Cooperatives

Welcome to another year at the Real Estate Think Tank. I enjoy writing about real estate and am thankful that I have this forum to share my thoughts on the subject. With that said, let’s get into Cooperatives.

A Cooperative, also known as a Real Estate Cooperative or Co-op, is a form of real estate ownership in which owners purchase shares in a corporate entity that owns a building. This entity is usually called an Apartment Corporation. Despite the name “Apartment Corporation,” a co-op can be both residential and commercial. Although residential co-ops, known as Housing Cooperatives, are more prevalent, commercial co-ops are not uncommon. 

In exchange for the purchase of shares in a co-op, each owner is given both an ownership interest in the Apartment Corporation, usually in the form of shares of stock, and a proprietary lease. The proprietary lease entitles each owner to occupy a certain portion of the building exclusively and confers most, if not all, of the rights of property ownership over the designated space, called an apartment.

Since the Apartment Corporation owns the building and not the owners, owners in a co-op are referred to as shareholders. Furthermore, shareholders do not technically own real estate or real property, but instead own shares, which are considered personal property. This distinction has certain legal ramifications that are noteworthy, but beyond the scope of this post. The ownership characteristics of a co-op, however, are also very interesting.

Condominiums

Condominium ownership is a form of real estate ownership that has unique characteristics. For those not well-versed in condominiums, here is a quick overview of their definition and purpose:

A condominium or condo allows a property, typically a multistory building, but not infrequently a large parcel of land, to be split into sections and owned by multiple owners. The unique aspect of condominium ownership is that it entitles an owner to ownership of a specific portion of a property and the space or “air” bounded by that portion. For example, through condominium ownership, one can convey the first floor of a three story building to one party, the second to another party and the third to yet another party. Interestingly, the units are frequently not required to be the same size, so one could create a two-unit condominium out of a three story building and convey the first floor to one party and the second and third floors to another party. A condominium is formed by recording a document, typically called a declaration in most jurisdictions, but also referred to by other names, such as a master deed, against the property. This document informs the public that the property is now a condominium, outlines the sizes of the units and common areas and provides other relevant information about the condominium.  Once a condominium is formed the property can no longer be sold as an undivided whole, unless the condominium regime is abandoned. The condominium regime will remain in effect until either the unit owners decide to abandon the condominium, the government dissolves the condominium, the property somehow loses the condominium status through the violation of local laws or the government condemns the property.

My Take On Tax Liens

Tax liens have always been of interest to me. As a teen, I would remember the infomercials advertising tax lien investments as the way to own tons of property for pennies on the dollar. Since my father was a contractor and property manager, I was introduced to real estate ownership at a young age and read my first book on tax liens in my late teens. At the time, I could not figure out why more people were not investing in tax liens. As an adult, real estate professional and attorney, I can now appreciate the risks/reward trade off that comes with this asset class. So, here is my take on tax liens.

Tax liens are a low cost way to obtain exposure to the real estate market. Although the supply and demand of tax liens is very much influenced by local events, tax liens will be around as long as there are municipalities in need of money and property owners who do not pay their taxes. Although cheap and available, investments in tax liens propose some unique risks and benefits.

One of the unique benefits of tax liens is that they initially offer passive income at high rates of return. Most tax liens are purchased via auction and most auctions employ one of two bidding methods--bidding up price or bidding down interest. Whether the price of the lien is bid up or the interest rate is bid down, the amount of back taxes owed does not increase and statutory penalty rates of interest typically offer an attractive return to purchasers that do not overbid. Moreover, upon the purchase of a tax lien, the municipality continues to serve as the collection agency for a statutorily mandated length of time, in most cases. This allows investors to collect on the purchased lien with minimal effort, for a period of time.

Taxes, Taxes, Taxes

This may be stating the obvious, but the tax consequences of a real estate transaction are one of the most important aspects of the deal. Although most generic measures of property value, such as cap rate and NOI seek to exclude taxation in order to generate values that can be comparable across investors, an individualized tax assessment of any real estate acquisition is essential to determining its true rate of return of and its opportunity costs.

Although I am not a tax professional, tax expert or tax adviser, I would like to briefly discuss various real estate investment tax considerations. I will attempt to address a few of the more popular tax considerations at the property, entity and security level: