Long game: buying all the shares in a coop over time

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Long game: buying all the shares in a coop over time

Paul Jump
Member since 2018 · 14 posts · 1 vote

I have the opportunity to purchase 2 adjacent one-bedroom apartments in an iconic New York City building. The building is a 6-stories, consisting of 24-units one-bedroom units and is organized as a coop—so essentially the deal is to purchase 1/12th shares in the coop.

I would be purchasing these two units to combine and occupy as my primary residence; however the individual apartments in the building change hands fairly often as pied-a-terre residences.

I fundamentally believe there NYC is changing and that there is opportunity in developing a building to consist of larger units.

I am trying to wrap my head around a long-term investment in a building in which I personally occupy. Is there a world where it could make sense for me to first buy and combine these two units to personally occupy as my primary residence, while picking off every other unit that goes up for sale? How would I begin to think about a business plan here. Remember I’d be in this for the long haul... like forever. Any advice, past stories, or general cautionary tales greatly appreciated.

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Jason Lee
Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes
5y

If you can make a nice apartment out of the two units and you can't find anything existing that's comparable (including the cost to combine), then go for it. Having said that there's a decent amount of inventory of larger apartments that don't need combining, and right now, smaller, more affordable units, are actually trading pretty briskly. Do you know enough about architecture and code to know if combining can even make sense? I've worked on a lot of combination deals and I haven't seen too many 1 beds that could be combined to make a layout that makes sense.

Not sure what the point of owning the entire building would be but it's close to impossible. You won't be around to see all 22 of the other units trade. Even if you were there's the darn co-op board that probably wouldn't let you buy the 3rd unit as an investment. If they did it would probably have to be all cash. Then if you were able to get to your 4th unit you'd make the building unwarrantable and your neighbors would have problems selling because it would be difficult to get mortgages in the building for everyone else because you own too many units. There's a reason no one does this.

I do know of a small co-op in Gramercy where the whole building is being shopped to developers. Shareholders have to vote on it but the co-op has retail units that might make a conversion attractive for a developer. What's missing from your idea is any kind of upside.

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  • Jason Lee
    Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes
    5y

    If you can make a nice apartment out of the two units and you can't find anything existing that's comparable (including the cost to combine), then go for it. Having said that there's a decent amount of inventory of larger apartments that don't need combining, and right now, smaller, more affordable units, are actually trading pretty briskly. Do you know enough about architecture and code to know if combining can even make sense? I've worked on a lot of combination deals and I haven't seen too many 1 beds that could be combined to make a layout that makes sense.

    Not sure what the point of owning the entire building would be but it's close to impossible. You won't be around to see all 22 of the other units trade. Even if you were there's the darn co-op board that probably wouldn't let you buy the 3rd unit as an investment. If they did it would probably have to be all cash. Then if you were able to get to your 4th unit you'd make the building unwarrantable and your neighbors would have problems selling because it would be difficult to get mortgages in the building for everyone else because you own too many units. There's a reason no one does this.

    I do know of a small co-op in Gramercy where the whole building is being shopped to developers. Shareholders have to vote on it but the co-op has retail units that might make a conversion attractive for a developer. What's missing from your idea is any kind of upside.

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  • Paul Jump
    OP
    Member since 2018 · 14 posts · 1 vote
    5y

    Thanks for the thoughtful response. Here's the scenario I worked out in my head with the following assumptions which still need to be validated:

    • It is possible to combine these two units
    • It will be eventually possible to buy and combine another 2 adjacent apartments
    • It is possible to sublet one combined apartment at a time with restrictions (only two years with primary occupancy requirements in between)

    I would therefore rotate my primary residency between the two, and sublet the unoccupied one. The upside is that comps for 2-bedroom coop units conservatively run 30+% higher than separated 1-bedrooms. So I'd be essentially covering all my cash investment with renovated appreciation. In addition think there are some tax benefits to rotating my primary residence in both being able to write-off depreciation and qualify to exclude the gain on the sale since I'd have occupied it for 2-years prior.

    In short, if I am unable to acquire the whole building, I could eventually flip every unit tax free--while probably also not paying much tax on my primary taxable income. Is that sound logic?

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    • Alexander Szikla
      Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
      5y

      This is a strategy that some folks have employed. Or more commonly, get enough of the building under your control plus a few friendly neighbors and get the board to go condo. 

      Often, the party pushing for this will need to get friendly by offering to foot the bill (or supplement) for common area upgrades. 

      This can be done but requires lots of patience and deep pockets! 

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    • Jason Lee
      Real Estate Agent · New York, NY · Member since 2015 · 401 posts · 235 votes
      5y

      You're assuming the combined two 1 beds will comp equally against a natural 2 bed. I've seen some seamless combinations but very rarely with two 1 beds.

      The real problems start when you try to purchase the 3rd and 4th units. Investor financing for co-ops has always been very difficult. All cash doesn't solve things either. You can call them pied-a-terres/second homes/whatever but the board will see it for what it is, an investment property. With so few units in the building I think your owning 4 units (or possibly 5) will make the building unwarrantable, which will hurt it's marketability, and depress prices.

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    • Paul Jump
      OP
      Member since 2018 · 14 posts · 1 vote
      5y

      @Jason Lee that's a great point about max number of units, and unnatural combinations. I've been told there are a couple well designed combinations in the building already, so my thinking is the building might have originally been a 12 unit buidling (and split up unnaturally). My assumption is the combined units match might match to comps--though would be planning to stay a long time, so would not be super concerned to be honest. 

      @Alexander Szikla condo conversion is an interesting concept. This would probably make the combined units pop in value what probably not so much benefiting the small units. I'd love to research Condo Conversion more. I'll post back here if I find some good comment on it in other forums. 

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    • Alexander Szikla
      Real Estate Agent · New York City · Member since 2020 · 819 posts · 641 votes
      5y

      Condo conversions require extensive legal fees however. Be warned. It isn't dissimilar from taking a company public. 

      1Reply
    • Paul Jump
      OP
      Member since 2018 · 14 posts · 1 vote
      5y

      @Alexander Szikla wow great analogy

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    • Brandon CohenPro Member
      Real Estate Agent · New York, NY · Member since 2014 · 160 posts · 45 votes
      5y

      @Paul Jump the thought of owning a 24 unit building sounds great... but even though it’s a long game plan it may be a very long game.  Traditional lending will more than likely go away but I’m sure some portfolio lenders would be interested to have a building on their balance sheet.  

      If the current opportunity is a good plan for you right now and the two 1 beds wilL make a quality layout 2 bed (as mentioned above some combo units are just awful), I would start with that and keep the pulse of your neighbors 

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