Boom looms for co-op conversion.

Industry prognosticators say the city is in for a new wave of cooperative conversions, particularly in the outer boroughs. This will occur because market factors are aligning and creating a financial opportunity for those buildings with the right stuff.

"Cooperative" is no longer a dirty word that causes home-seekers to turn tail. Workouts have created financially stable buildings, and the cooperative building sales market has gone from zero to at least 30 over the last year.

While sales prices are still much lower than they were in the 1980's - creating the perception of a bargain - interest rates are affordable, banks are aggressively providing loans for up to 95 percent of the sales prices, and buyers' lawyers are now sophisticated enough to scrutinize financial statements and minutes and to weed out unhealthy choices.

And since the politicians now recognize that cooperative and condominium taxes are higher than those of homeowners, a scheme that ends this year abates 25 percent of an owner-occupied unit's property taxes. Plans are also being drawn up to permanently end the discrepancy.

Those expected to be conversion targets are better buildings in the outer boroughs where owners missed the conversion market last time around.

Here, regulated rents are topping out in the $800 to $1,000 range, and while stable, middle-class tenant incomes won't justify luxury rent decontrols or Manhattan pricing, they can cover reasonable maintenance plus a bank loan.

Some building owners themselves may be looking for a way to cash out - particularly since state and federal capital gains tax changes have created a favorable climate for sales of long-term holdings - or they may be tired of managing the properties, or their heirs may want them to upscale the family operations.

They may decide to handle the conversion themselves, or sell at a high rent roll multiple to another who will.

Since the late 1980's, the number of conversions has been minimal. In 1987, during the heyday of the last cycle, the New York State Attorney General's office accepted 1,361 plans statewide. In 1997, they accepted 154.

In Manhattan, the only county for which a breakout was available, 50 plans were accepted in 1987. Last year, only eight plans were accepted - and they were all condominiums.

According to Dept. of Finance records, however, there were 28 more cooperative buildings on the 1999 tentative assessment roll than the year before, bringing the number citywide to 2,352 cooperative buildings. (That number does not include approximately 1,800 two- to 10-unit co-op, condo and cond-op buildings, or the approximately 43,000 condominium units.)

Finance records also show 28 more cooperatives in Manhattan, nine more co-ops in The Bronx, 10 more in Brooklyn and 11 more in Queens.

But if certain changes aren't made in Albany [see sidebar] the newest cooperators could find themselves tackling issues that are still plaguing the 1980s' pioneers.

Still, with only 15 percent of the apartments required to buy in order to effectuate a non-eviction plan, savvy owners would be able to convert, and then choose to rent at market rents or sell those other units that later become vacant.

"If I were consulting with an owner, and he says he wants to get market rent - and you are not going to get the $2,000 mark in the outer boroughs - I would tell him that if he's in it for the long run, convert the building at a mere 15 percent, and as he gets a vacancy, rent at market rents," advised Greg Carlson, a co-op consultant who is the president of Carlson Realty and the president of the Federation of New York Housing Cooperatives. "But that begins the same circumstances that we had in the late Eighties, when the sponsors couldn't afford to pay the maintenance and the high mortgages they themselves had attached to the buildings."

Others believe the market makers have learned the lessons of the Eighties. "The world is smarter, the banks are smarter and I don't think they would lend with sponsors putting large mortgages on the building, and leaving them [owning many units rented to rent regulated tenants who are paying less than the maintenance and] with a tremendous negative cash-flow," said Steven Birbach, chairman of Carlton Management.

Attorney Stuart M. Saft says today's rents are also high enough to cover the maintenance and avoid the negative cash-flows which occurred when rents were closer to $300 and $400.

"There are a lot of lessons we learned about how to structure the conversion plans to protect the owner from the downside," he added.

Owners can, for instance, write a plan for a co-op that does not give the board too much control, yet overall can provide the co-op shareholders with as much control as condo unit holders.

Joseph Strasburg, president of the 25,000-member Rent Stabilization Association, says he has not yet heard the clamor of owners heading for conversions.

"We had a couple of people interested in co-oping, and when they did the numbers they decided to do rentals," he said. "It doesn't mean they won't want to do it, but clearly the ones in Manhattan have found it much more worthwhile keeping the property a rental."

