History of Coops in New York City

It’s important to understand the difference between coops and condos before addressing which property type is best for you to purchase. This is a short history of the two property types in order to help you understand the differences.
The population in New York City is denser than other parts of the US, thus it makes economical sense to develop large multiple family properties to house this population. Coupled with the fact that land is more expensive than in most other parts of the country it makes sense to build vertically, creating a housing market that is unlike most of the country.
Historically, the majority of vertical empires took the form of rental buildings that were developed and owned by the landlord for the purpose of renting the apartments to people for a profit. The majority of today's coops and condos are a product of the demand for home ownership in New York City combined with forces of rent regulation laws.
Over time, there grew an appetite for home ownership. At the same time rent stabilization did not keep up with inflation, and it did not take long before the cost of each apartment became more than the regulated rents could cover. Many landlords were in a money losing situation, forced to burden a negative monthly cash flow. So how would a landlord get out of such a situation? The answer was to coop or to condo. During the 1980's, many landlords with negative cash flows, became sponsors and converted their buildings from rental buildings to coops or condos and sold their interest to individuals one apartment at a time.
The conversion was a fairly simple process. The landlord, or sponsor, gave each tenant a choice of buying their apartment through a non-eviction offering at an insider’s price generally less than what was offered to outsiders who were not protected by the non-eviction offering plan, or each insider would be guaranteed the right to continue renting under the terms already established under the laws of rent control and stabilization. The terms of each conversion or offering are detailed in a large book called an offering plan or prospectus.
The big question then becomes: Why did most sponsors choose to convert to coop and very few to condo? There are five basic reasons. A major reason was that condominium ownership was not allowed until 1964 in the State of New York. Another important reason for more coops was the familiarity with the cooperative conversion process. Other factors include a better economical position for the sponsor, marketability, and the importance of "exclusivity" was a premium only offered by the cooperative form of ownership.
Financial gain was an undeniable motivation for a sponsor to coop their buildings. Until very recently, only a cooperative could have an underlying mortgage, and many sponsors had existing mortgages secured by their rental buildings that needed to be dealt with at the time of the conversion. So, under the terms of many conversions, the sponsor’s existing mortgage became an underlying mortgage to be paid by the newly formed not for profit cooperative corporation as part of each shareholder’s (or apartment owner) monthly maintenance charges.
To further the financial position of some sponsors, upon converting, they were able to obtain an entirely new mortgage for a larger amount, or a wrap around mortgage. These mortgages were secured by the sponsor’s newly created value of being able to sell the apartments, and pass the mortgage payments onto the shareholders. This allowed some sponsors to tap their newly created value or equity without having to wait for each apartment to be sold.
Because the sponsor was able to get money from the underlying mortgage, freeing up capital immediately, the sponsor could then offer the cooperative units at a lower price to sell them quicker. For example, let's say a sponsor could sell each of their 100 units as condos for $100,000 each; the result would be gross revenue of $10,000,000 when all the condos are sold. Or, the sponsor could choose to sell each as a coop for $85,000 and hold an underlying mortgage of $3,000,000, which was realized immediately and to be paid by the cooperative corporation over time. The net result would be $11,500,000 in gross sales with almost a third put immediately into the sellers' pockets.
The more conservative sponsors were prudent about the size of mortgage passed onto cooperatives, others mortgaged without regard to the health of the cooperative corporation and apartment owners down the road. The market timing of some sponsors was better than others too. With the real estate market decline after 1987, some sponsors were left holding a majority of units that they could no longer afford to keep. As a result some coops were not as financially fit as others. An attempt to better inform prospective buyers of the activities of sponsors before buying into a cooperative, the State of New York enacted laws designed to protect the homebuyer. The law, the Martin Act, is better known as the AG Disclosure (the Attorney General Disclosure of the Sponsor). The Martin Act made it mandatory for sponsors owning ten percent or more of apartments in any coop or condo project to make a timely amendment to the offering plan that is filed with the New York Attorney General’s office.
This disclosure makes the Sponsor’s financial information relating the coop available as public information. Useful information contained in each filing is disclosure of the sponsor's unsold shares, the rent received from tenants in those apartments and the amount of maintenance the coop receives from the sponsor for these apartments, if the sponsor is using the unsold shares as collateral for a loan, a list of other coops or condos the sponsor has an interest, and if the sponsor is current on obligations to the coop or condo as well as to other parties.
Another main reason for converting to coops rather than condo was an issue of exclusivity and control. Owners and buyers were concerned about who might become their neighbor, and this type of control was valuable in the market. Condominiums did not and currently do not offer this homebuyer approval process. In today's market, people find value with in ownership with fewer restrictions, while others find value in exclusivity.