CHAPTER XXVII

COOPERATIVE APARTMENTS

By LAWRENCE B. ELLIMAN 1

An apartment building may be run entirely for the benefit of its tenants, who are its sole owners-broadly, it may be a cooperative apartment house.

The Two Plans of Ownership.-Under the so-called 100 per cent ownership plan each apartment is sold individually to an individual tenant-owner. His only equity-his only interest in the building is his own apartment and his pro rata share of the land on which the building stands. Under the so-called 40 per cent ownership plan the tenant-owners buy the whole building, but occupy only two-fifths of the apartments and cover the cost of the entire operation by the profit from the three-fifths which are rented out on customary leases. The rentals of the apartments leased correspond to average rentals in similar buildings, equally well situated.

The Two Plans Compared.-It is, therefore, often a question whether it is better business to buy in a 100 per cent or in a 40 per cent building. There are arguments in favor of each, as well as against; still many a man, after careful analysis, has concluded that individual circumstances alone decide which is the wiser investment.

If a building of 100 apartments represents a selling value of $2,000,000-which should be cost, plus a reasonable profit to the builder-the average cost per apartment would be $20,000. On a rental basis such apartments would bring, roughly, $3,500. If full operating expenses are figured at half that $1,750 per apartment-the difference between the cost

1 Lawrence B. Elliman, New York, N. Y., President of Pease & Elliman, Inc. He has been in the real estate business since 1897. His Company, one of the largest in New York, conducts a general real estate business.

of rent and the annual assessment (equivalent to operating expenses) shows itself clearly. It indicates, too, an annual saving of $1,750, which would wipe out the original $20,000 cost in eleven years and four months--interest not figured. The $1,750 annual assessment would continue, of course, or might fluctuate up or down with the market price of labor and materials, the relative value of the dollar, and taxes; however, for purposes of illustration this is close enough. Then it is clear that the $20,000 investment has done the following: (a) it has wiped itself out in 11 years; (b) it has doubled itself in 22 years, and so on indefinitely; (c) it reduces materially the cost of housing for the occupants.

In the case of the same building, sold on a 40 per cent cooperative basis, the figures are a little different. In that case only 40 of the 100 apartments are sold for tenantownership; and each of these 40 apartments is charged with its share of the cost of the remaining 60, so that instead of costing $20,000 each the cost rises to $50,000. But for this larger investment each tenant-owner owns two and one-half apartments.

'If, then, the 60 apartments are rented at $3,500 per annum each, they produce a gross revenue of $210,000. The total operating expenses are the same, naturally, as in the case of the 100 per cent apartment-$1,750 per apartment. This leaves a profit of $1,750 per apartment, which is applied to reduce the annual assessments of the tenant-owners. So we deduct the total operating cost of $175,000 from the $210,000 gross revenue from the rented apartments. This leaves an annual profit of $875 per tenant owner. Under this plan the annual assessment is eliminated and an income substituted. Thus it may be figured that the original investment returns a profit of $4,375-or at the rate of 8.75 per cent per year, including free rent.

The $50,000 investment has provided free rent and an annual profit as long as the conditions remain the same.

There is no doubt that in some respects the 40 per cent plan shows decided financial advantages. Yet, it requires a very much larger cash investment and it cannot be shorn of the risk which every landlord incurs-that of possible vacan

cies. This risk—which, to be sure, is entirely absent in the 100 per cent plan-derives its compensation from the much larger income on the investment.

How Tenant-ownership Works. Whether the building be operated on the 100 per cent or the 40 per cent plan, a corporation is formed with the desired number of stock shares, and capitalization equivalent to the equity in the property. In other words, if the buildings alone be worth $1,000,000 and the land another $1,000,000, a $2,000,000 corporation is formed, with stock of a par value decided by the board of directors.

