Risks of buying, owning, and living in a co-op with sponsor owning more than 50%?

[nym9]

What is the name of your state? NY, NY

Seller is requiring "100% cash payment since banks will not loan in the building, and sale cannot be contingent upon appraisal".

I am concerned with

a) unrestricted maintenance fee increases.
b) renters who are unconcerned with building condition and its rules.
c) assuming any potential debt or liability of sponsor.

How valid are each of these concerns?

 

[LindaP777]

Seller is requiring "100% cash payment since banks will not loan in the building, and sale cannot be contingent upon appraisal".

This alone would make me turn tail and run . . .

I am concerned with; a) unrestricted maintenance fee increases.

As the building gets older, maintenance fees go up. It Happens.

b) renters who are unconcerned with building condition and its rules.

Are there rules, and are they enforced?

 

[nym9]

This alone would make me turn tail and run . . .

Well the 100% cash down is because banks won't lend if more than 50% is sponsor owned.

As the building gets older, maintenance fees go up. It Happens.

Yes but in this case its determined by the sponsor, not the board.

Are there rules, and are they enforced?

Yes but again unlike a regular co-op with over 80% ownership, more than half the units here are rentals.

 

[You Are Guilty]

What is the name of your state? NY, NY

Seller is requiring "100% cash payment since banks will not loan in the building, and sale cannot be contingent upon appraisal".

I am concerned with

a) unrestricted maintenance fee increases.

Maintenance increases are unrestricted in every co-op: new, old, 100% owner-occupied, empty, tall, small, etc.

b) renters who are unconcerned with building condition and its rules.

A concern in every co-op that has renters (most have at least a few rental units). Unfortunately, not much you can do other than get on the sponsor to not rent to jackasses. Some sponsors are better than others in this regard - check out other buildings they own.

c) assuming any potential debt or liability of sponsor.

Such as? Unless you contractually do so, your libility is limited to the possession/use of your unit (and potentially your shares, but those types of lawsuits are few and far between). If someone falls down an elevator shaft, that's the sponsor's problem, not yours. If/when you do purchase, check out the buildings master insurance policy to ensure adequade coverage, make sure that you obtain as much owner's coverage that you can afford, and see what, if any, provisions are in place to purchase (and maintain) a D&O policy once there are enough owners to form the Board.

Overall, nothing sounds out of the ordinary for a purchase in a new conversion.

 

[LindaP777]

Well the 100% cash down is because banks won't lend if more than 50% is sponsor owned.

That's for a conventional loan. Try non-conforming. And why no appraisal???

Yes but in this case its determined by the sponsor, not the board.

But it doesn't remove the fact that the building it getting older and will need more maintenance. Doesn't there have to be some accounting on how/where the money is spent?

Yes but again unlike a regular co-op with over 80% ownership, more than half the units here are rentals.

Even tenants have to follow rules. Aren't they enforced?

 

[nym9]

I just found this info on why its not a good idea:

"If the percentages of shares held by the sponsor are high, a default could jeopardize every
investor. 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."

and

"The buyer assumes liability not only for their apartment shares but also for the additional pro rata share of the underlying mortgage. If the building is overfinanced, 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."

I am not clear on all that, but I do know that with a bank loan, they investigate all this before approving, I just want the some kind of similar screening mechanism.

 

[You Are Guilty]

With respect to the first paragraph you quoted, if it was true, then no one would ever be able to purchase a co-op in a new conversion, since no lender would approve them. Clearly, that isn't what happens in reality.

With respect to the second, it's technically correct, but a bit misleading. You are indirectly "responsible" for a pro-rata share of the mortgage via your maintenance payment. Technically, while a building can fall into a situation as described, in a hot real estate market, its extraordinarily unlikely, and even in the event it does happen, you have a variety of legal recourse to protect yourself. Of course, that also ignores that the same thing can (technically) happen even in a majority owner-occupied building.

Overall, you have not really raised any concerns that don't apply to every new co-op purchase. But if you still feel uncomfortable, the best, and only advice, anyone can give you is don't buy!

 

[tobysen]

Get the Condo's Declarations

To ease yourself of the rules and by-laws. Most states have laws that condominium's need to have documents that states their by-laws, declarations, etc... asked for a copy prior to any settlement..

tobysen

 

[alent1234]

there is a co-op in Queens called Anita Terrace where the sponsor owned over 50% of the shares. The sponsor let the building maintenance fly. Short story is that the co-op was in bankruptcy for several years, the sponsor tried to dissovle it so they could sell it off but the judge allowed a bank to loan them $500 million for repairs and saved the co-op. Now the maintenance is sky high.

Don't do it. there is a reason why fannie mae won't underwrite these loans.

 

[nym9]

With respect to the first paragraph you quoted, if it was true, then no one would ever be able to purchase a co-op in a new conversion, since no lender would approve them.

Or, as in this case, they would have to buy with their own funds, no loan.

With respect to the second, it's technically correct, but a bit misleading. You are indirectly "responsible" for a pro-rata share of the mortgage via your maintenance payment. Technically, while a building can fall into a situation as described, in a hot real estate market, its extraordinarily unlikely, and even in the event it does happen, you have a variety of legal recourse to protect yourself. Of course, that also ignores that the same thing can (technically) happen even in a majority owner-occupied building.

True, but the point is that in a majority owner-occupied building, the percentage of your liability / responsibility is that much less.

I can weigh the pros and cons of the likely real-world situation but I need to first understand the worst-case scenario (which I am doing thanks to the info here)

 

[You Are Guilty]

I don't know whether you're in NYC, but since something like 95% of the country's co-ops are here, I'll assume you are as well. Do you honestly think people are paying cash for new conversions? Given that even "cheap" ones are going for $400 sq/ft and up, it just isn't happening. (Hell, most people don't even put 20% down!)

Like I said, it's a risk of ownership in any co-op. Research the sponsor (their history of conversions, their current financial state, how they run other buildings), and make your decision.

 

[nym9]

there is a co-op in Queens called Anita Terrace where the sponsor owned over 50% of the shares. The sponsor let the building maintenance fly. Short story is that the co-op was in bankruptcy for several years, the sponsor tried to dissovle it so they could sell it off but the judge allowed a bank to loan them $500 million for repairs and saved the co-op. Now the maintenance is sky high.

Don't do it. there is a reason why fannie mae won't underwrite these loans.

Just did a search on Anita Terrace, thats exactly the type of risk I am trying to research. I know you can't get a loan for these sponsor-owned apartments, and now that I know why, I won't be paying cash for one either, thanks!

 

[You Are Guilty]

Just did a search on Anita Terrace, thats exactly the type of risk I am trying to research. I know you can't get a loan for these sponsor-owned apartments, and now that I know why, I won't be paying cash for one either, thanks!

And by the way, you absolutely can get a mortgage on places that still have a majority of units that are sponsor-owned. It's not as easy as finding a lender for a owner-occupied building, but it just takes a little more legwork. I can't recommend any specific banks, but here's a hint:
http://www.nydailynews.com/02-12-2007/business/story/496677p-418597c.html

 

[nym9]

And by the way, you absolutely can get a mortgage on places that still have a majority of units that are sponsor-owned. It's not as easy as finding a lender for a owner-occupied building, but it just takes a little more legwork. I can't recommend any specific banks, but here's a hint:
http://www.nydailynews.com/02-12-2007/business/story/496677p-418597c.html

Wow. And only 2 days ago too.

 

[You Are Guilty]

You're welcome

Enjoy your new apartment.