It Is So Simple: What Does a Housing Cooperative Membership/Share Purchase Buy?

It is all in the documents. It is all described in the bylaws.

Purchase of a membership or shares issued by a housing cooperative buys more than an undivided ownership of the cooperative corporation. It also buys the right to occupy a dwelling unit owned by the cooperative corporation. The ownership and possessory rights can be described as the “cooperative interest.” The term member or shareholder does not, in usual parlance, include the possessory right but only the corporate ownership interest.

In most states, this interest is considered personal property, in some others as real estate. But in either event, it is saleable, and it can be inherited. It must be noted in most all cooperatives the purchaser must be approved by the cooperative or the heir qualified under the cooperative’s membership criteria and any agreements with third parties.

In some cooperatives, the interest owner’s right to sell is inalienable. In others, it may be subject to the cooperative’s first option to buy at a price to be calculated by a formula in the bylaws or to be set by the cooperative. The cooperative may waive or fail to exercise the first option, in which event, the interest owner has an inalienable right to sell.

Whether held to be personal or real property, the interest can be inherited. Inheritance is governed by state laws, usually preferring the spouse and children, then other relatives. State law may be superseded by the interest owner signing a will or a living trust spelling out who should inherit. Cooperatives can adopt a policy to acknowledge the terms of a will, unless it is contested, in which event a court proceeding to “probate” the will would be required.

Cooperatives also can adopt a policy that would permit an interest’s owner to transfer ownership into a living trust controlling the transfer of the interest into the living trust. In either event, state laws permit the transfer where the cooperative interest is part of a small estate by use of a small estates affidavit.

In the event there may be a sale to or an inheritance by a person not qualified to live in a Section 8 subsidized unit, that person would not be eligible to reside in the cooperative or some other disqualifying factor (credit, family size or criminal background issues consistent with recent HUD guidelines) that person would be entitled to the proceeds paid by an eligible member from the waiting list.

What is described above is what a housing cooperator acquires when cooperative stock or membership is acquired. It is part of the overall governing contract consisting of the articles of incorporation or charter, bylaws and the occupancy agreement or proprietary lease enforceable by the cooperative AND the member or stockholder.

But Wait, Things Are Not So Simple in Some Cooperatives

The Chicago Area U.S. Department of Housing and Urban Development (HUD) office has dictated to cooperatives with Section 8 project-based contracts that all of that doesn’t matter. HUD regulations say that residents have to be chosen from a HUD supervised chronologically maintained waiting list. That HUD office says that a member cannot be permitted to exercise their right to sell or gift the membership to another family member, a friend or person of their choice, nor to permit a family member, friend or other designee to inherit it. The HUD office’s dictate means the cooperative is required to exercise its option to repurchase even if the price (transfer value) described in the bylaws is higher than that for which the cooperative can resell to someone from the waiting list. The practical result is to force such cooperatives to violate their own documents to avoid losses detrimental to their member residents.

Additionally, the HUD office puts forth the argument that there is a greater chance of a violation of the non-discriminatory law even though those laws can be enforced against the member seller as well as a cooperative seller if such an event occurs.

So, these cooperatives are caught in a vice between their HUD-approved documents and HUD regulations. The HUD regulations are designed to govern such situations within rentals where the tenants do not have such rights to sell or have their possessory lease interest inherited. Only if the heir resided with the deceased would the right to participate in the Section 8 program pass to that heir, and they could become a member by inheritance.

Not so simple anymore.

Facts and Figures of Cooperative Membership

The term “cooperative interest” was introduced by cooperative legislation proposed by the Uniform Commissioners for Uniform State Laws.

In some housing cooperatives, the cooperative has the first right of first refusal in which the cooperative can preempt a private sale by a cooperative member or stockholder by matching the price offered by the proposed purchaser. This price also may be higher than which the cooperative can resell it.

The conclusions that cooperative interests are personal property are a result of state court decisions; that they are real estate are the result of state legislatures having adopted a version of the Commissioners for Uniform State Laws’ proposals governing housing cooperatives.

HUD model bylaws provide for a formula by which the sale price of a cooperative interest increases annually. The product of this formula is described as “transfer value” to be paid if the cooperative exercises its option to re-purchase the cooperative interest. In limited equity cooperatives, it also represents the maximum that a member can sell a cooperative interest.

Whenever a party to a contract does not and cannot comply with the provisions of a contract, a breach of contract may have occurred with resulting liability. The bylaws and the occupancy agreement are contracts between the cooperative and each member. There is also a question whether a law can abrogate rights under a pre-existing contract.

If cooperatives seek to create policy (rules and regulations) relating to these matters, the cooperative should consult with an attorney. Neither this article nor NAHC proposes to give legal advice. The opinions expressed are those of the author.

The author wishes to thank Creighton Gallup, Esq., of Pentiuk, Couvreur and Kobiljak for constructive comments on the article.