Each apartment, then, is ascribed a pro rata value, which is represented by a corresponding amount of stock. The number of shares representing the several apartments is determined by their size and desirability. Obviously, in every apartment house, some apartments are more desirable than others. They may be larger, or have more sunlight and air, or the outlook from the windows may be more pleasing. All these, then, are considerations in determining the number of shares which represent apartment values. This stock ownership, besides giving full title to each apartment, carries with it also pro rata ownership of the land on which the building stands. The charter authorizing the corporation is limited, in that it restricts its operations purely to the ownership and maintenance of the specific building in question. It cannot erect new structures, nor do financing, nor engage in any other activity.

Plans of Purchase.-There are various methods in vogue by which cooperative apartments may be purchased. In some buildings a full cash payment of the value of the land and building is required. In others, 50 per cent may remain on mortgage.

In some buildings term payments may be arranged, which are exceedingly advantageous to the buyer and make it very easy for him to finance matters. An apartment costs, let us say, $18,000. Six thousand dollars is paid down, then there are semi-annual 6 per cent notes for $3,000 over a period of three years. Of course, in addition to this just as in the case of the tenant who has paid for his apartment outright

each owner is assessed his proportion of the operating and maintenance expenses of the entire building, and this assessment must include money for amortization of mortgages and for interest on mortgages, as well as for the whole investment, and for taxes.

On completion of the equity payments the tenant-owner gets a regular proprietary lease, transferable only on the approved sale of the stock.

While this may sound formidable, it actually works out at a far lower figure than rent for a duplicate of the apartment, since in the latter case there are no profits-no dividends. Whatever savings accrue through efficient management, or otherwise, show themselves in reduced assessments for the tenant-owners.

Disposal. It may be claimed as one of the disadvantages of cooperative ownership of apartments, that they are sometimes harder to sell than detached houses of equal value, or that the stock cannot readily be mortgaged. This is because of the protective restrictions placed around the sale of the stock by the tenants themselves.

Organization.-When the tenant-corporation is formed, and all the stock (every apartment, in other words) has been sold, the tenant-owners, at a stockholders' meeting, elect a board of directors.

One of the prime functions of this board lies in its vested right to determine the desirability of tenant-owners and, in the case of 40 per cent buildings, of lessees also. It is necessary for tenant-owner in selling his apartments, then, to find an acceptable purchaser, which is often more difficult than merely finding a purchaser. This seeming hardship has its compensation in maintaining the high character of the property and so keeping up its value. By restricting its sale to tenant-owners an individual apartment cannot be sold to speculators whose sole object is immediate leasing. It cannot be sold for business purposes. These highly advantageous restrictions enhance the value of property in the entire neighborhood and in the few cases where people have desired to sell, it has not proved difficult to secure an acceptable purchaser.

In many cases cooperatively owned apartments have appreciated so markedly in value, because of the high character and excellence of service in the building, that selling tenant-owners have realized handsome profits on their investments.

Every tenant owner has the privilege of leasing his apartment whenever he desires, though, of course, such a transaction is subject to the approval of the board, as in the case of selling. Many an owner has derived a good income from his property in this way, by renting at average market rates, while paying only his own far lower assessment.

Management.-It is customary for the board of directors to divest itself of the burden of house operation by giving over this responsibility to a management company, qualified by organization, financial standing, and experience to manage the building. In other cases they have retained a manager who, with the fund which the directors provide, employs all help, collects assessments, supervises heating, plumbing, the supply of water, gas and electricity, and does whatever else is necessary for the conduct of the building. This arrangement puts the burden of management, upon the board; and since its members are generally unfamiliar with apartmenthouse operation, there are opportunities for a dishonest or incompetent manager to cause the tenant-corporation a great deal of expense.

Experienced tenant-owners usually prefer to retain the service of the management company, for the agent whom the company appoints provides expert and unprejudiced supervision. Supplies cost less, for such companies buy in large volume for many buildings. Labor disturbances are less likely to occur, because these companies are constantly in touch with the labor market and can immediately replace recalcitrants with tried and efficient substitutes.

Tenant-ownership has the charm of giving each tenant a definite voice in the management, which is retained by whichever plan is provided. This probably accounts for the politeness of hall attendants, for the prompt responses at the switchboard, for the dispatch with which minor repairs are effected, and for the generally inviting and spic-and-span appearance of the public halls and passages.