Saft says it's the Manhattan prices that are the impetus for an outer borough conversion market.

"In Brooklyn and Queens, the owners are not getting helped by luxury decontrol," observes Saft, referring to the Manhattan tenants who can be brought to market if they are renting for $2,000 and up and make $175,000 for two years in a row.

To begin to create more converted units, "The first thing you have to see is sales," explains Saft, a partner and head of real estate department at Wolf Haldenstein Adler Freeman & Herz who represents many boards and predicts a new wave of conversions. "Two years ago you couldn't find anyone to buy. Now we are seeing people regularly buying apartments, and prices inching up."

Insiders didn't have to put any money down to obtain the original units when one bedrooms sold for $40,000, two-bedrooms for $80,000 and three-bedrooms for about $100,000.

Now, Carlson said recent sales include studios for $25,000, large one-bedrooms for $65,000 to $75,000, and several two-bedrooms for between $115,000 and $125,000.

Susan Hewitt is president of The Cheshire Group, which is a $40 million fund that purchases co-op units in bulk. She too saw the market for co-ops turn about two years ago in Manhattan, but in Queens that just started in January and February.

"We just sold 50 units in Hyde Park," she said. Previously, Hewitt found potential buyers were put off by what she dubs "the brother-in-law effect."

"Everyone had a brother-in-law who bought a co-op apartment and had a problem. But if he bought it for $150,000. and it's now selling for $40,000, that's a good value," she said.

But she notes that people still have fresh memories, they are cautious, and even hostile.

They also come in with sophisticated lawyers, who examine financial statements and the minutes. "They know what is going on and the percentage sold, and they understand the sublets," said Birbach, who warns that those co-ops with a low pre-sale level will have trouble finding lenders willing to make loans on units, even though there are several lenders aggressively in the market making loans on up to 95 percent of the value to qualified buyers.

"They will go out of their way to help people with strong credit and income, and that is helping fuel the sales again," he said, naming Dale Mortgage, Citibank and Chase as being active lenders.

Robert Knakal, a partner with the building brokerage firm Massey Knakal, concentrates on the plush core of Manhattan's East Side. To a large extent, he believes, the co-oping will be contingent on the loans.

"The sting they felt from the loans on the unsold shares is still being felt," he said.

But with prices in Manhattan escalating both for rents and for apartment sales, Knakal says it's easy to justify eight to 10 times rent roll payments to buy better buildings.

A typical rental building in the Manhattan core can be obtaining a $15 to $18 rental on average. But Knakal says the free market can be between $30 to $35 in the better neighborhoods.

"That presents a large potential upside. especially with the large vacancy bonus, so there is a lot of upside with these properties," he explained.

And if the owner wants to cash out, The Corcoran Group reports the average sale prices of co-ops and condos below 96th Street last year went for $404 a foot - with studios selling for $126,000, one bedrooms for $211,000, two-bedrooms for $481,000, three-bedrooms for $1,031,000 and four--bedrooms and up selling for an average of $2.327 million - all up 12.8 percent over 1996.

Even in the outlying sections of Brooklyn, where Saft's firm handled many workouts, apartments are selling for about $25,000 to $30,000 for a studio. "Even the rents were up to $800 to $1,000," he said.

It's the rising outer borough rent that is also making renters become buyers, because they can still afford a lower priced worked--out property with low maintenance.

Saft stresses too that new construction is in no way keeping up with the need for apartments. With estimates of a needed 20,000 to 40,000 apartments annually, the current 5,000 or so being created will nowhere fill that need.

Owners had held back on converting, says Saft, not only because buyers were scared, but because most owners thought the state legislature would eliminate the rent regulations, or at the very least enact vacancy decontrol.

If you owned a rental building, Birbach agreed, you wouldn't have thought about conversion. "It wasn't a business you wanted to be in," he recalled. "But certainly the market is up today, and if you have a building with high rents and decent turnovers, it may be a candidate for conversion."

Now, says Saft, his office already has more conversion plans to work on than in the last three years combined. "It's already beginning to start," he said.

Says Birbach, "People always want to be a homeowner. The benefits of home-ownership are out there. Whether they choose a single-family home, a co-op or a condo. The American dream is still there."