September2017

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).

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

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

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

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

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

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