Rising prices lead owners to convert rentals to co-ops.

Co-ops, long a popular but sometimes controversial form of for-sale housing in cities like New York and San Francisco, are starting to catch on in Southern California.

Last week alone, the Beverly Hills Planning Commission heard three applications from apartment building owners wanting to convert their properties into for-sale co-ops.

While the numbers remain small, conversion activity has been growing in recent years as housing prices balloon but rents remain relatively flat.

In Beverly Hills, there's been noticeable co-op activity because of relaxed parking requirements. Five conversions have taken place within the last 24 months--a pace that has some city officials, including Mayor Mark Egerman, questioning whether the city needs more co-op regulations.

"We shouldn't allow it to continue without looking at it," said Egerman. "We might decide it's the right course of action but that decision should be made alter considerable conversation and debate."

Co-op prices tend to be below condos and single-family homes--largely because they are usually converted from older apartments and office buildings, which don't have the same value as newer, high-quality condo buildings. Also, because they are conversions, co-ops may not have as much parking or luxury features a newer building would provide.

Unlike a condominium, where buyers own the space between their walls--air rights as it's called--owners of co-ops are given shares in the entire building and have a long-term lease for their particular unit. As with condos, the property is run by a homeowners association but with co-ops that body can block a sale by not agreeing to transfer a lease to a prospective buyer.

There are legendary stories of co-op buyers sweating through interviews with board members, who have blocked sales for simply not liking a candidate's profession or demeanor.

"We didn't know what to expect or think," said Ben Austin, a consultant to director Rob Reiner who recently bought a co-op unit in Beverly Hills. "So far the downsides you hear from the East Coast haven't happened. Maybe it's because people on the West Coast are more laid back."

Patrick Aroff, a Santa Monica-based developer, bought the four-unit apartment building where Austin lives at 9324 W. Olympic Blvd. two years ago for conversion to for-sale housing. When switching to condominiums wouldn't work because of a lack of parking, Aroff turned the townhouse-style units into co-ops, which sold for between $450,000 and $540,000.

"It allowed the city to preserve a beautiful building and provide what's considered affordable housing in Beverly Hills," Aroff said. "You'd have a hard time finding a condominium for under $600,000 in Beverly Hills."

Community building

The earliest co-op in Los Angeles is the Figueroa Arms, a 64-unit red brick building built downtown in 1925. Some of the early high-rises along Wilshire Boulevard in Westwood are co-ops, including the Wilshire Terrace at the northeast corner of Wilshire and Beverly Glen boulevards.

Looking to take advantage of lower co-op prices, L.A.'s Community Redevelopment Agency recently green-lighted a pilot program in East Hollywood that would provide landlords with incentives to convert their apartment buildings.

The program would give owners control of co-op shares but the agency would allow only a proscribed amount of appreciation to keep prices below market rates while still letting owners build equity. "We want to show the market that this is a viable option," said Helmi Hisserich, the CRA's Hollywood administrator.

She said that the conversions might bring more homeownership to Hollywood, where 97 percent of residents are renters, and help spruce up neighborhoods. "We're not talking about displacing renters but finding buildings where the owner is interested in doing a conversion to ownership," said Hisserich.

Co-op regulations require all owners to have their primary residence in the building, which forbids renting units out. While the provision at first made Austin nervous because it took away some flexibility with the property, he said it's actually made for a better experience.

"If these were condos and (allowed to be) sublet there might be a much more transactional feel to the building," said Austin, a former press deputy to Richard Riordan. "This way, everybody has a stake in the entire building and it makes a noticeable difference."

Because co-ops don't require new construction, they often pass muster in anti-growth communities where residents appreciate a dilapidated property getting fixed up before being sold. Egerman said co-op conversions could also stem the tide of developers tearing down older apartment buildings and putting up taller condominium buildings with more units in their place.

"That puts a lot of pressure on the neighborhood," he said. "Certainly there is a value to look at older housing stock and say, 'This something we can redevelop without simply razing it and building something new.'"

On the flip side, Egerman said Beverly Hills--where 65 percent of residents are renters--may need to require co-op conversions to meet modern safety codes by installing fire sprinklers and possibly paying fees into a fund to build more public parking. "The negative is that you allow the continuation of housing that has sub-standard elements, such as parking," he said.

But Aroff said that if co-op conversion codes are changed to parallel those used for condos, the incentives would be reduced. "It would have been physically and financially impossible to convert to condos," said Aroff of the Olympic Boulevard property. "I would have needed to create 12 new parking spaces and install fire sprinklers in every unit."

Also challenging more conversions is the limited number of institutions willing to finance prospective buyers.

Mitch Ohlbaum, president of mortgage broker Legend Mortgage Corp., said banks in Southern California aren't keen on the model and don't have the procedures in place to qualify buyers for mortgages.

"There are no lenders that want to underwrite co-ops in Southern California," said Ohlbaum, a former co-op owner in New York. "You can find them in New York and San Francisco but down here there's very few."

Ohlbaum said that if co-op conversions continue to catch on, a number of local banks might get into the business, especially since it would be easy to lend to the developer for the conversion and then become the preferred lender for prospective buyers.

Aroff said it took some detective work and arm-twisting to find lenders for his project.

"Not a lot of lenders have a product on the shelf to buy a co-op," he said. "I had to go and create relationships with banks so these buyers could finance their units. Had it not been Beverly Hills, I don't know how willing they would have been."

The other hurdle for Aroff was explaining the concept to prospective buyers. "I had to spend 20 minutes with nearly everyone looking at the units to explain what a co-op is," he said. "The word itself is foreign to 99 percent of the people here."

With so many homebuyers moving closer to their jobs to escape hour-long commutes, co-ops will become more prevalent for infill housing developers, said Lottie Cohen, a co-op attorney representing the owners of the Beverly Hills apartment buildings before the city's Planning Commission.

"We've reached a crucible," said Cohen, who is recruiting investors to buy a Hollywood building for conversion under the CRA program. "There's no more land to spread out the metropolitan area to build affordable housing for home ownership, so people must look inward to reconfigure older buildings."