Cooperative

What is a cooperative?

A housing cooperative, commonly referred to as a co-op, is a corporation formed to share ownership in a single property among multiple residents. In a co-op property, residents purchase shares in the corporation that provide the right to live in a unit, rather than owning the underlying real estate or property. A cooperative more broadly refers to a business owned collectively by its employees and customers in order to share expenses, responsibilities, benefits or profits.

Deeper definition

Cooperatives let people share ownership in a wide variety of housing types, from large, urban apartment buildings and townhouse developments, to senior assisted living facilities and mobile home parks. Co-op housing corporations are almost always not-for-profit organizations that are owned by the residents that live in the property.

When you buy into a housing co-op, you are not buying real estate. Rather, co-op members own shares in the corporation, which in turn leases or owns a property. This membership share obliges residents to share all costs on a pro-rated basis, and gives them the right to participate in the management of the corporation’s affairs.

Co-op membership grants residents the right to occupy a specified unit in the building, via a proprietary lease or an occupancy agreement. The number of shares each member holds is generally based upon the size of the unit, and in some cases other amenities such as outside space, exposure, or view. The total number of shares in a given co-op remains fixed unless units are combined or sub-divided.

There are a variety of co-op ownership structures in the U.S.:

• Market-rate cooperatives: This form lets members buy or sell their shares at whatever price the market will bear. Purchase prices and equity rules more closely resemble condo or single-family ownership.
• Limited-equity cooperatives (LEC): In an LEC, there are caps or controls on the price members can ask for their shares. These often benefit from below-market interest rate mortgages, grants, tax abatement, or other features to make housing more affordable.
• Leasing or zero-equity cooperatives: The co-op leases the property from an outside investor and does not own any real estate. This type often finds itself in a position to buy a property and convert to a market rate or limited-equity co-op.

Each member’s shareholding determines his or her monthly maintenance payments. Maintenance covers basic operating costs and building upkeep, insurance, property taxes, and any mortgage charges for the building itself, or equity loans taken out by the coop for capital improvements.

Co-ops are managed by a board of directors. In larger co-ops, a board is elected by the members, while in smaller co-ops all members sit on the board. The board then sets and updates the corporate charter, establishes the co-op rules and regulations, and reviews the sale and transfer of shares to new members. People who are applying to buy a co-op stake are interviewed by the board.

Regular mortgages are not used when buying into a co-op. Since members own shares in a corporation rather than real estate, a separate financing instrument called a cooperative mortgage or a share loan is granted by lenders. With a cooperative mortgage, the shares in the co-op and the proprietary lease are the collateral for the loan, and the funds are used to by the equity stake and the buyer makes regular monthly payments to lender.

Are you looking for a great rate on a co-op mortgage? Check out our mortgage rate tables to find a great deal.

Cooperative example

Dana owns a share in a cooperative located at 55 Central Park West in Manhattan. This beautiful 19-story Art Deco masterpiece is a well-known landmark, but Dana has tired of living there after supernatural forces infested the building and interfered in her private life. She’s held her share in the building since the early 1980s, and would like to cash out after years of run-away real estate appreciation in New York City. She lists the small one-bedroom for a cool $5 million and fields a number of offers. However, the board turns down the application of her first choice, a gaudy pop-star known for her rowdy personal life and for being a frequent target of the paparazzi. Her second choice made a slightly lower offer, but passed the board review with flying colors.

Planning to buy into a cooperative? Use the Bankrate net worth calculator to see how you fare.