The Shareholders

In the past 25 years, the profile of the typical cooperative shareholder has changed dramatically. In 1982, the city’s nascent co-op market was a very different animal. The first wave of co-op conversions turned renters into owners as sponsors encouraged anyone and everyone to buy his or her unit. Purchasers didn’t have to present their financial bona fides, sponsors didn’t require much of a down payment, and banks doled out loans to nearly all comers. The result was a whole new population of apartment owners, often unprepared for the nuts-and-bolts business of running a building.

Today’s owners span the demographic spectrum: from young singles and empty nesters to foreigners looking for a pied-a-terre. Unlike in the early days, co-ops now look closely at every aspect of a potential buyer, from personal habits to financial history. It’s certainly more difficult to buy an apartment in 2007 than it was in 1982 – and if present trends continue, it may well be even harder in 2032.

The Early Days

In the early 1980s, New York was a city of full of renters unfamiliar with – if not downright hostile to – the concept of home ownership. Co-ops were considered the prerogative of the wealthy few living in the rarified precincts up and down Central Park, the East River, or West End Avenue who sought the power to decide who their fellow residents would be. “If you bought a co-op in the ’60s or ’70s, you wanted to be in a building where you could control [the choice of] your neighbors,” notes Gil Neary, principal of DG Neary Realty.

“The most prestigious buildings were already co-ops,” adds Kirk Henckels, director of Stribling Private Brokerage.

Since almost all rental apartments fell under regulations which restricted how much could be charged, that generally meant operating costs exceeded rent rolls. Consequently, many landlords were losing money. A number of them took advantage of the newly liberalized non-eviction plans that allowed a building to convert to a co-op by selling only a small percentage of units. In 1982, state laws allowed conversions after only 15 percent of the newly formed co-op’s shares had been sold.

Because the concept of middle-class co-ops was so new, there were few previous sales to which prices could be compared. “A lot of people didn’t believe in the co-op market,” Neary says. “They didn’t believe anyone wanted to buy these buildings.”

Besides, the rent many people were paying was less than the mortgage and maintenance costs. So, people could rent for less than they could own. “In the early ’80s, the landlord was trying to romance the tenant to buy,” Neary says. “The landlord wanted the tenant to take the burden off of him.”

The city was just emerging from the brink of bankruptcy and the effects of the middle-class flight to the suburbs. “It was very controversial,” observes Arthur Weinstein, an attorney involved in many of the early conversions. “The overwhelming number of tenants were covered by rent controls or rent-regulation laws, so there was a huge fear, and the tenants had great leverage.”

The Wave

After renters were given huge discounts as incentives to purchase their units, a huge wave of conversions washed over the city. In the 1980s, rental buildings housing an estimated one million of the city’s seven million residents became co-ops.

Those conversions helped stem the tide of families leaving the city by offering middle-income families a long-term investment, even if many of them didn’t realize it at the time. But the new owners brought some of their old attitudes with them as well.

“People who used to be renters were now owners, but the mentality was still very much of a renter, ‘The landlord is evil,’” Neary says. “They didn’t understand merchandising the building, or things like fixing up the lobby. The first generation of buyers lived as cheaply as possible.”

They also lacked the extensive support system that most take for granted today. Most attorneys, accountants, and brokers didn’t understand the technicalities of the thicket of regulations and bylaws governing newly converted buildings. Owners had to play it by ear, making up the rules along the way.

“It was a learning curve,” says attorney Marc Luxemburg, the president of the Council of New York Cooperatives & Condominiums and a partner at Snow Becker Krauss. “Thirty years ago, fewer people had served on a board. There was no place to go to get information.”

There were few managing agents, and even those few weren’t familiar with anything except for those high-end “Gold Coast” co-ops. Luxemburg recalls the first time he looked at a financial statement for a building. “It didn’t look right,” he recalls. “But the managing agent was unhelpful. Back then, we were doing things on the fly.”

