Pushing Co-ops to Explain Why You Can’t Buy

Hundreds of thousands of New Yorkers live in the rough equivalent of private clubs — co-op apartment houses with rules that govern everything from admission to elevator-landing décor. In certain circles, the co-op-application-process horror story is as much a dinner-party cliché as the renovation-nightmare saga, the nursery-school-rejection narrative and indignation over excess packaging of food from Fresh Direct.

Now nearly two-thirds of the members of the City Council are co-sponsoring a measure to shed a little light on the shadowy process by which co-op boards decide which apartment buyers to accept and which to reject. To the uninitiated, the council members’ aim may seem modest. What they want is for co-op boards to be required to give their reasons for rejecting an applicant, and to do it in writing within five days of rejection.

But the proposal — in a bill that its prime sponsor, Hiram Monserrate, contends is taking too long to get a Council hearing — is stirring up opposition from groups like the Real Estate Board of New York and the Council of New York Cooperatives and Condominiums, which in recent days began sending out an “action alert” urging co-op boards to contact council members and, if necessary, talk them out of backing the bill.

The bill’s supporters, including civil rights groups and the Black, Latino and Asian Caucus of the Council, say it would help deter discrimination based on race and other criteria in violation of fair housing laws. Making co-op boards reveal their reasons would put boards on their best behavior, they say, and give rejected applicants a basis for an informed judgment on whether they had received fair treatment.

“Everyone knows that secrecy hinders severely the enforcement of fair housing laws in the co-op context,” said Craig Gurian, a lawyer specializing in civil rights who helped draft the bill. “We can’t pretend that we’re a progressive city and then say we believe in vigorous enforcement except if it’s in our own backyard.”

The bill’s opponents, who include Council Speaker Christine C. Quinn, say federal, state and city laws already prohibit discrimination and offer redress. They say the bill, the Fair and Prompt Co-op Disclosure Law, would let loose a flood of lawsuits, delay co-op sales, discourage residents from serving on co-op boards for fear of liability and impose an administrative burden, especially on smaller co-ops.

“The only one who is going to come out feeling good is the lawyers,” said Marc Luxemburg, president of the co-op and condominium council, which, with the real estate board, recently issued a guide on how to do co-op admissions fairly in response to the threat of legislation. “Anytime you try to give a reason, you’re going to get sued. You say the guy was obnoxious at the meeting, he comes in and says ‘I’m going to sue you.’ Every time you turn somebody down, you’ve got a lawsuit on your hands.”

Some council members say that they agree in principle with the idea of requiring boards to give reasons, but that Mr. Monserrate’s bill is not the best way to make it happen.

“While I appreciate the spirit of what it seeks to do, I’m not convinced that it’s actually going to increase the rights of buyers,” said Councilman Daniel R. Garodnick of Manhattan.

Currently, co-ops — apartment houses whose residents purchase shares in the cooperative corporations that own the buildings — are free to decide who can move into their buildings and are not required to give reasons. Co-op groups say most rejections are based on applicants’ finances. Like any homeowner or landlord, boards cannot legally discriminate on the basis of race, religion, family status and 11 other protected categories; people who suspect that they have been discriminated against can complain to the city’s Commission on Human Rights.

“Look, a lot of these things are quite delicate,” said Richard Siegler, a lawyer who represents co-op boards and condos. “Does somebody have the financial wherewithal to do it? Maybe someone has been turned down because he is a cheater at the golf club. This is something that is not discrimination, and it’s just very difficult to put in formal language or even in every case to give a reason. It has been this way for a long time.”

Mr. Monserrate, of Queens, said he was moved to introduce a version of the bill in 2004 after real estate agents in Manhattan and Queens told him they suspected a pattern of co-op board rejections involving applicants from minority groups. Mr. Gurian also suggested that legislation be drafted. The bill received a committee hearing in September 2005 but went no further in that session, so Mr. Monserrate introduced it again last year.

