Creating Affordable Cooperatives is Akin to Layering a Cake

With construction costs so high in most areas of the country, it is nearly impossible to create a new housing cooperative that is affordable or attainable using the traditional model of blanket debt and share financing covering the entire development cost.

In order to create affordability in a new cooperative, the trick is to use a layered approach to financing to bring “soft” money to the project to cover the gap between the total development cost of the project and proceeds generated by blanket debt and share sales. Soft money is no or low-cost capital given to a project in exchange for creating housing that is affordable to certain lower-income groups.

The first step in the process of closing the gap between the total cost development less the amount you will get through the blanket debt and share sales is to identify what is available from local government resources and other social “investors” that may be available to your project. These resources come in a variety of options that may differ from location to location. A good place to start, includes the following:

  • Local housing authority;
  • Local economic development offices;
  • State housing finance agencies;
  • Local and state U.S. Housing and Urban Development offices;
  • Local and state U.S. Department of Agriculture offices;
  • Social “investors” or lenders;
  • Regional federal home loan banks; and
  • Local land banks.

The resources provided by these groups can come in many forms including the following:

TAX ABATEMENTS – Most jurisdictions provide tax abatements in exchange for affordability. This abatement allows the property to pay a lower than normal or no real estate taxes for a given period of time in exchange for a certain number of units that will be affordable to a certain income level. The abatement provides for a lower operating cost for the property and increases the amount you can borrow on your blanket debt.

DIRECT GRANTS – Some jurisdictions provide direct funding to your project in the form of a grant that does not require repayment in exchange for a certain level of affordability.

LOW-COST, LONG-TERM LOANS – Many jurisdictions also offer low-cost loans to a project in exchange for affordability. The loans will be made in a subordinate position to the main blanket debt, often at interest rates of 1 percent or 2 percent annually and don’t require payment until maturity.

LAND GRANTS OR LONG-TERM LAND LEASE – Many local governments are granting government-owned land to local developers in exchange for affordability. In addition, land banks and governments may provide long-term land leases at very low cost to developers for the same purpose. This lowers the overall development cost for the project, making it more affordable to cooperative members in the long run.

FUNDING FOR ENERGY EFFICIENCY OR GREEN RETROFIT – Many jurisdictions have funding available for environmentally friendly projects.

HOME BUYER’S ASSISTANCE – Many local governments have homebuyer’s assistance or down payment assistance for certain income groups. Some allow this assistance to be used to lower the share prices for cooperative members.

OPPORTUNITY ZONES – If your project is in a qualified opportunity zone, there may other special lending programs or investment programs available.

It is not unusual for one or all of these types of soft type of funding in a project to help close the gap. You may also see several layers of soft loans to a project from a variety of sources. While most projects don’t have more than three or four layers of soft financing, it is not unusual to have six or seven layers depending on the resources available.

I am working with a number of developers who are building affordable cooperatives that are taking a very creative approach to raising capital in addition to what is listed above. A couple is looking at crowdfunding platforms to raise capital from like-minded individuals. Others are creating investment funds to attract socially conscious investors to fund cooperative development. Still, others are looking at approaching local businesses to invest in the housing cooperative to create affordable housing so members can live close to where they work.

In conclusion, while it is difficult to gather all of the financing mechanisms together today to create affordable and attainable housing cooperatives, it is possible, and it is being done.


Hugh Jeffers is originator at Centennial Mortgage


This article was featured in CHQ winter 2020 issue. Click here to read the PDF newsletter.

Comparative Study of 4 Affordable Home Ownership Models and Market-Rate Ownership and Renting Shows Strength of Housing Cooperatives for Low- to Moderate-Income Citizens

The United States is facing a housing crisis. The American workforce of moderate-income citizens—or people who make between 80 percent and 120 percent of the area median income (AMI)—has been highly affected. This group is often stuck paying a significant portion of their income towards rent and cannot make the jump to homeownership due to such high home prices and their inability to save. When people are contributing so much of their income to housing, it makes it difficult to pay for other necessities such as food and health care, according to T. Duggan’s 2018 article, How Families Slip Through published in the San Francisco Chronicle Fair Housing Rhode Island Technical Assistance Guide.

