Asked and AnsweredA co-op owner asks: I have found that maintenance is usually higher in coops than in condos because of the contribution by the shareholders to the building's underlying mortgage payments. In condos, the unit owners only pay for real estate taxes and common charges for common areas. Will the monthly maintenance be reduced after the underlying mortgage has been fully amortized?
Yes. This question speaks to the basic difference between co-ops and condos. Since a condo is real estate and a condo owner owns his or her particular unit separate and apart from the other units in the condo, the condominium (except as described below) is not permitted to have underlying indebtedness which is secured by a mortgage lien on the entire building. In a co-op, your shares represent a pro rata equity interest in the building, which is owned by the cooperative corporation. Accordingly, the underlying mortgage is an indebtedness obligation of the corporation. Monthly charges are usually higher in co-ops due to the cost of servicing (that is, payment of principal and interest expense) of the underlying mortgage. Once that mortgage is paid off (fully amortized), then the maintenance charges will be reduced as there will be no underlying mortgage to service. Most co-ops do have underlying mortgages, but a few have paid off their mortgage indebtedness. In today’s economy, a mortgage free co-op is a very good thing. Although condos do not have underlying indebtedness secured by all of the units, condos are now permitted to borrow for the purpose of making repairs or capital improvements. The borrowing is secured by a lien against the common charges and other rental streams in the condo. The effect of this borrowing is to cause the common charges to increase similar to the way maintenance charges increase in a co-op.