Mr. Gurian, a former legal director and chief counsel at the city’s Commission on Human Rights who now operates a largely one-man organization he calls the Anti-Discrimination Center of Metro New York, said he had found from his own experience as a lawyer that the absence of stated reasons given for rejecting co-op applicants made it hard to assess whether a client suspecting discrimination had a valid claim.

Under the bill, a co-op board would have to describe its reasons in detail and reveal the source of any negative information it had used. It would also have to say how many applications it received and rejected in the previous three years. If it failed to turn over the information, or do it on time, it could be fined thousands of dollars.

In February, the Black, Latino and Asian Caucus wrote to Speaker Quinn urging her to work with other Council members to make the bill law in early 2007.

On Thursday, Mr. Monserrate said: “The bottom line is at this point the bill has been there 15 to 16 months. It was introduced in the prior session and heard. We should have had a hearing by now and should have voted it out.”

Sandra Mullin, the Council speaker’s communications director, said the Housing and Buildings Committee, which would handle the bill, has had a “full plate” in recent months. But she also said, “While it’s certainly important to root out any discrimination in the condo and co-op process, this bill does not effectively meet that goal and may have unintended consequences.”

The Sizzling Luxury Market

The Richest Houses

Tom Wolfe made a legend out of the Upper East Side, in New York, with his book "The Bonfire of the Vanities." He portrayed an extremely select neighborhood, with big apartments, even bigger houses and people whose average income was no less than $500,000 a year.

In Wolfe’s words, the Upper East Side was the land of the "Masters of the Universe."

In fact, the Upper East Side does have the reputation of being the most expensive neighborhood in the United States. This two-square mile neighborhood, that runs from 59th to 96th streets between Central Park and the East River, has the highest concentration of the envied townhouses.

Those are the really expensive freestanding two-three story buildings where you can often see people loitering by the main door hoping that Woody Allen or Paul Newman will show up.

The cost of these houses ranges from $700,000 to $18 million. That was the price that Woody Allen paid for his Georgian townhouse on 92nd street. However, the Upper East Side is not only for the famous. They are wealthy, but not necessarily famous.

According to the census, the area contains 18 percent of all lawyers in the city, 21 percent of all management analysts and 18 percent of all public relations and advertising managers.

These people have the highest salaries in the city. The census shows that the area bounded by 63rd street, Fifth Avenue, 67th street and Madison has an average income of $730,000 for its home owning households. For New York City as a whole, it is $65,000. In other words, those who own a house or an apartment in the Upper East Side make ten times more money than those who own a house or an apartment anywhere else in the city.

No one in the neighborhood was reported to be living in poverty.

Even though only 30 percent of the households in New York are actual owners (in the United States, it is 64 percent), buying a townhouse can be easier than renting an apartment.

There is no approval process and there are also more lowdown payment loans that there used to be, and new mortgage products that allow more people to buy their home. Because of that and because of the strong economy of the last years, there are more homeowners in the United States than ever before.

That is what a Harvard University study concludes. The same report also warns that high home prices risk to threaten the market.

Even after buying the house, the bills pile up. The living costs of a townhouse are endless. Its owner may pay more than $100,000 every year in maintenance cost and utilities.

Taxes are the first point. They depend on the size of the house and on the location, says Jed Garfield, from Leslie Garfield & Co. Real Estate (one of the advisors of the Real Estate Board of New York). For a 10,000 square foot house located in 60th street between 5th Avenue and Madison Avenue (the most expensive area), the tax can go up to $75,000. That is the most expensive case. The cheapest one would be around $6,500.

The price of water and electricity may also be very high. Water’s expenses represent about $2,000 a year, while the electricity can be around $300 a month.

This changes in summer, says Fred Williams, from Sothebys International Real Estate. Most of these houses have air conditioning and its use raises the electricity cost up to $1,000 in the summer months.

The problem with these big houses can be the maintenance.

