PURCHASING A COOPERATIVE APARTMENT DUE DILIGENCE
When purchasing a cooperative apartment it is important that you (and your attorney) perform some research about your new home and investment. As you may already know, ownership of a cooperative apartment consists of owning shares of stock in the corporation that owns the building accompanied with a proprietary lease permitting occupancy and typically laying the ground rules concerning the use of the apartment and living in building where it is located.
When I represent purchasers of coop apartments I will review the offering plan, all amendments and the last two years worth of financials of the cooperative corporation. An offering plan is the required disclosure filed with the New York State Attorney General’s Office and contains information about the building, apartment and the cooperative corporation. The offering plan and amendments should be examined which contain the corporate by-laws and other important documents (including the proprietary lease) and any changes that have been made to them over the years. These documents contain the obligations and rights that affect ownership. As shares of stock to a corporation are being bought, it is important to determine the financial health of the corporation and any evidence of potential liabilities (including pending litigation) that may result in increases in maintenance or imposition of assessments. I feel the review of financial statements are so important (audited statements are preferred), that it is my practice to request a client’s accountant also review the financials as a second set of eyes.
Attorneys shouldn’t have all the fun. I will suggest that a purchaser of a cooperative apartment review the minutes of the meetings of the board of directors. This may be difficult if the corporation keeps very poor or no minutes of such meetings. I will give clients a list of things to look for in the minutes that may reveal the physical condition of the building and evidence how the coop conducts business. It is important that the purchaser review the minutes because they will be the occupant and each person is different. One person may think a certain condition at the building is perfectly fine. That same condition may cause another not to purchase an apartment in a particular building. Another good idea, depending on how shy a person is, is to travel to the building and ask people who look like they live there, how they like being in the building. If there are problems, you will hear about them. Try to speak to a few people to get a good cross section of opinion.
As contracts of sale typically are not contingent on performing due diligence, it is important that the financial and physical conditions affecting a cooperative apartment and the building be explored prior to going into contract. It is usually done at the same time the attorney is reviewing and negotiating the contract of sale. Doing so will increase the likelihood that the investment being made in your new home is a wise one.