199-east-lake-shore-drive-chicago

This is the first in a three-part series about cooperative apartments.

In searching for an apartment, you might find some described as “condos” or “condominiums” and others as “coops” or “cooperatives.”  While it is true that many (but not all) coop apartments are located in classically designed pre-War buildings, the term “coop” does not describe the style of the building but rather the ownership terms of the apartments.

With a condominium (or condo), you are buying a physical apartment (as defined by a legal description) as well as a share in the common elements of the building. A condo association, led by a board of directors, manages the building’s exterior and common elements, including landscaping, while the unit owners maintain the interiors of their individual apartments.

When you purchase in a cooperative (or coop), you are technically not buying real estate. Instead, you are purchasing shares of stock in a legal entity (usually a corporation) that owns real estate. Your shares of stock entitle you to occupy a specific apartment, as defined in the Proprietary Lease you receive with your stock certificate. So in the end, you have the same thing (a place to live), but how you achieve this is a bit different.

History of Coop Apartments

Some of the finest pre-War and Art Deco buildings in Chicago’s Gold Coast, Lincoln Park, Lakeview and Hyde Park neighborhoods are coops. My grandfather, Louis C. Sudler Sr., pioneered the conversion of many architecturally significant buildings from rental apartments to coops, mostly in the 1940s. Coops predated condominiums as the earliest form of apartment ownership in Chicago.

In the beginning, coops were popular among Chicago’s leading families. Each building had admission requirements, much like private country clubs. Their criteria included financial capacity and social stature. Because they were corporations, coops were exempt from fair housing rules and were able to discriminate. Bank financing was not available; purchasers paid for their shares of stock in cash.

In the late 1980s, banks started getting more creative, offering opportunities for coop purchasers to discretely obtain financing. However, as coop financing was not allowed, shares of stock could not be openly pledged as collateral. Thus, the earliest coop loans were unsecured lines of credit. I recall that The Northern Trust, which pioneered coop financing, took physical possession of stock certificates. As shareholders could not sell their apartments without first retrieving these certificates, they needed to remain on good terms with the bank.

By the time I started selling real estate in 1994, some coop buildings had started to openly permit shareholders to pledge their stock as collateral and obtain financing. This shift in policy made sense, as home mortgage interest deductions were (and still are) a valuable write-off against income taxes. As coops began to allow financing, it was with carefully designed rules that included:

– Limits on the percentage of the purchase price (or appraised value for existing coop owners) that could be financed.

– The requirement that the lender execute a “recognition agreement” acknowledging the coops rights, especially with respect to approving future sales.

Today, there are only a few coops left in Chicago that require purchasers to pay 100% cash. The rest allow purchasers to obtain loans for anywhere from 55% to 90% of their purchase price depending on the building. Another major shift is that coops can no longer reject a potential buyer for reasons other than their ability to afford the home. Consequently, the make-up of coop residents is more diverse than in the past.

Maintenance Fees and Real Estate Taxes

Buyers new to coops are often surprised by the fact that the monthly fees for coops are higher than for condos. However, this is usually because coop fees include two additional areas of expense that condo owners pay separately.

In both condos and coops, fees are collected from homeowners/shareholders to pay for building maintenance and insurance. In both cases, residents carry separate insurance for the interior components of their apartments including everything from the walls in.

But two other expenses are not handled the same way:

Real Estate Taxes. Both condo and coop owners pay real estate taxes. But how they receive and pay their bills varies.

– In condo buildings, each homeowner receives a tax bill directly from Cook County.

– In coops, shareholders do not receive individual real estate tax bills. Instead, Cook County issues a single tax bill to the corporation. Shareholders pay a proportional share of the total bill based on the number of shares of stock they own. In most coop buildings, real taxes are included in the monthly assessments, similar to the way some condo or single-family homeowners may pay their real estate taxes each month into an escrow along with their mortgage payments.

Real estate taxes paid for condos and coops are tax deductible and qualify for both homeowner’s and senior citizen exemptions.

Capital Projects. In all buildings (condos and coops), capital improvements are needed from time to time. These projects vary depending on the age and condition of the building and may include the need for tuck pointing, a new roof, new elevators, upgrades to the building’s electrical service, replacement plumbing risers, a new boiler, or new windows. While most buildings are diligent about maintaining a reserve fund for capital projects, there can be a gap between reserve fund balances and capital requirements, resulting in the need to collect additional funds from homeowners.