While there have been numerous efforts to address housing affordability for moderate-income households, the problem seems insurmountable. The city of Davis’s long experience with affordable housing provides unique insight into different affordable ownership models. To inform future affordable ownership housing initiatives and legislation supporting households from 80%-120% of income, the author compared four different models of affordable housing in the city of Davis with market-rate and rental models to determine their strengths, deficits and capacity for long-term affordability.

The Study

The four models included Aggie Village, Dos Pinos, Southfield Park and the city of Davis Affordable Ownership Housing Program (Davis AOH Program). Aggie Village is a form of university housing. The university owns the land and caps sale prices for residents who own the homes. Dos Pinos is a limited-equity housing cooperative (LEHC). Southfield Park is one of the city of Davis’s affordable housing projects. It features 2- and 3-bedroom condos that are limited to income-qualified buyers and can only appreciate 5.5 percent a year. The Davis AOH Program also offers opportunities for income qualified households that can appreciate 3.75 percent per year. The market-rate models are referred to as Purchasing Market Rate and Rental Market Rate.

The research for the study was mainly quantitative. The author selected a 3-bedroom unit from each model to analyze and the earliest available sale price, down payment and monthly payment were compared with 2019. Using the monthly payment, the author used the U.S. Department of Housing and Urban Development’s (HUD) definition of affordable—paying 30 percent or less of income—and the area median income (AMI) to determine if the unit was affordable to extremely low, very low, low or moderate-income four person families in Yolo County.


In terms of income levels, Dos Pinos and Aggie Village were affordable to low-income families. The Davis AOH Program and Southfield Park were affordable to moderate-income families and Rental and Purchasing Market Rate were only affordable to high-income four person families in Yolo County.

The average income for a family of four in Yolo County is $87,900. At a 30 percent HUD cap, they would be able to spend $2,198 a month on housing. This family would be able to afford to purchase a home/unit at Aggie Village, Dos Pinos or through the Davis AOH Program. If the families were to purchase a home on the market in Davis, Southfield Park, or rent in Davis, they would be contributing significantly more of their incomes towards housing than the other models.

The level of affordability changed over time. Aggie Village and Dos Pinos were the only two models that became more affordable over time. Purchasing Market Rate has also become more affordable, but it is still only considered affordable to those who make 160 percent of the AMI. In contrast, the Davis AOH Program, Southfield Park and Rental Market Rate have all become less affordable over time.

All of these affordable ownership models are less expensive than Purchasing Market Rate, but some also offer considerable savings as compared to renting. The most significant savings appear at Aggie Village and Dos Pinos where residents would save over 13 and 18 thousand dollars respectively per year as opposed to renting at market rate.


Of the four models, Dos Pinos is the most affordable model by monthly housing costs and has been shown to become more affordable over time. These facts are based on research conducted by K.Temkin, B. Theodos and D. Price’s in the 2010 study, Balancing Affordability and Opportunity: An Evaluation of Affordable Homeownership Programs with Long-term Affordability Controls and D. Thompson and M. Lund’s 2012 article, A Tale of Two Communities: The Longitudinal Effect of Limited-Equity Housing Cooperatives.

It bears noting that the monthly carrying charges for the apartments at Dos Pinos are not statistically accurate in their comparison. The Dos Pinos monthly carrying charge is extremely inclusive and covers virtually all of the housing expenses including interest payments, mortgage insurance and repairs. Thus, in reality Dos Pinos carrying charges are much lower than the monthly costs of the other models.

However, as a model, LEHCs do have some downsides. If the cooperative pays market price for land and buildings, when first built, the initial residents will need to be in a higher-income bracket to afford living there. For a LEHC to be affordable to a moderate-income family, there needs to be either leased land or a below market price concession on the land, the buildings or the financing. Over time, the monthly payments will become affordable to lower income residents, but the share will rise in price. The share price could make living there out of their reach even if potential residents could afford the monthly payments. At Dos Pinos, the full share must be paid up front, and members cannot use the share as loan collateral.

