Cooperative Living - AN ALTERNATIVE OPTION TO HOME OWNERSHIP
Buying a home or renting an apartment are not the only living arrangements available in the marketplace. Here I introduce the concept of cooperative living, and how it may be one of the best home ownership solutions available - especially in Vancouver, BC - a market with some of the highest real estate prices around the globe!
WHAT IS A CO-OP?
A cooperative, or co-op, is essentially a self-directed association of people who work together for their mutual benefit, whether it is economic, cultural or social, there is typically a common goal amongst the group. They are typically self managed and non-profit.
Co-ops are more common than you may think. There are several businesses that are cooperatively owned in Vancouver. Vancity Credit Union, as well as most other credit unions being cooperatively owned, food co-ops are common, daycare co-ops are becoming more popular, and more small business than we can count are cooperatively owned.
HOUSING COOPERATIVES (CO-OP)
Housing cooperatives are a distinctive form of home ownership, providing an alternative to the traditional methods of acquiring a primary residence. They are different from other residential arrangements such as single family and condominium ownership.
A housing cooperative is a legal entity (corporation), which owns real estate. It’s membership-based and membership is granted upon purchasing shares in the cooperative. Individuals purchase a percentage share of the building and the land on which it is built, tied to the square footage of their unit; all owners own the building collectively, with exclusive rights to occupy their own unit by way of an occupancy agreement (also known as a proprietary agreement), which is similar to a lease.
It’s important to note, members / shareholders in a co-op own equity in their residence and their shares can be sold at market value, just like any other residential property.
There are housing co-ops of the rich and famous: John Lennon, for instance, lived in The Dakota, a housing cooperative, and most apartments in New York City that are owned rather than rented are held through a cooperative rather than via a strata arrangement.
ADVANTAGES TO OWNING IN A CO-OP
Tax benefits: As a co-op owner, your share of the real estate taxes and interest on any underlying mortgage allocated to your shares may be deductible. The co-op corporation notifies shareholders of the dollar amounts of these allocations annually.
Less of a chance of foreclosure: Your shares in the co-op and the proprietary lease are the collateral. They are not as valuable to the lender because they can’t be sold or disposed of as easily as real estate.
Get more for less: Coops are known to be less expensive; you’re able to buy a much larger or newer home for much less than a comparable strata unit in the area.
Leverage buying power: Pooling of the members’ resources means a lower cost of owning and maintaining the building for each co-op member, because the residents are the owners, not investors looking to turn a profit.
Democratic communities: The residents make decisions on how the co-op operates.
Property tax rebate: A co-op will calculate the property tax owed to the city for the entire building in the annual financial projection and include each member’s unit share in their monthly fees. This often results in an annual rebate for each member.
Screen and select your neighbours: The Board of Directors meets with every potential shareholder, prior to becoming a member, screening and selecting who may live in the cooperative. This screening process goes both ways, as it gives the potential member an opportunity to determine if the co-op is suitable for them as well, building and maintaining a like-minded community.
Management of a co-op is run exactly like a strata operation. Shareholders each own one voting share in the coop.
Members of a co-op elect a board of directors from amongst the shareholders at a general meeting, usually the annual general meeting. Rules are determined by the Board, providing a flexible means of addressing the issues that arise in a community to assure the members’ peaceful possession of their home.
The Board of Directors is generally responsible for the business decisions including the financial requirements and sustainability of the co-operative. The Board of Directors meets with every new member of the cooperative to ensure they understand the bylaws, rules and culture of the co-op prior to becoming a member.
It is common for a caretaker to live on site and manage the building. Employment of a property management company is common to assist in the regulation of meetings, minutes and financial statements and projections.
Like a strata, members pay a monthly fee. This fee covers all of the co-op's costs including, heat, hot water, amenities, operating costs for the building, contribution to the contingency fund and annual property taxes.
In 1999 there were over 2,000 housing co-ops in Canada with 111,000 members and combined assets of nearly $5.6 billion (CMHC). How many housing co-ops do you think are active today?
How is a co-op home loan different than a mortgage? When you get a mortgage to buy a house or a condominium, the property is collateral for the mortgage. Since you’re not buying real estate property when you buy a co-op, you are not getting a mortgage in the traditional meaning of the term. In effect, you are getting a loan to buy the shares and proprietary lease to live in the co-op unit. Your shares in the co-op and the proprietary lease are the collateral. Select lenders willing to grant a mortgage; Vancity and Canadian Western Bank finance co-op’s in British Columbia. A typical down-payment of 25-35% is required to purchase shares in a cooperative.
When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located. You will own the number of shares allocated for that apartment based on its size and location. Instead of the deed you receive when you buy a house or a condo, with a co-op you get a stock certificate and a proprietary lease or occupancy agreement. The lease spells out the rights and obligations of the coop and the shareholder for the use and occupancy of the apartment. The shareholder becomes part owner of the building and has a proprietary lease on a specific apartment.
TYPES OF HOUSING CO-OPS
When one hears the term “co-op housing” it’s typically associated with “social housing” or “low income assistance”. What many do not know is that there are three types of co-op housing, each vastly different than the other.
HOUSING COOPERATIVES COME IN THREE BASIC EQUITY STRUCTURES:
Market - Rate Housing Cooperatives:
- Members own equity in their residence - Shares can be sold at market value, just like any other residential property
Limited Equity Housing Cooperatives:
- Often used by affordable housing developers - Allow members to own some equity in their home - Membership sale price of the home is limited to that which they paid
Group Equity or Zero-Equity Housing Cooperatives:
- Members do not own equity in their residences - Often have rental agreements well below market rates