San Diego, CA · Member since 2016 · 58 posts · 2 votes
My solely-owned LLC owns a 10-unit townhome-style apartment building in TN. All units are identical. I am considering selling units off as they come available as co-op's. Its doubtful that the municipalities involved would sign off on a condo conversion or subdivision, as their aren't many rentals in the area. However, there aren't many good tenants as I've come to find.
Condos in neighboring counties go for $220/sqft, apartments $135/sqft. Typically, co-op's are less valuable than condos for a number of reasons such as supply/demand, lack of investor interest, older units, estate planning issues, financing and board policies.
However, these units are new and there is not a significant oversupply of any kind of housing in the area currently. Additionally, by virtue of owning all of the units I could, with the help of an attorney, construct the bylaws in such a way to maximize value and eliminate bylaws that would be value-restrictive.
I've talked to a couple of non-QM lenders who could provide financing to buyers under such a scenario, but the tricky part is appraisal value, especially in a state where, according to Redfin, no co-op's have sold in the last 5 years.
If I got a couple units sold using seller-financing at $220/sqft, since there aren't any other co-op comps, would this provide a basis upon which an appraiser would provide a valuation closer to $220/sqft than $135/sqft? Any advice is greatly appreciated.
Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
2y
Have the co-op take out a loan for 60% of building value, then charge buyers 20% of value in cash for each unit. In NYC trying to compare like properties and eliminating co - op debt, co-ops will sell for 60% to 200% of a comparable condo. The high end is the 20 or so co ops on 5th Avenue or Park Ave (one is on East End Avenue) that require liquid assets of $100 million + to gain board approval. For these ultra exclusive co ops the fact that the tenants can turn down anyone for any reason is a big plus.
Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes
2y
@David F.
As Russell mentioned co-ops are probably 1/2 the price of a condo and you would also have extensive costs to set up a co-op and typically it’s my understanding the builder funds the first 1-2 years of reserves. I would make sure you speak with a land use attorney on this
@David F. What's the zoning on the property and do you have a relationship or contact with the local rep?
The zoning is R2, which includes a wide variety of options that includes multifamily, which is defined in the general plan below in this excerpt. So, I don't believe it would require a rezoning.
"Dwelling, Multi-Family - A building containing three (3) or more dwelling units. The term includes cooperative apartments, condominiums, and the like."
@David F. What's the zoning on the property and do you have a relationship or contact with the local rep?
@Karen Wanamarta
The zoning is R2, which includes a wide variety of options that includes multifamily, which is defined in the general plan below in this excerpt. So, I don't believe it would require a rezoning.
"Dwelling, Multi-Family - A building containing three (3) or more dwelling units. The term includes cooperative apartments, condominiums, and the like."
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
1y
Interested to see if this moved forward, I've considered something similar in San Diego. There aren't many co-ops in Southern California, mostly in LA or a senior community in Orange County, but there's not much of a discount between condos and co-ops - at most, 10%.
Interested to see if this moved forward, I've considered something similar in San Diego. There aren't many co-ops in Southern California, mostly in LA or a senior community in Orange County, but there's not much of a discount between condos and co-ops - at most, 10%.
What is your source of the 10% difference data? I have considered doing a TIC/coop in San Dego but have the belief, without any data except for how I would value the financing challenges and tic risks, as being much greater than 10% price difference from condo price. I expect greater than 10% just for the loss of residential F/f financing.
at 10% difference, or even 15% difference, coop would be up there with lot splits on sophisticated value add.
I did the below research a couple/few years ago (so info is slightly old) but never ended up doing one but for those who watch my posts, I have indicated it is high on my list for Q4. my hope is to get a nice unit for my son at below 50% of retail.
