TURNING CO-OP INTO CONDO

Over in Queens, The Delmar, a 36-unit co-op, also was concerned about declining value. Board president Connie Sokol, who was renting her apartment when the building converted in 1987, says shareholders began to get edgy even before the economy tanked in 2008.

Although the sponsor owns just five units, Sokol and other board members feared that even a few foreclosures on shareholders could be disastrous. "We'd heard of some co-ops in Queens where the board made bad decisions and the corporation went bankrupt and the building went back to a rental," says Sokol. "We thought that with our underlying mortgage of $500,000, the bank would auction off the building and the sponsor could pick it up and turn the building back into a rental. That shook us up."

The Bensonhurst board had heard a great deal about the higher prices condos could apparently command in the market, as well as the greater freedom individual owners had in dealing with their apartments — no board telling them what to do regarding sublets — and the absence of an underlying mortgage.

Turning the Wrong Way

But there were also hurdles, warns Arthur Weinstein, an attorney in private practice who specializes in co-op and condo law but who was not involved with these conversions. "There are many roadblocks, not the least of which is the repayment of the building's underlying mortgage," he says. "And that might include huge prepayment penalties."  In fact, he notes, a former shareholder will probably end up paying more because of the need to take out a new, larger loan than the one currently in place, simply to pay off that former shareholder's portion of the co-op's underlying mortgage.

Then there are lawyers' fees, filing fees with city agencies, approvals needed from the state attorney general's office.... It is an expensive and complex process, and many lawyers say the headaches outweigh the benefits.

Unless, of course, you want to pay a conversion specialist fees in the $250,000 range to do all that work for you. Both boards found such an entity in Residential Ownership Alternatives Hutton, an Allendale, N.J., company that has handled more than 3,000 conversations nationwide.

After checking with two satisfied buildings in Queens that ROA Hutton had helped convert several years ago, the five Bensonhurst board members invited Jack Boyajian, the firm's president, to meet them in March 2010. Boyajian laid out what is required to convert from a co-op to a condo:

Getting shareholder approval

The Bensonhurst co-op needed the approval of at least 67 percent of the shareholders to proceed with the conversion. (The percentage, spelled out in the bylaws, varies from building to building.)

Paying off the underlying mortgage

The co-op had to pay off its underlying mortgage, and shareholders who carried personal mortgages would have to arrange their own financing for a condo unit.

Drafting new governing documents

A new declaration of the condominium and new bylaws would have to be written to replace the old proprietary lease and bylaws. 

Coping with tax obligation

Instead of owning shares in a corporation that owns real estate, owners of condos own a piece of real estate directly. "The tax consequences [of the exchange] are quite tricky," says Weinstein. "If you're surrendering your co-op stock and getting a condominium apartment in exchange, you are getting valuable consideration in exchange for your stock. And that's a taxable event."

If an apartment's value has increased at the time of conversion, shareholders who used the apartment as their principal residence and meet certain other requirements can declare an "exclusion of gain" up to $250,000 ($500,000 on a joint return). If the rise in value is larger, however, even such an owner of the new condo might have to pay some income tax, according to Joel E. Miller, a partner at the Flushing, Queens, law firm Miller & Miller.

Next page: Lien Times and Lower Standards >>