CAI-NJ Sept.2017(1)

S E P T E M B E R , 2 0 1 7

A shareholder in a co-op does not own a piece of real

property, but instead owns shares in a co-op corporation,

which are often organized as business corporations pursu-

ant to Title 14A. As per the terms of a co-op’s certificate of

incorporation, proprietary lease, and bylaws (collectively

“governing documents”), the ownership of shares give the

shareholder the right to “rent” one of the apartment units

owned by the co-op. Notwithstanding the references to

tenancies and rent in co-op governing documents, New

Jersey courts have recognized that co-op ownership does

not create a traditional landlord-tenant relationship, and is

instead a “hybrid” form of ownership having characteristics

of both real property (i.e. land) and personal property (i.e.

stock).

Since a co-op has legal title to all of the land and

improvements, the co-op pays the municipal real estate

taxes assessed against the property. In addition, it is com-

mon for co-ops to obtain “underlying” mortgages on the

real property that it owns. Funds from underlying mortgages

are often used to fund capital projects, and can spread out

the cost of same over a number of years. In addition to

covering the cost of operating the common property,

co-op maintenance fees also include a shareholder’s

portion of property taxes and any underlying

mortgage debt service. Therefore, when

comparing the maintenance charges between

comparable condominium and co-op units

it is important to take into account the com-

mon real estate taxes and

debt service included in the

co-op charges, and that must be covered

individually by the condo owner outside of

maintenance. In addition, the effect of the

underlying mortgage upon the

value of the co-op shares should

be considered when evaluating com-

parable condo and co-op units.

Based on special

IRS rules, a co-op

owner can usual-

ly deduct his or

CONDO/CO-OP...

from page 46.

her share of the real estate taxes and interest paid on the

underlying mortgage. See 28 U.S.C. section 216. In

addition, co-op purchasers often obtain financing through

“share loans,” which are loans given by a bank or other

lender that are secured by a lien on the shares and propri-

etary lease. As will be discussed below, share loans have

some significant differences from traditional mortgages and

it is often the case that there are not as many lenders in the

share loan market.

While many of the governance issues involving co-ops

and condominiums are identical or substantially similar

(authority of the board to act, open meeting requirements,

enforcement of covenant issues involving owners, etc.),

significant differences arise as same relate to sales, rentals,

and collection of debts.

While condominiums are traditionally freely alienable

(i.e. saleable) in New Jersey, it is our experience that the

governing documents of many co-ops limit the sales of

shares to buyers only after obtaining the consent of the

board of directors (the “board”) or a committee thereof

(often styled the admissions committee). New Jersey courts

have determined that, “It is clear that reasonable restraints

on alienation of cooperative units may be valid.”

Sulcov v.

2100 Linwood Owners, Inc.,

303 N.J. Super. 13,

28 (App. Div. 1997).

Under most sets of co-op governing doc-

uments, the board’s review of a proposed

applicant is limited to whether the applicant

meets the financial require-

ments for admission set by

the board. The financial requirements often

will, among other things, set a stan-

dard of income to expenses that

the applicant must document

(such as “income must equal four

times monthly fixed expenses when taking

into account anticipat-

ed housing costs”) and

may also require the appli-

cant to have certain liquid funds.

The admissions pro-

cess usually involves

submitting requested finan-

cial information