A cooperative housing corporation, often better known as a housing co-op, is a corporation organized under state law with the purpose of providing housing to its member shareholders. These shareholders collectively own the corporation that owns the building who then leases them a unit under a proprietary lease. The shareholders also elect a board of directors to make decisions for the corporation according to the corporation’s by-laws. Understanding key differences, advantages and disadvantages of cooperative housing corporations compared to condominium projects can help you reach consensus on decisions that affect you and your co-op neighbors.
How Co-ops Are Formed
Like any other corporation, cooperative housing corporations are formed by filing Articles of Incorporation with the Secretary of State. The original property owner, also called the sponsor, sells or transfers the property to the corporation who then sells shares of the corporation to shareholders and signs a proprietary lease allowing them to live in a unit. The sponsor retains control of the corporation until it sells a majority of the shares at which point it becomes controlled by shareholder-residents.
A board of directors elected by shareholders makes decisions or governs the cooperative housing corporation. The board’s powers and responsibilities, as well as its relationship to shareholders, are outlined in the corporation’s by-laws and include hiring a company to manage the building; setting and tracking a budget, including shareholders’ monthly maintenance fees to cover building expenses; and regularly providing shareholders information through reports and meetings.
How Cooperative Housing Corporations Differ From Condominiums
The key difference between cooperative housing corporations and condominium projects is that co-ops own the building and allow their member shareholders to live in an apartment according to a proprietary lease. That is, shareholders own the corporation that owns the building but not the individual unit where they live as condominium owners do. This landlord-tenant relationship between corporation and shareholder is different from condominiums which have homeowner associations that represent the condominium owners, not a separate entity that owns the building.
Advantages and Disadvantages to the Co-op Model
One important advantage over condominiums is that, because they own the building, cooperative corporations can use their building as collateral on a loan to finance building improvements. Condominiums cannot. As the landlord, the corporation can also take a shareholder to court for nonpayment of maintenance fees. Notorious disadvantages are that shareholders have restrictions on subleasing their apartments, must request board approval to sell their shares and often must pay a fee or percentage of the profit from the sale of their shares to the corporation in what is known as a “flip tax” to fund the corporation’s reserve account.
Changes to the Corporation
Most changes to the corporation are made through amendments to the corporation’s by-laws. Amendments must follow the approval procedure outlined in the by-laws, usually involving a meeting with a vote of a certain proportion of shareholders, and cannot contradict the articles of incorporation or state law which always supersede the by-laws. Since amendments are rare but potentially litigious, it’s always advisable to speak with an experienced co-op lawyer first.
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