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Condos versus Coops

 

     We’ve long had “cooperatives” or “coops” in DC. The Watergate is one. Indeed many of the most beautiful and interesting DC residences are coops. However, it’s always seemed to me that we don’t really understand them and are a little afraid of them. And, to our credit, that we don’t use them to exclude “undesirables” (whatever that means) as is done in Manhattan .
     Another opinion based on my experience: The transformation of the venerable Chastleton, at 16th and R Streets NW, from apartments to a coop changed – legitimized – our feelings with remarkable rapidity. I was thrilled, in April of 2007, when I saw the sales banner go up outside the wonderful old Gothic building, once home to Mrs. Wallis Simpson, the American divorcee for whom Edward VIII gave up the British throne. I was impressed upon learning that half of the 300 or so apartment dwellers had chosen to buy their units when the building converted. I was amazed when I discovered that in this very prime location fully renovated studios were selling for the astonishingly low price of $170,000. Despite being coops, despite being a depressed real estate market and despite being the size of large postage stamps, these studios were one of DC’s hottest purchases and, in my opinion, high on the best investments list.  

Spring at 4000 Cathedral NW - magnificent and a great value
     It took only one year in a “bad” market to sell the entire inventory – 70 or 80 of these diminutive spaces – even given a strategy for releasing Chastleton units only comprehensible to the developer. After first selling off the exterior (as opposed to interior courtyard) units on high floors, he seemed to choose the sequence at random. Nonetheless, whenever he’d release 10 new units, they’d all sell in days. And every time a new group came on the market, it did so at higher prices. As “they” say, the coops were flying off the shelves.

Fall at 4000 Cathedral NW
 

     So what’s the difference between condos and coops?

     Legally the difference is profound. A condominium is “real property”. The concept apparently originated from two ideas: First, “real action” can be taken in relation to this type of property. Second, the property is “immovable.” In other words, rights transfer with the property and don’t “move” with the owner. The word, “real”, might have come from the word “royal” or the Spanish word “real”, i.e. “king” since most property was owned by one crown or other. Property “rights” were certainly influenced by the voracious imperialism of the small country of Spain and the tiny country of England , which each once controlled disproportionately large pieces of the world’s real property.

     A condominium is owned separately by individual owners who have a proportionate share in the building’s common areas. Condominium owners form an association to jointly manage their assets.

 

     A cooperative, on the other hand, is a security, like a stock. The security signifies a part of a one legal whole. As in a corporation, a Board manages a coop.

 

     Practically a condo and a coop are both similar and different. Some might say the most important difference is that, because coops are not real property and therefore are not subject to fair housing laws, a coop board can refuse anyone entry for any reason without being jailed, fined or even questioned. In cities where coops are popular - New York City is the number one example - that's why. Discrimination is not always or even mostly racial. A rock star is probably more likely to not be allowed in an Upper West Side New York coop than an "ethically diverse" businessman. If I remember correctly, Richard Nixon was refused by one of the coops in which he wanted to live. Fortunately, here in DC, even though prospective residents are subject to Board pre-review, we're much more egalitarian.

 

 

Chastleton entrance


The Ontario coop.
Hidden above the Park. Certainly one of DC's most beautiful residences.

 

     Another primary but more mundane difference is the way condos and coops are taxed. Coops do not pay real estate tax. Rather the entire entity is taxed as one organization and the amount allocated amidst the owners based on the amount of stock owned. Since taxes are paid by the entire building rather than the individual owners, coop taxes are generally included in the monthly fee – one of the reasons coop fees appear much higher.

     Taxes paid by coop owners are significantly lower – perhaps one half – of the property taxes paid by a comparably valued condominium. Unfortunately, both purchasers and sellers lost the great closing cost advantage of coops – not paying transfer and recordation tax, which, in DC, is 1.1% or, above $400,000 sales price, 1.45%. This benefit went away on October 1, 2009, sad to say. So in this way also coops are being treated as real property even though, as I said, legally they are securities. Without escrowed property tax, coop purchasers’ closing costs will still be somewhat less but no longer dramatically.