Yet in spite of these downsides, the monthly payment becomes remarkably affordable over time. Perhaps the most outstanding statistic in all of this study is the savings for families who live at Dos Pinos compared to a market-rate rental. The median family of four living in the average three-bedroom apartment in Davis would pay $2,731 per month. By living at Dos Pinos (and paying $1,212 per month), this family would save $18,228 per year. The median income family renting the average apartment in Davis is paying 37 percent of their income. Their overpayment of rental housing cost by the median income family in Davis prevents them from ever saving for the conventional down payment.


As the United States faces a housing crisis, and more presently an economic downturn, the issue of affordable ownership housing has only become more important. Policy makers and planners should know that models like Dos Pinos are best for creating and preserving affordable ownership housing.

LEHCS become more affordable over time and provide savings for residents who would have spent that money on housing if they lived in market-rate rental units.

Affordable ownership housing is a unique strategy that can significantly impact people and communities in a positive way. Our workforce of middle-income families needs more of it. Read full study.

This article was featured in CHQ winter 2020 issue. Click here to read the PDF newsletter.


Mikaela Fenton is a senior at the University of California, Davis, studying community and regional development.

Understanding Cooperative Financial Statements: Not for Professionals Only

Financial statements – the mere term often causes eyes to glaze over and minds wander. Let’s just leave that job to the professionals, right? Wrong! If you’re a board member of a cooperative, a basic understanding of financial statements is one of your important responsibilities. To govern your cooperative responsibly, you don’t need to have a certified public accountant (CPA)’s level of financial expertise. You don’t need to master the science of accounting. But you do need to have a rudimentary comprehension of the cooperative’s financial information – enough to feel comfortable with its basic financial statements, interpret them in a meaningful way and ask appropriate questions.

Here’s the dirty little secret: tacking this financial work doesn’t have to be an exercise in misery. In fact, it can be somewhat fun. My personal history reflects that. During my first experience living in a housing cooperative, in my much younger days, I was elected to the board of directors. I considered myself to be rather clueless (and looking back on that phase of my life years later, that was a pretty astute observation). I assumed that analyzing the financial information was best left to the masters of the craft, the professionals who could essentially speak a different language. The more I learned, however, the more I realized how false this assumption was.

It does take a lot of work to master the science of accounting. Years of study and experience are required to become an expert. However, the basic rules that govern accounting are not particularly complicated – in fact, the topic is founded on a few rather simple concepts.

One of the best starting points to the whole accounting world is to consider two of the most important financial statements: the balance sheet and the income statement.

The balance sheet represents a cooperative’s financial position at a particular point in time while an income statement reveals the cooperative’s financial performance over a given period over time. Much of the academic study of accounting – in fact, much of the study involved to become a CPA – delves into nuanced definitions of these items. The balance sheet manifests one of the simplest – and the most fundamental – rules of accounting: assets are equal to liabilities plus equity. That is, what you have (assets), can, by definition, be divided up into two components: what you owe (liabilities) and what you own (equity). So, what assets might a cooperative have? Assets are things of economic value that a cooperative possesses. All its cash accounts are one example. And its buildings unless it leases them and the underlying land are two more. And all the furniture it owns, its equipment. . .assets are good things. What about its liabilities? A liability is pretty much synonymous with an obligation. What obligations does a cooperative have? Its loans payable is usually the biggest, along with amounts it owes its vendors, which are commonly known as accounts payable. And the difference between these two – the assets (what it has) minus the liabilities (what is owes) – is the equity, what it owns, its net worth.

Obviously, any organization would prefer to have its equity be large and its liabilities be small. Relatively low amounts of debt give the cooperative more freedom and flexibility. Relatively high amounts of debt put the cooperative in a more precarious situation, and higher carrying charges need to be assessed to cover the required loan payments.

The other basic financial statement, the income statement (also known as the statement of profit and losses), is even more simple. Revenue, which is also known as income, represents transactions that increase in the financial wealth of the cooperative while expenses consist of transactions that decrease its financial wealth. The “bottom line” shows the revenue minus the expenses – the net income. When expenses exceed revenue, which a cooperative never likes to see, the result is a net loss.

