What is a Cooperative?

What is a housing cooperative?

(Download handout)

A housing cooperative is formed when people join on a democratic basis to own or control the housing and/or related community facilities in which they live. Usually they form a not-for-profit cooperative corporation. Each month they pay a fee to cover their share of the operating expenses. Personal income tax deductions, lower turnover rates, lower real estate tax assessments (in some local areas), controlled maintenance costs, and resident participation and control are some of the benefits of choosing cooperative home ownership.

What do I actually own?

The main distinction between a housing cooperative and other forms of home ownership is that in a housing cooperative you don’t directly own real estate. But if you don’t own real estate, what exactly are you buying? You are buying shares or a membership in a cooperative housing corporation. The corporation owns or leases all real estate. As part of your membership (as a shareholder) in the cooperative you have an exclusive right to live in a specific unit (this is established thorough an occupancy agreement or proprietary lease) for as long as you want, as long as you adhere to the cooperative’s rules and regulations. As part of your membership, you have a vote in the corporation’s affairs.

Arrowwood Hills is a Limited-equity housing cooperative. What does that mean?

In a limited-equity housing cooperative (LEC) there are restrictions on the proceeds members can get from selling their shares. These are usually imposed because the cooperatives’ members benefit from below-market interest rate mortgage loans, grants, real estate tax abatement, or other features that make the housing more “affordable” to both initial and future residents for a specified period of time. In some cooperatives these limitations are voluntarily imposed by members. These restrictions are usually found in the cooperative’s bylaws. The documents may also establish maximum income limits for new members to target the special benefits of the housing to families who need them the most

Can cooperatives discriminate?

Like any other form of housing, cooperatives cannot discriminate based on the protected classes listed in the Fair Housing Act, which include race, color, religion, sex, familial status, national origin, or disability. Historically, the basic cooperative principles include both open membership without restriction as provided by law and non-partisan in politics and non-sectarian in religion. However, many cooperatives are selective in approving memberships. As communities of people who share a financial obligation and responsibility for governing how they want to live together, it is important for cooperatives to ensure that incoming members can meet their financial obligation and will abide by the rules of the community.

Do I pay real estate taxes?

Taxes are assessed on the cooperative corporation, as owner of the property. Your monthly payments to the cooperative are, in part, used by the cooperative to pay the real estate taxes. Even though you don’t pay real estate taxes directly, federal tax law allows you to deduct your share of the cooperative’s tax payments, as well as your mortgage interest payments, on your personal income tax return.



Economic Advantages

  • Affordable: Lower down payment, much lower closing costs, economies of scale, and a longer mortgage term all make cooperatives more affordable than other ownership housing.
  • Living in a Cooperative Stays Affordable. Members have no reason to substantially increase monthly charges unless taxes or operating increase; typically monthly charges remain reasonable.
  • Tax Deductions. For income tax purposes, the cooperative member is usually considered a homeowner and, as such, can deduct his or her share of the real estate taxes and mortgage interest paid by the cooperative.
  • Equity. Cooperatives can provide for accumulation of individual member equity. For market-rate cooperatives, the accumulation of equity and resale prices are based on the market. Limited-equity cooperatives establish limitations on the accumulation of equity to ensure long-term affordability to new members.
  • Limited Liability. Members have no personal liability on the cooperative mortgage. The cooperative association is responsible for paying off any mortgage loans. This can often make it possible for persons whose income might not qualify them for an individual mortgage to buy a membership in a limited equity cooperative.
  • Consumer Action. Through their cooperative association, members can jointly exert influence to change tax rates and utility prices and obtain improved services from local governments. The cooperative, as consumer advocate, also can join with other organizations and/or coalitions.
  • Savings. Cooperative members can benefit from economies of scale in cooperative costs as well as from not-for-profit operation. Also, when there are “transfers,” only the out-going member’s equity must be financed by the incoming member. Transfers of shares are subject to fewer settlement costs.

Social Advantages

  • Elimination of Outside Landlord. Cooperatives offer control of one’s living environment and a security of tenure not available in rental housing.
  • Community Control. As mutual owners, member residents participate at various levels in the decision-making process. This is not true of tenants who usually do not have the opportunity to exercise input into the landlord’s decisions. Members own the cooperative collectively and can remain in their homes for as long as they wish, as long as they meet their monthly obligations, and abide by the cooperative bylaws, rules, and regulations.
  • Cultural Diversity. Many cooperative members say that the possibility for interacting with people from different backgrounds, cultures, and income levels is a positive factor in their decision to become a member.
  • Extended Services. By establishing cooperative procedures and working together, people can provide services for themselves that otherwise would be impossible to obtain. When one cooperatively organized venture is successful, it often becomes clear that people can be successful in another area as well. As a result, the original effort often can be strengthened. Examples include athletic teams, cooperative preschools, credit unions, tutoring, food-buying clubs, arts and crafts, and senior health care and support services.

Physical Benefits

  • Shared Maintenance Responsibilities. Cooperative members usually have limited direct maintenance responsibilities. The cooperative association is responsible for major repairs, insurance, equipment replacement and upkeep of common grounds and facilities.
  • Vandalism and Security. Cooperative members vigorously protect their association’s property. An important benefit of converting rental properties to cooperative ownership is reduction in vandalism and abuse of property and improved and shared security arrangements. And recent studies show that a cooperative’s presence in the neighborhood reduces neighborhood crime.