TIC in this case is virtually synonymous with coop.
finance items
- There are several ways to finance TICs – group loans and fractional loans are the most common. - Fractional TIC loan: you can now own a unit in a building that isn't classified as a condominium, yet from a financing perspective, will feel that way. Fractional TICs give owners the financial independence that has been associated with condos, without the need to wait for a condo conversion, a process which can take anywhere from 2 to 10 years depending on the specific requirements for the subject property. Fractional TIC loans are available for both owner occupied, second homes, and investment properties. A default by one co-owner results in a foreclosure on only the defaulting owner's share, and does not affect the other co-owners. - Both Sterling and Bank of Marin offer financing to TIC developers for acquisition and renovation of buildings that will then be converted and sold as tenancy in common. These loan products include a partial release feature that allows them to be repaid gradually as TIC interests are sold, and ensure that the sold TIC units are not encumbered by a blanket encumbrance. - The variety of financing products available as individual tenant in common loans remains limited, and the terms are generally less favorable than either apartment building loans or condominium loans. The maximum fixed-rate period seems to be seven years, and there is generally a balloon payment at 10 or 15 years. Rates tend to be 25 to 50 basis points above commercial (5+ unit) apartment building loans, and 50-100 basis points above residential (1-4 unit) loans. Loan-to-value allowances vary, but seem to top out at 75-80%, and even that figure can be misleadingly optimistic in light of the appraisal difficulties (described below). Secondary financing is generally permitted, and the realities of the marketplace usually require the seller to carry financing for most buyers. Underwriting guidelines are more strict than on residential loans, and buyers who might qualify for a condo loan sometimes cannot qualify for an individual tenancy in common loan. Many lenders also impose additional requirements such as owner-occupancy, and/or that one lender make all of the institutional loans in the building. - Valuation: The variety of financing products available as individual tenant in common loans remains limited, and the terms are generally less favorable than either apartment building loans or condominium loans. The maximum fixed-rate period seems to be seven years, and there is generally a balloon payment at 10 or 15 years. Rates tend to be 25 to 50 basis points above commercial (5+ unit) apartment building loans, and 50-100 basis points above residential (1-4 unit) loans. Loan-to-value allowances vary, but seem to top out at 75-80%, and even that figure can be misleadingly optimistic in light of the appraisal difficulties. Secondary financing is generally permitted, and the realities of the marketplace usually require the seller to carry financing for most buyers. Underwriting guidelines are more strict than on residential loans, and buyers who might qualify for a condo loan sometimes cannot qualify for an individual tenancy in common loan. Many lenders also impose additional requirements such as owner-occupancy, and/or that one lender make all of the institutional loans in the building. - The CA rules seem to have many rules related to financing such as seller must include appraisal, no balloon payments before 10 years, etc. definitely need to have lawyer look at it.
Risks/additional hurdles - On the practical side, the absence of deeded rights makes tenancy in common ownership considerably more risky than condominium ownership, even where the TIC owners have separate financing. The increased risk is generated by the fact that the owners are relying on the validity of the tenancy in common Agreement for their usage rights, and it is possible to imagine legal circumstances under which this validity might be undermined. - If the subdivider or someone with relationship to subdivider sells, a public report must be done. How much work is a public report?
by the way I received a lawyer referral who is supposedly familiar with tic in California. Andy Sirkin, based in San Francisco but supposedly has done some in Las Angeles. Seeing I have not done a tic, I have not used this lawyer myself but I suspect CA lawyers with TIC experience is likely limited.
Excellent write up, thank you for that. As for the 10% discount, I’m basing it on the few co-op’s that I’ve found in LA and Orange County. North Hollywood has a handful of 20-50 unit communities structured as co-ops. Orange County, specifically Laguna Hills 55+ community, has quite a large number of co-ops. I also believe there is a small co-op in La Jolla but only infrequent sales so not good for estimating a discount. It by no means is an exhaustive search but I also haven’t seen any co-op communities selling for 50% of comparable condos.
I also know lenders that have originated loans for the co-ops in Laguna Hills and I was also reading how Fannie Mae buys mortgages issues to co-ops so it sounds like there’s a market for both qualified and non-qualified loans. Unclear if all co-ops are viewed equally.