The way that condos and coops customarily fund capital improvements can be another distinguishing feature.

– Condo buildings typically utilize “special assessments” to pay for capital improvements. They can be structured as a one-time payment or as a series of payments over months or even years.

– Coops, on the other hand, can pledge the building as collateral and obtain a mortgage (or line of credit) that can be used to pay for capital improvements over a longer period of time. In such a case, shareholders pay their pro rata share of the building’s monthly mortgage payment along with their regular maintenance fees. Obtaining a loan to pay for capital projects can be viewed as preferential over a special assessment, as the cost of the improvement is less burdensome. Any interest shareholders pay on the coop’s mortgage is tax deductible, just like interest on their home loans.

Board Approval / Admission Requirements

In condo buildings, homeowners have virtually no say in who moves into the building. Some condo associations (mostly older ones) have a provision in their by-laws that gives them the “right of first refusal.” This provision was designed to provide a back-stop to prevent someone from dumping their apartment at an excessively low price, injuring values in the building. However, the hurdles involved in exercising a right of first refusal (including the requirement that the association buy the unit from the seller at their price) make it nearly impossible.

Still, under the right of first refusal provision, condo associations may request copies of sales contracts, applications and/or credit reports.  At Chicago’s prestigious Park Tower, for example, the condo association also requires letters of reference.  Buildings that have a right of first refusal do not qualify for FHA or VA financing.

Coops have a more involved application process. The main reason that coops still “approve” buyers in this day and age is to confirm the buyers’ ability to afford their homes, including association fees, real estate taxes and potential future capital improvements. If someone buys a coop and stops paying their monthly assessments, neighbors would be on the hook for more than just their maintenance fees. Consequently, coop purchasers are usually required to provide the following: an application, a detailed balance sheet, and several personal and professional letters of reference. Some coops also ask to see tax returns. After the coop board has received and reviewed the buyer’s application, an interview is scheduled, and then the buyer is officially approved.

In my fifteen years of selling apartments in nearly every coop building in Chicago’s North Side, I have had only one sale fall apart because the buyer was not approved. In that one instance, the buyer had virtually no monetary assets (their primary asset was an antique doll collection). In addition, only one of the purchasers was employed and that was as an independent contractor with 100% commission based income. I recall that it was a difficult decision for the coop board, but given that it was a small building constructed in the 1920s, the board wanted to be sure that everyone in the building had the capacity to cover their fair share of future expenses. This couple did not qualify.

Most coops discourage flipping or buying purely for investment. For that reason, rentals are rarely allowed except under extenuating circumstances, and then, only with board approval.

Financing

Condo associations do not get involved in how purchasers finance their apartment. That is between the lender and the buyer. As I noted earlier in this blog post, most coops do have restrictions in this area, primarily as it relates to the amount a coop purchaser can borrow as a percentage of their purchase price. Most coops now allow buyers to borrow around 75% of their purchase price, some more and some less. However, a few buildings including 209 E. Lake Shore Drive, 1500 N. Lake Shore Drive and 2430 N. Lakeview still require buyers to pay for their entire purchase in cash.

The good news is that the portfolio of loan products available to coop borrowers is relatively diverse and competitive with condo financing options.

Conclusion

In the last decade, buyers have shifted away from coops. In my experience, this was for several reasons:

– A large number of new condominium buildings came online with amenities like private outdoor space and deeded, onsite garage parking – perks that are not often available in pre-War buildings.

– The sky was the limit on what banks would lend condo owners, so many took advantage of this. Some people obtained highly leveraged loans, borrowing more than their purchase price.

– Many felt the coop application process invaded their privacy, and they wanted to avoid it altogether.

Ironically, as over-leveraged condo owners and investors in certain buildings have failed to meet their obligations resulting in a drop in home values building-wide, the benefits of buying in a coop are making a comeback. While the coop approval process, caps on financing, and restrictions against buying for investment do not guarantee financial immunity for shareholders, they are a good hedge.

The next part in this series will explore the state of Chicago’s coop market.


Print This Post Print This Post

Comments

  • Chicago48

    Sadley, Chicago doesn't have enough cooperatives that are affordable.