Most of them were built before the war, and some of them need constant repairs. Williams estimates that maintenance of the roof and walls can cost around $3,000 a year, while a full renovation would cost between $2,000 and $3,000 for each square foot of property. The other option is to hire a visiting superintendent, who would take care of all the repairs and who would have a salary of $25,000 a year.

The last economical step to consider is the insurance. Again, it depends on the location and the size of the house, but Garfield says that it will rarely be cheaper than $3,000 a year.

In spite of all these costs, the demand for townhouses has increased in the last seven years. "There was a big change in the market in 1994," says Jed Garfield. "There were more people making money and more available houses." Consequently, more and more townhouses were sold.

The market is living now with the consequence of that boom. There are fewer houses available and the ones that are available are extremely expensive. Only one of the townhouses that are listed for sale has a price below $1,000,000. It is a house on Manhattan Avenue, with seven bedrooms, seven rooms and seven bathrooms.

Investing In Central Park Apartments 

Brokers and buyers say there's still gold in them there bricks, but warn they have to work off current cash-flows and not make deals off future returns. They are buying quality that is well leased and well located, and cash-flows that they can count on.

Buyers are adjusting cap rates, tweaking lease renewals and remain aware that lenders are looking harder at their laptops before tossing over the keys.

And while many of the mezzanine piece players packed up after the fall hiccup of '98, and are "yet to be found," the significant players that can put money in the deals have less competition for the product that they like, said Gordon Borvik, a senior director of Eastern Consolidated Properties.

Even though it is the same buyers that are cruising the offerings, this time, when they target a building, the fundamentals have to be there. "They need to see that the deal makes some economic sense today," he said.

Warned Gil Robinov, a senior vice president with CB Richard Ellis, "The people reaching and looking for upside, and buying for vacancies, are taking a risk."

While office buyers are generally staying away from makeovers - such as the upscaling of a vacant Class B to a Class A - developers might pick up something similar in the Lower Manhattan market to convert to luxury residences - one segment that appears to be booming as individuals clamor to pony up $4 million for a revamped industrial flat.

Residential apartment buildings are turning over in all the boroughs, but particularly in Manhattan. There, buyers are paying between 8.5 and 9 times the rent roll, said Debra Lee Charatan, president of her eponymous brokerage, which handles many apartment house investment deals.

"Money is still relatively cheap, even though we've seen an increase in interest rates," explained Charatan.

These residential building purchasers are not converting, but they are buying to hold, and are looking for rent upside where there is a long-term ownership that has not "worked" the buildings by making improvements to the properties.

"The owners of these target buildings haven't renovated or added value, and the buyers are looking for deals where they can add value," said Charatan. That means higher rents through the rehabilitation of empty apartments and general work on building systems, which bring rent increases in the future.

Richard Baxter, senior managing director of Insignia Capital Advisors, says because the office leasing market is still rising while the selling prices have begun to stabilize, there is still upside for purchasers.

"They are buying at a rate of return, but they can count on office rents to increase, so when they roll over there is upside," he explained.

While he is seeing cap rates from 7.5 to 9 percent, Baxter said the ultimate cap rate will depend on when the leases roll over. If there is a shorter time until the upside, the cap rate is less, but if it is a long time until the leases roll over, then there is a higher cap rate.

Robert Knakal, a partner with Massey Knakal Realty Services, which now services most of Manhattan, says the market is so hot, he's stopped advising buyers and is representing only sellers.

"I won't take on an assignment to represent a buyer, and if they ask me if I have any good deals, I say 'No.' In retrospect, I might be wrong," he considered, but added, "It's still hard to justify the prices."

But the firm has many clients that are selling. "They are taking advantage of the market and they are able to achieve their prices," Knakal said.

Half his clients think the market has only a year left on the upside, but the other 50 percent believe the market will continue to increase in value for the next seven to 10 years.

