Cooperative Ownership
In a cooperative, a corporation holds title to the land and building.
The corporation offers shares of stock to prospective tenants.
The price the corporation sets for each apartment becomes the price of the stock. The purchaser becomes a shareholder in the corporation by virtue of this stock ownership and receives a proprietary lease to the apartment for the life of the corporation.
Because stock is personal property, the cooperative tenant-owners do not own real estate. Instead, they own an interest in a corporation that has only one asset, the building, which is personal property.
Operation and Management of a Co-Op
The operation and management of a cooperative are determined by the corporation’s bylaws. Through their control of the corporation, the shareholders of a cooperative control the property and its operation. They elect officers and directors who are responsible for operating the corporation and its real estate assets. Individual shareholders are obligated to abide by the corporation’s bylaws.
An important issue in most cooperatives is the method by which shares in the corporation may be transferred to new owners. The bylaws may require that the board of directors approve any prospective shareholders. In some cooperatives, a tenant-owner must sell the stock back to the corporation at the original purchase price so that the corporation realizes any profits when the shares are resold. In others, if the stock is sold for the latest “going price” on the unit, stock profits may go to the departing tenant or at least be shared.
The corporation incurs costs in the operation and maintenance of the entire parcel, including both the common property and the individual apartments. These costs include real estate taxes and any mortgage payments the corporation may have. The corporation also budgets funds for such expenses as insurance, utilities, repairs and maintenance, janitorial and other services, replacement of equipment, and reserves for capital expenditures. Funds for the budget are assessed to individual shareholders, generally in the form of monthly fees similar to those charged by a homeowners’ association in a condominium.
Unlike in a condominium association, which has the authority to impose a lien on the title held by a unit owner who defaults on maintenance payments, the burden of any defaulted payment in a cooperative falls on the remaining shareholders. Each shareholder is affected by the financial ability of the others.
For this reason, approval of prospective tenants by the board of directors frequently involves financial evaluation. If the corporation is unable to make mortgage and tax payments because of shareholder defaults, the property might be sold by court order in a foreclosure suit. This could destroy the interests of all shareholders, including those who have paid their assessments.
Advantages of Co-Op Ownership
Cooperative ownership, despite its risks, has become desirable in recent years for several reasons. Lending institutions view the shares of stock as acceptable collateral for financing. The availability of financing extends the possible transfer of shares to modest purchasers in many co-ops. As a tenant owner, rather than a tenant who pays rent to a landlord, the shareholder has some control over the property. Tenants in cooperatives also enjoy certain income tax advantages. The IRS treats cooperatives as it does fee simple interest in single homes or condominiums in regard to deductibility of loan interest, property taxes, and homeseller’s tax exclusions. Finally, owners enjoy freedom from maintenance.
Illinois real estate licensees are permitted to list and sell cooperative units and interests without obtaining a securities license.