  • Chicago48

    Sadley, Chicago doesn't have enough cooperatives that are affordable.

  • Linda-joanne

    Informative info. Is there an allengiance of Chicago Co-ops?

  • piercepola

    Wow, this one is really looking one of incredible post about Chicago. And this post really unveils the exceptional information about Coop apartments in Chicago. I am really crazy about this post.

    Homeowners Association Management

  • Mary Steenson

    Thank you for this, Jennifer.  My husband and I bought our shares in a beautiful building on the lakefront in South Shore nearly 4 years ago.  There are several vacant units here, now (ageing population), and because of our financial structure, we need to appeal to people who understand the level of commitment required by this kind of home ownership. Your article clarifies this system.  May I have your permission to print your column?
    Mary Steenson

  • http://www.liveandplayinchicago.com Jennifer Ames

    Glad you found the column helpful, Mary. Yes, you are certainly welcome to print it for your own personal use. Best of luck!

  • http://profiles.google.com/neelix60555 Deb Sampson

    Did the other two parts get published?

  • http://www.liveandplayinchicago.com Jennifer Ames

    Unfortunately not. When the market quiets down a bit later this year, I'm hoping to put pen back to paper and get those and other posts up. If you have a specific co-op question you'd like to ask, feel free to do so here in the comments or at liveandplay@jenniferames.com. Thanks!

  • http://www.telavivapartments.net telavivvacationapartment

    hmmmm… this is the first time I've heard about 'coop apartments'.. So cool to give it a try. thanks for the post.

  • http://www.uprinting.com/door-hanger.html door hanger

    Honestly you broaden up my knowledge about these two, about condos and coop. This is also the firs time I've heard about coop apartments. I usually hear about condominiums because that is so popular here in my place.

  • http://telaviv-apartment.com/ telavivapartments

    I hope that I can experience this someday because I am sure that this is really nice..

  • alan

    I'm interested in more of this series.    The coop buildings in Chicago are fantastic from a location and architectural perspective.    I'm curious whether you believe they are a good short and long term investment.

  • Stephen

    I live in Seattle now, but grew up in Chicago, and this blog was one of the most helpful resources about finding out more about how Coops work.  I dream about moving back to Chicago one day and living in one of the beautiful lakefront pre-war buildings. I'm eagerly waiting the other two parts in this series.

  • Hansen Deanna

    Are you aware of any co-ops that converted to condominium? 
    Would there be any advantages to doing so?

  • Aaabookworm

    If you are still in the market, we have an affordable lake front coop for sale. Mies Van der Rohe architectural design. Fabulous view of Lake Michigan with lots of trees and parks in the area. One block from 13+ mile lakefront bike path. Close to University of Chicago. Excellent transport to downtown. Two BR/Two Bath. Contact me at 312-404-4153 if you would like to talk. Claire

  • Nisha

    If you own stock in a co-op, do you have to live in it yourself or can you rent it out to a 3rd party?

  • http://www.liveandplayinchicago.com Jennifer Ames

    Each building sets their own rules on rentals, but it’s generally not easy to lease out a co-op apartment. Some buildings only allow rentals in case of hardship. Some require a waiting period before rentals are allowed. Some don’t allow rentals at all. For those that do allow rentals, the tenants are often required to undergo the same rigorous application process as the owners, including letters of recommendation and board approval.

  • Chblinks

    Try London Towne

  • John

    Looking for a good co-op attorney do you know of any you would recommend

  • Fran

    Herbert H Fisher, Esq at 155 N Michigan, Suite 622, Chicago, 60601 Phone (312) 729-5083 He has a nationwide practice and is the foremost attorney for coops in the country. He has been a licensed practicing member of the bar since 1953 and comes highly recommended.

  • Tremayne Primm

    I realize this is an old posting, but I have been searching for co-ops in Chicago and would love some address to investigate.

  • Dee

    We’re thinking of buying a second home as a Pied a Terre in Chicago. Would we be wise to look at a coop since we can deduct the assessments?

  • http://www.liveandplayinchicago.com Jennifer Ames

    Hi Dee,

    Thanks for checking in! I believe the only portion of your assessment that is deductible is the real estate taxes and interest on the building’s mortgage. My advice would be to find the home that you like best.