Because of the Internet and E-commerce, the upsiders believe the real estate and capital markets could be in an up cycle for an unprecedented period, much longer than the typical seven- to 10-year cycles of the past century.

"The half that are happy to sell, we're happy to work with," Knakal says. "Fortunately, there are still buyers."

Many recent sellers are covering their sometimes enormous gains by rolling them through Section 1031 tax free exchanges.

"When you do a 1031, you can afford to pay a little more, and you can't afford to then sell it," explained Charatan. "You want to buy up, and you are not going to be selling the building in the near future, because if you do, and sell well, you are going to get whammyed with a double tax hit."

That's because the investor turned seller brings along "the old basis and the new profit."

Such 1031 buyers include W&M Properties, which has now cashed-out of several long-time deals, including the Class A office building at 1185 Sixth Avenue, and is buying other quality properties around selected areas of the U.S. They are working hard to identify assets so they can avoid the terrible tax bite.

"I'm not overly optimistic about the future of the economy or real estate," explained Anthony E. Malkin, president of W&M Properties. Because they recognize they are paying top dollar in today's market, and must buy well kept assets, it is important for them to make sharp purchases.

The W&M target today is a quality, center core structure which can accommodate multi-tenancies at sites that are easily accessible from multiple transportation options.

"I'm obsessed with asset quality," Malkin said. "If you set aside money from a [tax deferred] swap to improve the acquisition, that money is taxable. So we need to buy properties that don't need improvements."

And while they have begun to obsess on asset quality for their swaps, Malkin said they have "always obsessed on credit quality and revenue sources" for their tenants.

That's one reason with "tremendous exposure to New York," he's not looking in Lower Manhattan, which he still considers a single industry market. "And that which is not Financial, doesn't have cash-flow to pay rent without capital raising," Malkin continued. "It's good for New York, but not for us."

Those buyers counting on turning over commercial leases and raising rents, however, may have reached the end of the line. There is a natural resistance for small tenants and large at different price points, where they recognize they have to go somewhere else.

"We've reached saturation with the leasing prices, unquestionably," says David Brimlow, president of Brimlow Realty, who works both the leasing and sales sides. He has seen the small tenants hit the $30 a foot wall and bounce off to somewhere else. That comes directly out of their pocket, and they simply can't afford the hit.

The buildings that have gone from $20 a foot rents to $30 a foot are starting to see the fall-off from the $40 buildings.

"The small tenants are being pushed out and are suffering the most," agreed Gil Robinov, of CB Richard Ellis. "What they have to do is go into buildings of a lower grade or location, and to side street buildings."

But these properties are often Class C buildings, held by long-term family owners that aren't always willing to invest the money to upgrade for their suddenly more upscale tenants. "The investors won't buy them," Robinov added of these buildings.

As the market continues, buyers, sellers, investors and lenders are keeping a steady eye on each deal. The pace has slowed, and investors are taking more time with their due diligence. They don't want to be rushed into a deal that will make them sorry later.

"There's always resistance on the buyer's part, but ultimately, there is always someone willing to pay the high price, and you want to find that one person," said Knakal, keeping his fingers crossed.

Borvik, meanwhile, may have found one of those people outside of the locals and stock market driven companies, who is able to shake out the booty and have it land on a premium purchase. He's currently representing a Saudi sheik who is excited about entering the New York market for the very first time.

"He doesn't want a triple net leased trophy property. He prefers excellent location, and will hire a management firm," Borvik said.

So far, despite a few Class A office sellers unhappy about reaching lofty price goals and sticking with their assets, most properties are still selling, and every scrap of land and huddled mass of tenements is finding a buyer.

Knakal said his firm has sold 16 development sites in the past 12 months, and is even expanding its services to Harlem, which he feels is not being properly serviced by the real estate community.

"What's interesting is that it's a good time to buy, and a good time to sell everything," said Charatan.

Concurred Baxter, "I don't see any reason to walt, nor do I see any reason not to buy. If the economics of the transaction are sound, and you have the resources to invest, there is no reason to sit on the sidelines and wait."

