Watergate is probably the most famous - or infamous - cooperative housing association here in the District of Columbia. But do you know that there are over 50 such associations here, ranging in size from only four units to over 100 apartments.
The general public often confuses condominiums with cooperatives. In reality, as far as living standards go, there are few differences. However, from a legal - and financing - point of view, there are major differences.
There are many definitions of cooperatives, but the one I like best is that a cooperative is a multi-unit apartment building, in which each resident has an interest in the entire building, and a lease (or contract or share of stock) enabling the owner to occupy a particular apartment unit within the building.
If you own a condominium, you actually own your entire apartment, as well as a percentage of the common areas (called the "common elements"). A cooperative owner -often called a shareholder -- does not own the unit. In fact, you could call such owner a "tenant".
The cooperative association, which is usually a corporation consisting of all the unit owners, owns the entire building, including all of the individual units. Each co-op unit owner either owns shares in the cooperative association -- just like owning shares in any other corporation - or for non-stock corporations has what is known as a "proprietary lease". This lease spells out the rights and responsibilities of the owner, as well as the obligations and duties of the Association.
Decisions on the management, lifestyle and financial details are made by the cooperative unit members themselves, either through their vote at regularly scheduled meetings, or by delegation to an elected board of directors, which runs the day-to-day operations of the cooperative.
While this may sound complex, in reality, cooperative living can be very desirable. Cooperative residents generally get the same tax treatment as other homeowners. If they have a loan and if that loan is secured by their ownership documents (ie. the stock certificate or the proprietary lease), they can deduct the yearly interest paid on that loan. Additionally, if the cooperative association has a mortgage on the entire building -- called a blanket or underlying mortgage -shareholders can deduct their proportionate share of the interest on that mortgage. And under most circumstances, they can also deduct their proportionate share of the real estate taxes which the cooperative pays.
How do you go about buying into a cooperative apartment? Let us assume that you have picked a building and have agreed with the seller on a price. It is important to enter into a written contract to purchase this unit, spelling out the various terms and conditions agreed upon, including when the transfer will take place, the price and any financing arrangements between the seller and the buyer.
Perhaps the most important distinction between a condominium and a cooperative is that most cooperative associations require that a prospective purchaser be approved by a membership committee comprised of current cooperative owners. The approval process allows the committee to approve or reject a potential purchaser. However, there are only two grounds on which rejection can legally be based: financial or unwillingness to abide by the terms of the association's rules and regulations. If the membership committee believes that the potential purchaser does not have the financial capacity to live in the complex -- or if the committee determines that the potential purchaser has demonstrated an unwillingness or an inability to comply with the operating rules -- that potential purchaser may be rejected for ownership. However, under no circumstances can the applicant be rejected for other reasons, such as age, sex, race, sexual preference or religion.
The two classic cases in history involve Richard Nixon and Barbra Streisand -- both of whom were rejected for membership in New York cooperatives. The membership committees of those cooperatives were concerned that the presence of these celebrities would create havoc within the cooperative, and would make their building a tourist attraction.
Until the mid-1980's, it was often difficult to obtain financing for the purchase of a cooperative apartment. Thus, sellers often had to "take back" some of the purchase price, by way of a promissory note. As security for this promissory note, the new owners would pledge the shares of stock (or proprietary lease) which they received at settlement.
In recent years, however, cooperative financing is freely available, and is referred to as "share loan financing.
A condominium is governed by the applicable law in the jurisdiction where the property is located. The relevant documents include the Declaration, Bylaws, Rules and Regulations and Plats and Plans. In coops, however, there are few substantive statutes that govern or regulate the associations. The operating documents are the Articles of Incorporation, Bylaws, House Rules and Proprietary or Ownership materials.
One interesting aspect of cooperative living is that typically, unlike condominiums, there is a larger percentage of owner occupancy. In fact, many coops specifically prohibit renting of apartments. As a result, from my experience, there is usually more active participation in the management of the cooperative by the co-op members. It is this participation -- indeed a spirit of involvement -- that has kept cooperatives alive and well, and a competing force to condominium living.
There are those who claim that cooperatives are not as good investments as are condominiums, and indeed some cooperative associations have changed to condominium. I do not agree. Especially after the mortgage meltdown that plagued this country for several years, there are many condominiums which are financially unsound and are just not good investments. Much depends on the individual project: how is it managed? Is the Board actively involved and does the Board have the expertise to run such a project? What is the financial state of the association? Are there adequate reserves? Does the Board allow delinquencies to mount or have they adopted a "zero tolerance" approach to collections?
These, and many other factors, must be considered - both for condominium as well as cooperatives. Potential purchasers must do their homework, review carefully the legal documents and the financial statements, before they sign any contract to purchase. It is also a good idea to meet with the association President to get a flavor of life in the association.