Cooperatives: Definition & Requirements

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Sometimes you don't own your home, but you own the entity that owns your home. In this lesson, you'll learn about cooperatives, their general characteristics, and different types. A short quiz follows the lesson.

Cooperatives - General Characteristics

The first thing you need to realize about owning part of a cooperative is that a cooperative is not actually a piece of real property. That's right, you don't own the real estate when you are part of a cooperative. Instead, you own part of a legal entity that is formed and operated to own real estate.

A cooperative is a legal entity (usually a corporation) that owns and manages a multiunit dwelling, such as an apartment complex. If you purchase a share in a cooperative, you will become a shareholder and be entitled to lease a unit from it. In effect, you are both a tenant and owner because you lease from the entity, which you partially own, that in turn owns the property that you are leasing.

Aside from your unit, you'll also have a right to use all common areas and amenities provided by the cooperative, such as pools, fitness centers, outdoor areas, parking, lobby, and concierge services. Your rental payment will cover your proportionate share of any financing, taxes, insurance, repairs, maintenance and other operating costs of the cooperative.

Since most cooperatives are structured as a corporation, they are governed in a similar manner. You'll have a board of directors elected by the shareholders. The directors will then select officers to run the day-to-day operations of the cooperative. Shareholders usually serve as board members and officers of the cooperative.

Legal Instruments

You'll need three essential legal documents for the formation and operation of a cooperative. First, you need to draft and file the document that forms the cooperative as a legal entity; depending upon the state, this document may be called the articles of incorporation, certificate of incorporation or corporate charter. You'll also need to develop a set of bylaws, which is the set of rules that govern how the cooperative is managed and operated. Bylaws typically address shareholder and director meetings, selection of directors and officers, and the rights and responsibilities of the directors, officers and shareholders among other things. Finally, you'll also need a proprietary lease or occupancy agreement, which is the contract between the shareholder and the cooperative for the exclusive occupation and use of one of the cooperative's units as well as the use of the common areas. Lawyers are usually retained to do this type of complex drafting.

Blanket Mortgage & Equity

Typically, the developer of a cooperative will take out a loan secured by a blanket mortgage to develop the land and build the units and common areas. A blanket mortgage covers multiple pieces of property but you don't have to pay off the entire mortgage when you sell one of the properties. This allows cooperative units to be freely bought and sold. The rent the cooperative receives from its shareholders for their respective units will be used to pay the loan.

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