     A second difference is a coop’s “underlying mortgage”. Whereas each condo owner is responsible for all of his own financing, some, but not all, cooperative buildings may hold mortgages on part of the building’s value. The mortgage may have originated when the building was first purchased or as the result of a “special assessment” for a major renovation. Older buildings may have paid off their mortgages long ago. However, if there is an underlying mortgage it is allocated based on the shares owned, just like taxes. Like taxes it is included in the monthly fee. Also, it is deducted from the amount of financing a new purchaser must acquire. (See the table below.)

 

I sold the gated garden across from the Graham mansion at 1661 Crescent Place (and the coop attached to it, of course).

     In most, but not all, coops, utilities are not separately metered but are allocated to each unit and included in the fee – another reason why coop fees appear higher.

     The primary similarity is that mortgage interest and other real property tax deductions also apply to cooperatives.

     With a couple of notable exceptions, the sales process for coops is identical to condos. They can be listed in multiple listing services and sold by real estate brokers. As far as I know, Edmund J. Flynn is the only settlement company for coops in DC and possibly Montgomery County, Maryland and close-in Northern Virginia. Coops are all they handle and they do it with soothing efficiency.

     Also, very few lenders make loans for coops. Coop loans are a specialty of National City Bank. They’ve been making these loans for 25 years. One of their most well respected and knowledgeable loan officers is Cam Carson, who’s been in the business almost as long.

Cam Carson-Wagnon
PNC Mortgage
703-273-1670 (office)
703-577-8175 (cell)
cam.carson-wagnon@pncmortgage.com

 

    Deb Levy has been in the business since the late 1980s and is extremely responsive and efficient.

Deb Levy
301-332-7758 mobile
www.debbielevy.com

     This table, given to me by the Chastleton sales office, shows a sample cost breakdown for coops versus condos. Please keep in mind that the breakdown will differ with every building.

     Some buildings do not have underlying mortgages.

     The operating expense part of the coop fee is comparable to a condo fee. These fees vary significantly from building to building. There are coops in DC, including some with 24 hour doormen, that have the equivalent of $200 per month operating expenses for a big 2 bedroom. On the other end there's the Watergate, where fees for a 2 bedroom run about $2000 per month, sometimes more.

     The primary fact to keep in mind is that coop fees include far more than condo fees ... And if you pay a coop fee you will NOT pay taxes on top of it, as you do with a condo fee. Instead of condo monthly expenses of mortgage payment, condo fee, taxes and utilities, a coop purchaser just pays mortgage and coop fee. Property taxes in DC run about 80 cents per $1000 of assessment - an extra $4000 per year on a $500,000 condo - so the difference can be significant. In this chart, the Chastleton's taxes also seem high to me relative to other coops.

     It’s not really that complicated. It just looks like it. So please feel free to ask me any questions.

 

 
Monthly Payment Worksheet
 
1 bedroom
2 bedroom
Coop
Condo
Coop
Condo
Purchase Price
$ 294,000
$ 294,000
$ 419,000
$ 419,000
Underlying Mortgage
$ 59,406
$ 93,914
Net Price
$ 234,594
$ 294,000
$ 325,086
$ 419,000
Downpayment
$ 23,459
$ 29,400
$ 32,509
$ 41,900
Purchaser's mortgage
$ 211,135
$ 264,600
$ 292,577
$ 377,100
Interest Rate
6.50%
6.50%
6.50%
6.50%
Payment (tax deductable)
$ 1,335
$ 1,672
$ 1,849
$ 2,384
Monthly Taxes (tax deductable)
$ 113
$ 245
$ 179
$ 349
Monthly Underlying Payment
(tax deductable)
$ 456
$ 722
Operating Expenses
$ 293
$ 293
$ 463
$ 463
TOTAL MONTHLY PAYMENT
$ 2,197
$ 2,210
$ 3,213
$ 3,196
Tax Advantage 28%Tax Bracket
Total Net Monthly Payment
$ 1,371
$ 1,381
$ 1,980
$ 1,968
These Estimates are not guaranteed and do not include prorated items or costs associates with any other transaction