Despite the current bullish environment, one broker who asked to remain anonymous, observed the limited land mass that comprises Manhattan island and its similarities to other world markets.

The broker said, "There will be a point in time when Manhattan will become like Japan or Hong Kong, where there is no land left, and we will reach that point, and it will be interesting." Stay tuned.

Manhattan co-ops set price records for third straight quarter - New York City

New price records were set for the third consecutive quarter by Manhattan's co-op market between April and June while sales volume rose, the Real Estate Board of New York (REBNY) said in its Cooperative Sales Report covering that period.

The median sales price overall reached $395,000 during the quarter, topping both the previous quarter's median price of $350,000 and the median price of $325,000 reported a year ago, according to REBNY Executive Vice President Deborah B. Beck.

Price gains were largest in the post-war market, where the median price per room broke all-time records for both the East and West Sides. The median price per room for East Side post-war co-ops reached $95,000, a 19-percent jump over the previous record - set during the prior quarter - and the highest number attained since REBNY began tracking the market in 1992.

On the West Side, the median price per room for post-war units also climbed to new heights, up 13 percent from the first quarter to $90,143.

"Rising prices continue to sweep the co-op market, a trend which is all the more striking given the slowing of the national economy," Beck said.

Sales volume soared along with prices. REBNY received data on 716 transfers during the quarter; 460 transfers were reported during the previous quarter. Moreover, Beck pointed out, "Only in the third quarter of 1996, when 720 transfers were reported, were more sales passed on to us in a three-month period."

Price increases swept every size category, according to Hall Willkie, executive vice president of Brown Harris Stevens and Chairperson of REBNY's Residential Research Committee. Willkie noted that sales of two-bedroom units registered this category's highest-ever median price of $117,841 per room during the second quarter. Studio and one-bedroom co-ops also fared well, posting a 10 percent hike over last year's second quarter, up from $60,000 to $66,000 per room. Three-bedroom units fetched $176,786 per room, six percent more than the figure tabulated one year ago.

In the pre-war market, prices rose slightly on the East Side from the median price per room of $120,000 recorded last quarter to $122,000. Although median prices dropped slightly from the prior three-month period on the West Side, the current per-room price of $98,571 was the second highest such figure in the REBNY survey's history.

Median transaction time - the period between the date of listing and the date of closing - increased during the quarter, up from 4.8 months a year ago to 5.3 months. Beck suggested that this trend reflects the strength of the seller's market. "Given the extremely favorable market conditions, sellers may simply be more confident, and therefore more willing to hold out for their asking prices," she said.

Transaction time rose for transfers of prewar units on both the East Side and the West Side. On the East Side, median transaction time edged up slightly from the 5.8 months recorded a year ago to 6 months, while West Side co-op transfers took 13 percent longer to close. For post-war apartments, transaction time was unchanged on the East Side at 5.2 months, and up from 3.8 months to 4.7 months on the West Side.

The Downtown market was also strong during the quarter. Reported sales jumped from 87 a year ago to 118; median price per room climbed from $59,143 to $76,345 during the same period; and the median sales price rose from last year's figure of $185,750 to $254,750.

The geographical distribution of sales volume shifted only marginally. The East Side accounted for 58 percent of the sales volume last year, and dropped slightly over the year to 54 percent. Downtown's portion climbed from 13 percent to 16 percent during the same period, while the percentage of total sales volume from the West Side remained unchanged at 29 percent.

The Real Estate Board Cooperative Sales Report is the only fully documented survey of the city's co-op housing market, a sector whose transactions are not publicly recorded. The report pools and analyzes confidential sales and data supplied monthly by more than 20 REBNY member firms. The complete findings, distributed exclusively to those firms, help brokers assist their clients in setting realistic offering or sales prices.

If You're Thinking of Living On/Fifth Avenue; Culture, Convenience and Central Park