Condo Boards Start To Act Like Their Co-Op Counterparts
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Like the spunky cat that fancies itself a dog, the boards of Manhattan condominiums are acting more and more like those of co-ops, several brokers and lawyers who are familiar with the market say.
Much of the difference between condos and co-op apartments lies in their boards’ ability to screen potential buyers. Finicky New York co-op boards are known to demand detailed and invasive disclosures and turn away rich and famous buyers based on obscure criteria. Condo boards have much less discretion. They maintain the right of first refusal, where they can opt to purchase an apartment if they dislike the prospective buyer. But such instances are rare, brokers said.
The president of the Council of New York Cooperatives and Condominiums, Marc Luxemburg, said the next logical step was for a condo board to “get rid of their right of first refusal and put in a consent requirement.”
“Eventually, they are going to want to get to the place where co-ops are,” he said.
A May appellate court decision in the case of Demchick v. 90 East End Avenue Condominium spurred speculation among brokers and real estate lawyers that condos may soon adopt consent requirements in their bylaws. So far, that has not happened, but it might soon, an attorney for Belkin, Burden, Wenig and Goldman, Aaron Shmulewitz, said. Mr. Shmulewitz specializes in condo and co-op law.
In the meantime, an increasing number of condo boards are finding other ways to exert their influence.
Boards are now requiring buyers to submit more complex application packages requiring full financial disclosure, including recent tax returns, references, and even personal interviews. Some condos are also now instituting “flip taxes” or transaction fees that the board collects from owners who are moving in and out.
An informal poll by one broker, Marc Lawrence of the Corcoran Group, showed that more than a dozen brokers had encountered interviews and some form of a flip tax at condos across Manhattan.
“These are not the fanciest ones,” Mr. Lawrence said. “These are some of the condos that have been around for a number of years.”
A real estate investor who has served on three different condo boards in Manhattan, David Hansard, said that even though it amounts to a “bluff,” assertive condo boards will harass purchasers with stall tactics.
“Slowing down the approval process, asking for more and more information – they can make your life miserable. The renter or purchaser loses interest,” he said.
Mr. Shmulewitz, the attorney, said he has fielded more calls recently from condo boards that want to adopt flip taxes. While a standard condo flip tax might be found to be illegal by the courts, Mr. Shmulewitz said, he has advised condo boards to institute bylaws that require purchasers to make “a contribution of capital” of about 1% to 2% of the gross sales price.
He said that, anecdotally, the condo “flip tax” had not adversely affected prices because purchasers “want to buy in a building with a healthy reserve fund.”
Opinions differ on what is driving condo boards to behave like co-ops.
Mr. Hansard, the former condo board member, said market fluctuations drive a board’s assertiveness. “In a weak economy, they get more flak from owners if they think you are making it more difficult to find buyers or renters,” he said. “Right now, they are all pretty cocky. Everyone feels like they are rich, at least on paper.”
Mr. Lawrence, of Corcoran, said the newfound stringency partly reflects the type of buyer attracted to the current strong real estate market. He said boards have tightened up in response to more foreign buyers, “faceless buyers” who will not have a presence in the building, or speculative buyers who look to flip a property immediately.
A broker from Brown Harris Stevens, Elaine Clayman, said the changes were not an act of aggression but of caution. She said higher common fees, such as those for insurance and heating, have driven some condo boards to try to fatten their reserve funds.
Mr. Luxemburg says it’s only natural for condos to want more control. “When you live in one, you realize there is a sense to having rules. It is good to have a board that screens people, that has rules and can enforce them,” Mr. Lawrence said.
There is also disagreement on how co-ops that are acting like condos will be priced.
Mr. Luxemburg is “dubious that it will have any kind of financial effect.”
But one of the often cited reasons for higher demand of condos is that less regulation over potential buyers translates into a wider market.
The president of the appraisal firm Miller Samuel, Jonathan Miller, said “Anytime you limit marketability, it impacts value. If you limit marketability on condos, new or old, there will be an impact on the value of condos relative to co-ops.”
While stricter condo rules may narrow the price differential between condos and co-ops, Mr. Miller did not think it would eradicate it.
“There will still be a significant differential,” he said.