The Housing Cooperative Advantage: Membership has Privileges

THE U.S. CENSUS BUREAU reported an annual rental population of nearly 31 percent in 2019. While there is an overwhelming number of homeowners in America, the rental population seems to be disproportionally concentrated in densely populated metropolitan areas and accounts for millions of households. Prices and availability have become major impediments to families seeking housing in our country. Profit motivated development of housing stock continues to exacerbate the problem. Those in the know understand well-run housing cooperatives are the most economical solution to this ever-growing problem.

Housing cooperatives have a unique advantage over other forms of housing. Simply put, membership is ownership. Unlike the rental option, a member in a housing cooperative can exercise and enjoy ownership privileges. Unfortunately, based on informal surveys of the National Association of Housing Cooperatives (NAHC) participating cooperatives, it is apparent that many cooperative members don’t actually share this perspective of ownership through their cooperative membership and therefore occupy just like a renter would although they are enjoying all the economic benefits the cooperative provides. These households have chosen to relinquish the control of their housing communities by failing to become engaged in the process of cooperative governance. In many cases, these members have complaints about how the community is run, using phrases that begin with the word, “They,” assuming governance is the job of a select few or that of management. However, individual member engagement is essential to the success of a housing cooperative.

Too often we hear reports of cooperatives that seem to have problems with finances, voting rights, membership transfer procedures, management conflicts and limited knowledge of the governing documents. These challenges result in an atmosphere of mistrust and suspicion and a lack of transparency. Cooperatives that find themselves at this place must take steps to right the ship. However, they must assess their operation to determine where the problems lie, then take the necessary steps to correct those issues. Here is a five-step approach cooperative members can adopt.

1] GET INVOLVED. It is a widely held misconception that one must be a board member in order to work in the cooperative and effect change. This is not true. The member should seek to volunteer on committees, find areas of interest and start new projects or volunteer to review work by others in the cooperative.

2 ] UNDERSTAND YOUR COOPERATIVE. Most cooperative members fail to read and understand the bylaws and other governing documents until there is a problem. Study your governing documents. Convene informal study sessions with other members. Involve management or your legal counsel if you have difficulty understanding key provisions. At every cooperative event have a session on governing documents to keep members up-to-date. Establish a committee charged with monitoring local laws that affect your cooperative and its governance structure. This committee will report quarterly with the aim of keeping your documents fresh and relevant.

3 ] UNDERSTAND THE SCOPE OF WORK OF YOUR PROFESSIONALS. All too common is the expectation that one of your hired professionals should have taken care of an item that was not included in their scope of work. Review your service contracts to test the scope of work against the needs of your cooperative. If you find gaps, amend those agreements. This work should be a collaborative effort between the cooperative and the professional. Everyone is better served when expectations are realistic and documented.

4 ] ASSIGN THE RIGHT PEOPLE. Committee assignments in the cooperative should fit the skill set of the volunteering member. The cooperative would benefit from having clear committee job descriptions. Get to know each member and their skills so you can achieve the most appropriate match. This task can be done through strong social interactions. Conversations with members will often reveal skills and interests that would have gone unnoticed.

5 ] MEASURE YOUR PROGRESS. Tasks that are measured regularly usually get completed. Evaluating the operations of the cooperative is critical. There should be tools in place to evaluate the effectiveness of each project, volunteer and professional. These evaluations should be structured to get the best out of each person, not as a punitive tool to highlight deficiencies. Find out what works best and do more of that.

The privileges of membership will be readily realized as your cooperative becomes more successful. Your community will become the most desired housing location in your area, and members will get the word out. Your waitlist will be filled with motivated applicants. The political and social effectiveness of your community will be realized by each member, and they will want to become engaged. When was the last time you experienced greater than 50 percent-member participation at your cooperative for an event that wasn’t a gripe session? You can turn that around. Start now.

Your cooperative offers you the opportunity to learn a great deal about what it takes to keep your cooperative afloat. It offers you the ability to learn how to be a contributor and leader in your community. It is a democratic experience where it counts, your home.

Fred Gibbs, NAHC President

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.