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In one of my previous blog posts, I talked about sponsor co-ops – apartments being sold by the building’s developer or owner – and the pros of buying such units. If you have followed my lead, you may have encountered a rare form of NYC building: the condop. While brokers usually describe the as co-op units with condo rules, this is an oversimplification.
Condops are mixed-use co-op buildings with commercial or non-residential space on the ground floor. Each co-op resident owns shares in a corporation, which in turn owns the entire residential portion of the building as one condo. As a result, they will have separate boards for the residential and commercial parts of the building.
Why NYC Has Condops
Back in the 1980’s, New York City had a tax rule known as the 80/20 rule, that capped the earnings a co-op could make from non-residential or commercial spaces at 20% of their income. Above 20%, the shareholders could not take advantage of certain homeowners’ tax deductions. To fix that, owners and developers created a new category of housing which divided their buildings: the commercial space was designated as one condo unit, and the rest of the residential part of the building was considered another and divided into co-op shares. This allowed the owner of the building to enjoy all the freedoms of condo ownership when it came to renting out that commercial space, and this is how the condop was born. There are less than 300 condops in NYC today, compared to a few thousand co-op and condos, and most of them can be found on Manhattan’s east side.
What You Need to Know Before Buying a Condop
You should be prepared for the fact that multiple boards could mean multiple opinions, and not always on the same side. If the commercial tenant has more seats on the board than the residents, the votes on resident-related issues may be entirely in the commercial space owners’ hands.
Have your broker feel around with management to see if the board functions well and if there has been any recent litigation involving the board. Make sure your attorney does some digging in the financials both for the co-op and the condo to find out if they are distributing expenses properly, if the condo is up to date on its financial contributions, and to learn what percentage of the condo’s common charges is assigned to the co-op.
Is a Condop Right for You?
If you are willing to deal with the multiple-boards situation, there are advantages to be had when buying in a condop. For instance, they can offer some flexibility if you’re having trouble with post-closing liquidity.
The type of business that is occupying the retail space may also make a difference for you: is it a loud restaurant? A doctor’s office with and x-ray machine? Remember, the retail spaces are separately owned and the co-op doesn’t have any control over them.
You should also make sure you are working with local lenders, since most out-of-state lenders have little to no knowledge about co-ops, let alone the hybrid condop. Be prepared for the bank to ask for a slightly bigger down payment, since condops are treated like condos.
Lastly, although they are often said to have more liberal finance and sublet policies, they are actually just as tough as regular co-ops.
And that’s it! The mystery of the condop has been revealed!