When a building needed a new boiler or the roof required extensive repairs, these new owners were floored by maintenance increases. Rising interest rates meant that more of their income was going to pay the mortgage.

At the same time, sponsors were wooing another breed: investors in occupied apartments. Sponsors were hot to sell units with a “negative carry” – the difference between the amount collected from rent and the cost of maintaining the apartment. Tax laws favored investors, who bought these units and waited for the tenant to leave – “to heaven or some other place,” as Frances Greenburger puts it. Greenburger’s firm, Time Equities, became the leader in this area.

Then, the bottom dropped out. In 1986, the Tax Reform Act eliminated incentives to buy occupied units, and one year later, the stock market crashed, causing prices of New York City co-ops to tank. “When the market collapsed, investors became disenchanted because they didn’t have the upside they hoped for,” Greenburger says.

In the meantime, investors and sponsors were pitted against those renters who had opted to buy their units. The acrimony spilled out to the media, giving potential buyers the impression that co-ops were a hotbed of warring factions. It didn’t help that some unscrupulous sponsors were bailing on their buildings, which resulted in a mini-wave of bank foreclosures. Some shareholders in buildings in Queens and Brooklyn lost their entire investment.

Looking back from the lofty perch of today’s much more stable market, it’s difficult to imagine how insecure owners were back then. They didn’t see their apartments as investments so much as a potential financial albatross. Many of them recalled their low rents with regret. Lenders, burned by sponsor defaults and shareholders who couldn’t make interest payments, soured on the co-op market. It was an unsettled, unhappy time, full of jittery, insecure shareholders.

Flying High

The situation is markedly different today. Co-op boards learned their lessons from the mistakes of the past. They tightened requirements. As anyone purchasing an apartment knows, boards even in marginal neighborhoods require extensive financial disclosures. “The difference today is that buyers have to meet financial requirements, as opposed to not meeting any except those of their mortgage bank,” Henckels says.

These buyers trend wealthier than their counterparts of 25 years ago, thanks in no small part to Wall Street. “As the economy cycled up and down over the years, the purchasing population has changed,” Luxemburg says. “The spectrum of people that buy in a downtime is broader than in an uptime. Since 1996, financial people tend to dominate the market. Their money pushes many others aside.”

Greenburger, who has re-entered the market after weathering the 1980s’ default era, says he is constantly being courted by investors looking to buy units. What was once considered at best an iffy investment is now considered virtually blue chip. “We don’t sell to investors,” he says. “We prefer to hold them for our own portfolio.”

The few remaining conversions taking place are in apartments that were built late enough so that renters didn’t qualify for rent stabilization, such as The Sheffield, on West 57th Street, which is going condo. The fact that tenants are paying market rates is an incentive to buy, but it also means the sponsor has less incentive to offer any substantial insider discount.

Another factor buoying the market are new laws governing rent stabilization itself. Now that apartments renting for over $2,000 are decontrolled, landlords have less reason to convert their buildings. At the same time, they can take advantage of more liberal policies involving vacancies, which has led to anxiety among tenants at Stuyvesant Town and Starrett City.

Expensive Proposition

All of this means that, whatever the fluctuation in prices or average time on the market, buying an apartment in the city remains an expensive proposition. Although no one keeps official statistics, the consensus among knowledgeable observers is that the demographic profile of buyers has dramatically changed since 1982.

Weinstein, the attorney, points to the parents of a New York University student who opt to buy a studio for their offspring rather than pour money into an out-of-sight rental – something unheard of 25 years ago, when landlords were abandoning whole blocks of buildings in the East Village.

The new breed of owners is paying a lot of money in a long-term investment. This often pits them against the older generation of owners, even at the high end. Henckels notes that a change in the tax laws in 1997 made people reluctant to move from big apartments because per-sale tax exclusion amounts were instituted. This has meant more empty nesters are staying for a while longer in those classic sixes.