The income statement is very much related to the cooperative’s annual operating budget. In fact, to a large extent, the budget is the cooperative’s financial target for the year, and the income statement shows how the cooperative has been performing against that benchmark. Directors should compare the income statement (actual) to the budget (target) each month or quarter.

These two basic financial statements are interrelated. Remember the equity section of the balance sheet? This increases in tandem with the cooperative’s net income (Of course, if the cooperative has a net loss, equity decreases by a similar amount). During the year, the equity section will show a component called “Net income (loss),” reflecting the cooperative’s financial performance to date. At the end of the year, the total net income (loss) is absorbed into a specific equity account called retained earnings, which is the sum total of the prior years’ net incomes and losses of the cooperative that have been “retained” in the organization. And simultaneously, revenue and expenses revert to zero at the start of the new year.

As previously noted, the format of the budget closely mirrors that of the income statement. And the income statement is crucial to creating next year’s budget: the upcoming budgetary expenses are derived, at least in part, from the cooperative’s actual current expenses, and the budgetary income needs to be high enough to cover those expenses, plus proper allocations to reserve accounts. The balance sheet is an important tool in developing the annual budget as well. What is the loans payable on which the cooperative is obligated to make payments? The liability section of the balance sheet provides such insights. How quickly does the cooperative need to build up its reserves to replace its current assets? The assets section of the balance sheet gives information about the exiting property and equipment as well as the current level of cash reserves.

While you’re digesting this information, let me throw out a final twist: there’s more than one way to record revenue and expenses. During the course of the year, most cooperative finance staff records revenue as cash is received and records expenses as cash is paid. This is known as the cash basis of accounting, and it aligns nicely with the cooperative’s annual budget. After the year is closed, management often works to transform the financials into the accrual basis of accounting, which recognizes revenue as it’s earned and expenses when they’re incurred. The accrual basis of accounting is required for financial statements to be presented in accordance with generally accepted accounting principles (GAAP), which is usually the case in a formal document such as an audit report.

What are the major differences between these two bases? Well, member carrying charge income on the cash basis would be shown as the amounts of cash payments that were received. On the accrual basis, however, carrying charge income would be shown as the amounts charged to the members. Amounts billed but not paid would show up as accounts receivable (an asset), and amounts paid prior to being billed would be noted as deferred revenue (a liability). In the expenses section, operational costs on the cash basis show up as expenses as the cooperative pays its vendors, whereas expenses are recorded when incurred to vendors on the accrual basis.

Expenses incurred before they’re paid would be recorded as accounts payable (a liability), and payments made before expenses are incurred are known as prepaid expenses (an asset). Overall, the important point to remember is that the year-end audit report will usually present the financial statements a bit differently than the internal financial reports that the board reviewed during the year.

These guidelines won’t make you an accounting expert. But you don’t need to be a financial authority to function effectively as a board member; you just need to be informed and have a little bit of knowledge. And a little knowledge can go a long way!

This article was featured in CHQ fall 2020 issue. Click here to read the PDF newsletter.

Brian Dahlk, CPA, a senior manager at Wegner CPAs in Madison, Wisc., has been a member of three different housing cooperatives and has provided audits, financial reviews, tax returns and consulting services for cooperative organizations across the country.

Is My Cooperative in Trouble?

A problem in some cooperatives is the boards do not treat the operations and management of their cooperative like a business. While the cooperative structure is a home and a community, it is also the primary asset of a corporation that needs to be managed. The “asset” needs to be kept in good working order to generate the revenue needed to operate. Allowing that asset to fall into disrepair or to be mismanaged will result in lost revenue, which may, in turn, jeopardize the cooperative’s ability to provide a home and community for its members. In simplest terms, there is a natural reluctance to raise your own “rent” affecting your personal finances, even though it may be necessary to maintain the viability of the cooperative business and result in savings in the long run.

Minor problems can become big problems with big consequences. For instance, leaky pipes may seem like a small problem, but they can have a severe financial impact. They result in higher water bills but also can be the source of significant mold problems. Mold remediation can be very expensive. Low water pressure can be a sign of a need to replace the main water supply lines to your property, also an expensive undertaking. Buckled sidewalks result in tripping hazards. These hazards can result in lawsuits against the cooperative. These are just a few examples of seemingly small problems resulting in larger more expensive issues.

