted more than 6,000 co-op units to condos in markets across the country, with about half of them in New Jersey. Boyajian claims that ROA’s first conversion, the Waters Ebb project in Edgewater, N.J., in 1992, had buyers for condos at $150,000, while identical units in the adjoining co-op were ignored, despite selling for as little as $25,000. The co-op owners were soon forced to convert to condos as well. He said ROA expects to have done their first conversion in New York by next spring.
Boyajian said as much as 50 percent of the city’s co-op housing stock are “ideal candidates” for conversion. He cited Mitchell- Lama properties, set up as affordable housing, whose relatively low values would rise tremendously from a conversion.
Co-ops that are subject to the so-called 80/20 requirement, which forbids more than 20 percent of the co-op’s money coming from any sources outside the contributions of the co-op members, are also promising candidates, he said. Co-ops whose mortgages are coming up with no prepayment penalties would also fit the bill, he said.
Despite this rosy scenario, Jacobs said he doesn’t think a co-op-to-condo makeover will occur any time soon in the city, partly because Manhattan co-op boards retain the ability to reject buyers.
Add the layers of legal and administrative hurdles to be overcome, such as securing the acceptance of often reluctant co-op boards, getting shareholder approval in a supermajority vote and extensive document filings and review by the Attorney General’s office, and prospects for a sweeping shift seem remote.
“It will take years and years to happen and Manhattan will be the last place where it changes,” said Jacobs.
Attorney Eliot Zuckerman also said things will have to get much worse for co-op owners before prospects become better for proponents of condo conversions.
He said only an economic downturn might cause people to reconsider their resistance to conversions when they see that condos are more “marketable.”
Douglas Wagner, president of Manhattan-based brokerage Benjamin James Associates, said that buyers’ attitudes would be to prefer the greater bundle of rights that a condo provides over a co-op, especially the freedom from dealing with co-op boards. He thinks conversions would make sense particularly for co-ops in the twilight of their lease terms.
But Wagner said financing issues, including due diligence matters and the valuation issues involved in converting from capital stock to real property ownership, present major obstacles.
“It is very expensive to do usually,” added Teresa Donohue, a vice president at New York Mortgage Co., citing the additional expense of paying off the unit owners’ share of the underlying mortgage that most co-ops hold. Each unit owner who previously had a mortgage on his co-op unit would need to refinance out of the coop and into the condo unit, and would incur the higher closing costs of a condo.
“So they are more than likely taking on additional debt with the conversion,” said Donohue. The unit owner often has to decide whether the value of the newly acquired condo is increasing enough to justify the added expense and restructuring of their debts, she said.
Sometimes the bottom line is that it’s too expensive to get to a new bottom line, said Zuckerman. His firm recently tried to convert a co-op in Queens to a condo, but the deal fell through because most of the shareholders simply couldn’t come up with the money, even though conversion would have increased their property values by more than 30 percent, he said.