In more modest buildings, where capital gains taxes are less of an issue, older owners sometimes square off against more recent purchasers. Steven Sparling is a 32-year-old literacy coach at a public school, who bought his Queens apartment two years ago in a building where most owners of the 28 units had lived for several years. He and other younger owners would like to see capital improvements, which pits them against many older residents on fixed incomes.

In the two years that he’s been living there, for instance, he’s experienced a leaking roof, water damage in the lobby, and an overall decline in building services. The managing agent changed and the on-site super left. The outside door is currently locked in the evenings, making it more difficult to have late-night visitors.

What is worse, though, is the overall “them-against-us” mentality. “I’ve heard comments about young people,” he says. At a party for a shareholder’s 97th birthday, he overheard a board member say, “If only all of the people in the building could be older.”

Although he hastens to add that some of the seniors also want improvements, the fights are wearing him down. “I saved up my money to buy this, so when [this happens], it makes your life hell,” he says. “People bitch at each other. We’re tired.”

As Greenburger notes, even if the overall profile of apartment owners may not be different in terms of age, differences in income levels between long-termers and those buying in lately can create conflicts.

There is, however, another change in ownership that is more dramatic than such differences. If a rising tide lifts all boats, the city’s prosperity has translated into more conversions in outlying and formerly marginal neighborhoods. This has meant a sea change from the owners of the early 1980s to a more diverse demographic. “The sociological scope of who is a [co-op owner] has become democratized ethnically as well as economically,” Luxemburg says. “There are, for example, more Hispanics and Asians in cooperatives.”

Moving Toward Condos

Once scorned, the co-op model has become an entrenched part of the city’s real estate landscape. What can city residents expect in 2032?

As more and more boards tighten, limit, or even refuse to allow sublets, absentee investor-owners will probably become even scarcer. And co-ops are continuing to tighten the application process. They now require larger and larger down payments, to the point where some see a revolt on the horizon. The future may lie in all of those new condos coming on the market. Already, these buildings, with their far more liberal bylaws, are putting co-ops on notice.

In the last two years, Miller Samuel Real Estate Appraisers has reported that Manhattan co-op sales trail condos by $900 to $1,200 per square foot. In that same time period, condo sales leaped by more than 20 percent. Pamela Hannigan, a professor at New York University’s Real Estate Institute, sees condos as the future. It’s no secret that non-U.S. residents prefer condos because of the less-onerous financial disclosures and easier admissions policies. “Property rights are stronger,” she says. “Condos are more in line with the 24-hour city which we are and which we need to be to be competitive as a global city.”

Neary says he keeps hearing more and more clients tell him, “No more co-ops.” And, in fact, his last ten customers bought condos. To compete, he sees co-ops as either adopting more condo-type bylaws or going the distance and converting entirely to condominium status.

Ironically, this may be particularly beneficial to older co-ops, since they have paid off much of the underlying mortgage on the building and enjoy more stable finances. Even in those buildings where conversion would mean shareholders paying out substantial sums of money, owners may take a second look if the tax benefits between condos and co-ops equalize.

On the other hand, a co-op allows owners not only more say in who gets to live there but fosters a sense of neighborliness. That makes Luxemburg see a reverse trend, with more condos making their bylaws conform to the co-op model.

Perhaps, but both Hannigan and Greenburger predict new buildings and rental conversions will be increasing the percentage of condos over co-ops. Although Greenburger cites “the personality of the building” as the determining factor in whether a co-op would “condo-ize,” they both believe that co-ops will face pressure to change.

Whatever happens, the average future apartment owner, at least in Manhattan, will probably be even wealthier than today. He or she may be a non-U.S. resident, or a citizen whose primary residence is elsewhere. As for other neighborhoods, the market will determine whether the gentrifying trend will continue. Hannigan says the gap in neighborhood prices will increase between established areas and those considered more marginal.

One thing no one sees is a return to the bad old days of the mid-’70s or early ’90s. “Buildings are more financially stable than they ever were,” Henckels observes. “That’s the great mechanism that will stabilize the New York market.”