POSTWAR_CO-OP'S
Theoretically building an apartment house on а Co- operative basis, in which each tenant owns his own apartment and shares in the cost and maintenance of the building, seems an ideal arrangement. In America a great deal of this has been down, and in Hong Kong at the present time a few enter- prises have been promoted on this basis. The following relates some of the difficulties encountered in this type of enterprise.
The cooperative apartment, fair-haired real estate child of the Twenties and white elephant of the Thirties, is again riding the top-of-the-market in Manhattan residential building. Since the war, private money (except for Metropolitan's gigantic investment in Stuyvesant Town) has shown little interest in mediumpriced rental housing. The luxury apart- ment house is its current lodestone and of the eleven completed or under construction since the war, eight have turned out to be co-ops,
The reasons are not hard to find. In a period of dwelling shortage and rising prices, the co-op (at least in the large cities) looks like the answer to a builder's prayer. It eliminates the necessity of high rents, based on inflated costs and continued over many years, come good times or bad. It encourages high quality construction when most builders are cutting every possible corner. To the tenant buyer it often represents the only method of securing desirable living quar- ters in a market short of rental apartments. The decision to turn co-op was made by many New York builders under the late OPA, when official rent estimates could not be squared with rising costs. Since the demise of price control they have stuck to the idea as a means side-stepping embarrassingly stiff rents.
The
The co-op first came into fashion after World War I during a period of inflation and shortage similar to the present. The early ones were well-financed. but the trend soon developed gold rush proportions. Inflated building on inflated land was topped off by dubious mortgage financing. luxury co-op became a speculative operation, not only for builders, but for buyers who saw a chance for quick turnover and thus quick profits on a relatively small investment, like buying stock on margin. When last heard of before the crash one such single apartment was selling for $450,000 with a whopping yearly maintenance charge of $22,000.
Even before the market collapsed, the co-ops were getting into financial difficulties because of tenant default on opcrat- ing expenses, taxes and mortgage charges. The remaining tenants then had to assume the defaulted load-a process which snow-balled into foreclosure. By 1934, over 75 per cent of the co-ops in both Chicago and New York had gone under.
Not until the middle of World War II did they show signs of reviving. "Re-co-oping" of the old apartments began as a means of wriggling out from under wartime rent ceilings. It gained momentum after VJ day as maintenance costs climbed while ceilings remained fixed. Most of the sales were made at less than the original cost of the building and at much less than their reproduction value. The scheme appealed to tenants because of the housing shortage and the fear of inflated rents once controls were dropped. However, in some cases it was a matter of quick and easy blackmail. One apartment house on Chicago's Gold Coast was bought by a promoter for $280,000, sold back to its desperate tenants for a neat $430,000. There was enough of this type of operation and of newspaper publicity on it to give the phrase "co-op apartment" a uinny ring to the ear of the average citizen,
However, most of the current reconversion ventures as well as the new luxury cooperatives are not fly-by-night ventures. They stand on a much firmer financial base than the Klondike co-ops of the Twenties. In addition, tax revisions and lease changes have provided new attractions for tenant-buyers. Under new income tax regulations, co-op owners are allowed to deduct their share of the building's mortgage interest and real estate taxes from gross income. Since these charges normally amount to between one-third and one-half of the yearly maintenance fee, this represents а real saving for highly surtaxed tenant-owners. Under several new plans, the builder has also undertaken to protect owners from increased maintenance charges caused by inflation or tenant default. This is accomplished with a guaranteed trust fund set aside for emergency purposes. Co-op lease changes are equally important. During the Twenties, most owners were tied to their building with 99-year, no escape- clause leases. The only out was to sell. In the depression when no takers could be found, the millstone quality of a co-op could hardly be overstated. To-day, most co-ops are set up with relatively short-term leases and frequent escape clause renewals. If a tenant defaults on his payments and cannot find a buyer, he turns his stock over to the tenant organization. He loses his investment, but not his shirt.
The
Whether these co-ops will follow the same cycle of boom and bust that their forerunners in the Twenties went through is still anybody's guess. Admittedly they are being built at inflationary cost. With the luxury builders still enjoying a seller's market, there is as yet no speculative turnover. once-burned, twice-shy philosophy of both banks and builders should effectively brake any such tendencies. At present the success of the co-ops is being measured in terms of the housing shortage, and as long as it lasts vacancy risks are small. If and when the shortage eases, the co-ops-like any current building venture-will stand or fall on the intrinsic merits of their financing plans plus the value which they offer to demanding tenants.
The conventional co-op has always been a speculative venture for the builder. He takes his profit from equity
down payments made by the tenants, turns the mortgage over to a bank and is quickly out of the financial picture. This apartment house at 15 E. 91st St. is unusual because it is a co-op built as an investment property-traditionally a contradiction in terms. Robert W. Dowling, President of City Investing Co. is responsible for this new twist which is typical of his unorthodox methods of operating. Instead of selling out the entire mortgage to another outfit, he has taken his profit as a builder and in addition retained half of the $2,500,000 mortgage, thus gaining an excellent property for his investment company. He also intends this as a guarantee of good faith to tenant-buyers. With Dowling backing his own speculation it could hardly be less than a sound pro- position.
City Investing Co.'s subsidiary will retain half the mortgage until July, 1949. when the indebtedness will be refinanced and the mortgage extended to October, 1952. Until 1957 the Dowling organization will retain an interest of at least $500,000, provided that the building remains a co-op and the mortgage is not paid off In addition the company offers a five-year guarantee to absorb any rise in maintenance costs beyond 10 per cent and a ten-year guarantee of responsibility for defaulting owners.
Another aspect of the Dowling finance scheme is the low down payment required of tenants. Instead of the usual 50 per cent equity. 50 per cent mortgage, he asks for only an 11 per cent equity, 89 per cent of the sales price going into mortgage. Competitors argue that the small equity payment makes the building's carrying charges abnormally high, a dangerous situation in case of depression. For instance, a conventional co-op built by Percy and Harold Uris at 880 Fifth Ave. charge $15,200 equity for a four-room apartment with carrying charges of $160 per month. Dowling's four-room apartment, requires only $3,450 down payment, but has a larger carrying charge of $284 per month. In defense of his plan, Dowling explains that low equity makes purchase easier during inflation and that deduction of high maintenance charges from income tax gives his tenant an actual money advantage. By the end of ten years he will have as much equity in the apartment as did the Uris purchaser with his original down payment.
Despite both the housing shortage and Dowling's favorable tenant policy, twelve of his 41 apartments remained unsold last May. Managing agents of the co-op explain this as a result of their extremely selective tenant policy plus the fact that they started renting out of season. Competitors suggest that tenants shy away from the overly-elaborate financing scheme. At any rate, other Manhattan luxury co-ops were selling fast this spring under orthodox financing.
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