Management and financial tracking are also critical with their own subset of issues that can result in larger problems down the road. An uptick in delinquencies can be a sign of lack of oversight. Worse yet, it could also be a sign of a slowing economy which may impact a greater majority of members’ ability to pay their monthly charges. Cooperatives need to look at macro issues such as this and plan accordingly. Many cooperatives actually have a plan to help members during an economic downturn. These plans may include hardship reserves to help members who need it, contingency reserves and expense reviews to ensure your cooperative is spending money where it needs to and not in areas that can be deferred during the recession.

For U.S. Housing and Urban Development financed cooperatives, it is required that the cooperative deposit 3 percent of annual monthly charges into an operating reserve. This deposit continues until the operating reserve is 15 percent of annual monthly charges. Then the annual deposit is decreased to 2 percent of annual monthly charges. After the operating reserve reaches 25 percent of annual monthly charges, annual deposits are no longer required. This creates an operating reserve that has been found effective in dealing with most potential operational issues outside of the normal cash flow of the property and provides a good rule of thumb for any cooperative to follow in creating an operating reserve.

Another issue that may result in bigger problems is accounts payable. Bills can stack up quickly and not addressing the results in a big problem that will negatively impact operations and may result in late fees, lawsuits, and unneeded legal bills. Not paying a contractor or real estate taxes will result in liens against the property. These liens may be difficult to overcome and will result in increased legal fees.

For all of these issues, the question of whether to raise revenues now, i.e. raise the “rent,” almost always results in lower future expenses and long-term savings.

Boards need to continually monitor their operations and property, identify problem areas and address them. By doing this, they will keep small problems from developing into issues that are difficult to resolve. It will also help you identify whether or not outside help is needed to address them.

Boards need to be asking these basic questions on a continual basis:

  • Does the cooperative have trouble paying its bills?
  • Are accounts payable in excess of 60 days?
  • Have maintenance calls increased?
  • Are there unresolved capital repairs?
  • Has vacancy increased?
  • Has applicant traffic slowed?
  • Have operating expenses increased?
  • Are we increasing monthly charges regularly?

By asking yourself these questions routinely, and being honest about the answers, you can assess whether or not problems exist that you should address. These questions help you identify common problem areas all cooperatives may face from time to time. Common problems include:

  • Underestimating operating expenses;
  • Underestimating the frequency and cost of repairs;
  • Not having sufficient cash reserves;
  • Not tracking occupancy trends or turnover adequately;
  • Not tracking delinquencies and late payments adequately;
  • Not addressing member concerns;
  • Not addressing repair issues and public safety issues on a timely basis; and
  • Not being honest about the need for financing to address physical issues and reposition your property.

An important part of the assessment process includes a physical inspection of the property. This inspection needs to be thorough and examine all areas of the property, including the roof. Inspections should ensure that the property is Americans with Disabilities Act compliant: entry doors are locked; hallways and stairwells are free from obstruction; heating, ventilation and air conditioning systems are in working order; and emergency vehicle lanes are clearly marked. Also, the inspection should address all common areas including laundry rooms, trash enclosures, crawl spaces/basements, mailboxes, playgrounds, and property signage. It is important to also check for pest infestations regularly. As part of the process, the property should maintain a disaster relief plan and coordinate with local emergency services as necessary.

Successful cooperative boards are pro-active about reviewing their property’s performance. These are the things you should do regularly to ensure you catch problems before they become significant issues:

  • Ask yourself the “are we in trouble” questions above;
  • Review performance of the property with the management company monthly;
  • Be mindful of the common problem areas and mistakes;
  • Review property management performance regularly;
  • Visually inspect the property thoroughly and regularly (at least every 6 months);
  • Be proactive in dealing with issues; and
  • Seek outside help as needed.

By establishing this framework to regularly assess your performance, you will help keep your cooperative ahead of potential problems and set yourself up for future success.

Hugh Jeffers is vice president of origination at Centennial Mortgage in South Bend, Ind.

