Tuesday, April 1, 2008

Condominiums vs. Cooperatives

ABA's Probate & Property Magazine, March/April 2008
Keeping Current - Property

Condominiums vs. Cooperatives. Condominiums are an increasingly popular form of common interest homeownership in the United States today. Although cooperatives have older historical roots here, they are dominant today mainly in just one U.S. location— New York City. In The Condominium versus Cooperative Puzzle: An Empirical Analysis of Housing in New York City, 36 J. Legal. Stud. 275 (2007), Michael H. Schill, Ioan Voicu, and Jonathan Miller set out to understand why the cooperative form of home ownership has thrived in New York City for so long, despite the apparent economic advantages of the condominium form. The authors initially postulate that condominium units should be more valuable than cooperative units because they reduce unit owner risk by concentrating mortgage, maintenance, and property tax obligations on each individual unit owner, rather than requiring unit owners to share risk created by the blanket mortgage and other obligations affecting the entire cooperative property. In addition, the authors suggest that the ability of cooperative associations to screen prospective new unit owners for financial creditworthiness and to impose limitations on subletting, along with the prospect of unit owners’ increased responsibility for cooperative management, should reduce demand for cooperatives and thus make them less valuable than condominiums even though cooperatives provide some countervailing advantages. The focal point of the article is the authors’ application of a complex regression analysis to a data set of approximately 100,000 sales of cooperative and condominium units over an 18-year period (1984–2002) in New York City. The result, according to the authors, is that “the typical” condominium unit is worth about 8.8% more than the “typical” cooperative unit, although one market segment exhibited the opposite effect on value. In cooperatives that prohibit buyers from financing the purchase of units, the condominium premium disappears and turns into a 25.4% cooperative premium. If condominiums have greater market value, what accounts for the continued dominance of cooperatives in New York? One explanation is the greater potential of the cooperative form to allow unit owners to engage in forms of social exclusion. Two other explanations, particularly relevant for buildings occupied by less affluent residents, are that (1) relatively high transaction costs associated with converting from the cooperative form to the condominium form can consume a substantial part of the condominium premium and (2) costs of collective decision making (collective action problems) can be insurmountable, particularly in urban communities with heterogeneous populations. Thus, the authors conclude that it may be a long time before condominiums, despite their apparent economic advantages, replace cooperatives as the dominant common interest homeownership form in New York City.

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