A Co-op Mortgage Recording Tax?
A: One reason why Condominium closing costs are higher than co-ops, assuming the buyer is taking out significant financing for the transaction, is that co-ops enjoy a loophole when it comes to the mortgage recording tax. Well, this loophole may be closed if Governor Paterson gets his way. As I long stated, higher rates + higher taxes are in our future and the city will look to every nook & cranny to squeeze more tax revenue out of city residents to help close record budget deficits.
From The New York Observer (via The Real Deal), "The Bell Tolls For Co-ops":
In the governor's cross hairs are loans for co-ops, which have long been free of taxation while taxes on equivalent condos and houses run between 2.05 percent and 2.175 percent of any mortgage. The budget seeks to allow the city to slap this mortgage recording tax onto co-ops, swinging the tax lasso around a cash source that has been eyed-but untouched-by city officials since at least the days of Ed Koch.Love the 'this is an issue of equity and tax fairness' line...can't we spin it the other way and argue to eliminate the condo mortgage recording tax to be more fair with the co-ops??? Nah, that is not happening!The tax would mark another step in the assimilation of the co-op, an outlier housing type that was once beyond the reaches of many housing rules and laws, and it would bring in, by the mayor's count, at least $50 million annually in revenue for the city. For the Paterson administration, the current lack of a co-op mortgage tax is merely a "loophole" in need of closing. "Ultimately, this is an issue of equity and tax fairness," said Matt Anderson, a spokesman for the state's Division of the Budget.
Recording taxes do not currently apply to co-op mortgages because they are, in actuality, not mortgages at all. Officially, a co-op buyer purchases shares in a corporation that owns a building, not a specific piece of real estate. Thus, a buyer cannot get a mortgage on property, but rather a loan backed by shares of the building.
For UD readers, this will come as no surprise; higher taxes are coming, its in what form and exact rules that are only now coming together.
So, we must ask ourselves how buyers will re-value co-ops on the open market if closing costs do in fact now rise via this mortgage recording tax? In my opinion, I don't think it will be that much of an effect; perhaps a minimal one more as a headline effect that will wear off with time. My thinking is this: The main reason I find buyers to value condo's over co-ops is the legal structure that bypasses a strict board approval process and the liberal rules and guidelines as to how the condo property can be used.
In my opinion, the gap in value between a condo and a co-op is not because the co-op closing costs are 1.8%-1.925% (loans under 500K is 1.8% of the loan amount, loans over 500K are 1.925% of the loan amount) of the purchase price lower! Although that does play a role, I just think there are other forces that play a deeper role as to why buyers value condos higher than coops! Rarely do I find buyers willing to put a premium on a co-op's value solely because the closing costs are lower. So, how much of a penalty will buyer's put on a co-ops open market value if closing costs do rise just under 2% of the loan amount as a one time closing fee? In my opinion, minimal if any that will dissolve with time.
Buyers value condos over co-ops because of the following that doesn't change with this added closing tax, if it passes:
1. Right of First Refusal Board Process
2. Lack of Strict Financial Preset Requirements for Purchase / Secure Financing Most Important
3. Ability to use as Pied-a-terre (2nd home)
4. Ability to Freely Sublet
5. Ability to use Guarantor
6. Ability for Parents to Buy for Children
7. Speculative Investors / Foreign Buyers without Citizenship
etc..you get the point!
Those above noted items is what expands the desirability and affordability of condos over stricter co-ops. The end result is a much wider buyer pool to market condos too! That is not to say co-ops aren't desired, they are, just to point out to you the more important differences that I find from working with buyers that expand the marketability of condominiums! Just my $0.02!!
Comments (8)
Noah, so funny, I was in the middle of writing a piece on this... Contrary to your opinion, don't you think that placing a mortgage tax on a coop will actually put a damper on the cooperative market?
Yes, many buyers stay away from co-ops due to their liberal and stringent boards, but there are also those who flock towards them because the closing costs are minimal at best. Some of my clients buy co-ops just because of that, they don't mind the board. On a $1MM purchase of a coop, the closing costs are about $4,000 without the Mansion Tax. On a Condo they are more like $30k not including the Mansion Tax... Even more if it is a new construction.