How to Streamline the Process of Collecting Carrying Charges

This may be the most obvious observation in the world: Members staying current on their carrying charges are essential to the lifeblood of the cooperative corporation.  Without them, you are in big trouble.  It seems so fundamental, but our office still sees frequent issues, popping up on a daily basis and we thought this was a good opportunity to go over some tips on how to streamline the process.

  1. Partial payments: Have a consistent policy on whether you will take partial payments after a Notice has been issued.  We don’t need confusion amongst members as to whether the partial payment has taken them out of the legal process.  We also don’t need a manager making an expectation for one member and not another, as there could be legal consequences for showing disparate treatment of members.  We want to work with members where can, but we need to be consistent.
  2. Certified funds: Mandate that once a Notice goes out, only certified funds will be an acceptable manner of payment. Time is money and the cooperative should not have to wait to see if the funds are actually there.  This is at minimum a showing of good faith by the delinquent member that the funds are available and keeps the follow up by management to a minimum. The money is good when it is presented and deposited, without any fear of getting an NSF notice.
  3. Make sure delinquent members come into the office and pay in person. How many times have we heard the old phrase “the check is in the mail”?   For Cooperative purposes, the “mail” is usually the dropbox, but you get my point.  I don’t like going to court and having a member tell me, “well I dropped it off in the box.”  That is not always verifiable or credible.  Having the delinquent member go into the office with certified funds and getting a receipt confirming payment will eliminate that issue, since that payment has been verified likely would have resulted in them not even being in court that day because the case would likely have already been dismissed.
  4. Accepting Carrying Charges After the Time Provided in the Judgment for Possession: Laws will differ state by state, but in Michigan like many other states, a Cooperative has no obligation to accept payments after the time to pay set forth in the judgment has elapsed.  Every month it seems, we will have Defendant/members trying to pay after the timeframe has expired, and sometimes after we have ordered the bailiff out to execute and dumpsters for their belongings.  Legally, you have no obligation to accept this money because the ship has sailed.  Of course, the Cooperative has every right to make accommodations for payment if they choose to do so, but the court has no authority to require you to accept these payments.  If they do, it is an appealable issue.
  5. Be clear and unambiguous when the Court Officer/Bailiff comes to execute: It is customary for the executing officer to contact the management company or the lawyer who ordered the execution to ascertain if the execution is still necessary, or if the delinquent Defendant /member has paid. Saying anything other than the “Defendant has not satisfied the judgment and the writ needs to be executed” can cause issues.  We just had to handle a similar issue where the court officer at the time of execution believed there was some type of a payment plan because he heard some payment had been made.  The manager didn’t tell him to hold off on execution, but because the directive was not clear, the court officer took it upon himself to discontinue the execution process which required additional attorney fees to get the process back on track.
  6. Creating habitual non-payment policies. If you are in a state like Michigan which allows a member to ”pay and stay,” meaning if they can come up with the money within 10 days after the judgment is signed, they have cured the balance by satisfying the judgment and can stay.  It costs time and resources for members who are habitually late, or “frequent flyers” as we call them.  Work with your cooperative attorney to adopt a policy that requires any member who is late 3 consecutive times or 4 times in a calendar year to be terminated.  Costs, resources mount when members do not take their obligation seriously.  This policy gives you more leverage on problem members and provides an independent cause of action that they cannot satisfy by paying every time they are taken to court.  It may sound harsh, but in the event the cooperative is not able to recoup all of their fees every time they go to court, those losses add up.  It is not fair the rest of the membership should pay the price for those who don’t live up to their obligations.

Creighton D. Gallup in an experienced Partner with Pentiuk, Couvreur & Kobiljak, P.C. He has drafted proposed legislation exempting housing cooperatives from the Michigan Truth in Renting Act and the Michigan Consumer Protection Act. You may recognize him as Creighton is a frequent instructor at NAHC and MAHC where attendees benefit from his many years’ experience working with management companies and housing cooperative boards.


Please note this content is provided to our readers for educational purposes but it is not intended and should not be regarded as legal advice. Readers are encouraged to consult with competent legal counsel for personalized guidance.