Regardless, I do see higher taxes across the board in our future but to tax unreal property will be a sight to see.
MM.
Posted by MortgageMan | February 3, 2010 3:35 PM
MM - well yes, I do see some effect but I dont see the coop market taking a notable and sustainable plunge because of this.
Keep in mind what this tax is for loans over and under 500K.
On a 500K or under deal, 1.8% of loan amount, so lets assume 80% these days and a 499K deal, you are talking about a hit of 7,185 at closing for the buyer...so how does that affect the coop purchase of 499K?
I would argue that if the buyer can no longer afford the property with an additional 7,185 required at closing, should they really be buying? Does it mean they can only afford 450K now, instead of 499K?
What about a purchase price of 980,000, under mansion tax? The 1.925% of loan amount would add 15,092 on 80% financing at closing. A hit yes, but if they are buying a 1M loan, putting down 200K, how much of a penalty do they now add to the deal to compensate for this tax?
Most of my clients understand the closing costs and expect them...very few of my clients tweak their affordability and budget that much because of it. If they are buying 2m pad, condo, they expect 80k or so closing costs. if they are buying 2m pad coop, they expect less but plan for the worst. I dont see these buyers lowering their budget to say 1.85 or 1.9m strictly because of this.
Most of my buyers have a set budget, and they try to get the best product for under that level, preferably condo knowing what closing costs will be before hand.
Yes, I do think there will be effect, but minimal. Nothing that so called TANKS the coop market. And I think the effect will be most noticeable in the months or quarters after the headline of the tax passing and taking effect. Over time, I see that so called penalty due to the tax alone dissipating. Just my two cents. I certainly could be wrong, but if I was, and it hit the coop market 3% or 5%, I think buyers would step up and be happy to grab the discount and that would change market forces by itself to re-correct later. If anything, this market has proven its resiliency even faced with the most severe credit crisis in last century; granted the reflation was built upon temporary and extraordinary policy measures taken with which we dont know the unintended consequences for yet when they are withdrawn, it still happened.
Posted by Noah | February 3, 2010 5:14 PM
What doesn't register in Paterson's head that it's already so damn difficult to live here. If they are aiming to empty out manhattan - they're well on their way. It's disgusting really how city dwellers on this island get raked over the coals. ENOUGH IS ENOUGH. VOTE REPUBLICAN!!!!!!!!!!!!!!!!!!!!!
Posted by impossible | February 3, 2010 6:25 PM
impossible, it is not taxes that makes it difficult to live here, its the high cost of just about everything. If a few additional taxes is going to push people over the edge, they were just far too close to the edge to begin with. Manhattan will not empty. There would be turnover and prices would need to drop to keep people in.
In a rational world, prices would drop equally with the tax. However, I think most people only focus on the closing costs as an afterthought similar to forgetting to think enough about sales tax when buying something expensive.
Posted by Anonymous | February 4, 2010 9:34 AM
Manhattan Coop and Condo owners should be responsible for their fare share in supporting our city. A 5% surcharge on Manhattan property values would benefit ALL city neighborhoods and could be used to support the most vulnerable amongst us.
Posted by Osgood | February 7, 2010 12:58 PM
Osgood, I couldn't disagree with you more. We are already overtaxed, and our taxes just go to subsidize the parasitic class of unionized government workers.
Raising taxes is the wrong answer - NY needs to cut spending, pensions, entitlements, and bureaucratic headcount.
My maintenance is going up 12% this year JUST to pay increased property taxes. I get close to zero in services in return. The government is a parasite sucking the blood out of the productive class.
I am willing to pay my "fair share" but at 50% and counting, I am already overburdened by these bloodsuckers.
If this continues, at some point in the not-to-distant future, there will be a tax revolt.
Posted by Thisson | February 9, 2010 4:06 PM
It is just so tempting to abandon the real estate business (at least temporarily) right now. However I’ll look into your ideas. Thanks
Posted by Find properties | March 3, 2010 4:06 AM
Those above noted items is what expands the desirability and affordability of condos over stricter co-ops. The end result is a much wider buyer pool to market condos too! That is not to say co-ops aren't desired, they are, just to point out to you the more important differences that I find from working with buyers that expand the marketability of condominiums! Just my $0.02!!
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