What is a Cooperative Building?

During your home search process, you may have come across a few buildings in Los Angeles that are a Co-Op (Cooperatives). Co-Ops are more popular in cities like New York but can also be found here in Los Angeles.

You may be familiar with how condo associations function, Co-Ops aren’t much different. Just like condos, Co-Ops feature multiple units of housing, are governed by bylaws and are operated by officers and directors. Owners within the community share in the cost of maintenance and utilities in the form of monthly dues. The main difference between a Condo and Co-Op is how ownership within the community works.

When you purchase a home within a Co-Op, you aren’t technically purchasing the unit itself but rather purchasing shares within a corporation whose only asset is the building. Each unit within the building is valued at a specific amount of shares within the corporation. The corporation owns the home you live in and you gain the right to occupy the unit through what is called a proprietary lease or occupancy agreement.

Co-Op owners have the right to sell their property at will, just like a regular condo owner. Depending on the Co-Op laws,  you may have to sell it back to the corporation at the original purchase price with all the stockholders sharing collectively in whatever profits are made when the shares(Unit) are resold. Not all Co-Ops function like that though and may allow the owner to keep the entire profit from the resale to themselves.

Another difference to Co-Op ownership that differs from condo ownership. A condo owner can freely sell their home to anyone they choose. Within a Co-Op, before an owner is allowed to sell their home to someone, that potential owner must be approved by the board of directors. That means that each potential owner is vetted by the board to make sure that they will be outstanding neighbors and will abide by all bylaws and regulations within the building. The vetting process includes the examination of the applicant’s finances which helps to understand that the potential owner will be a responsible member who pays their debts and will not default on any payments because if one member defaults on their part of the mortgage, maintenance and tax payments, all of the shareholders must pay for it.

Compared to a condo, if an owner does not pay their mortgage or tax obligations, liens are placed on their property preventing them from selling their home. Buildings with a high foreclosure rate or unpaid monthly dues may result in a poorly maintained community.

Due to the vetting process of a Co-Op, each owner within the corporation are high-caliber owners who are financially responsible individuals who follow the building’s rules and regulations and care greatly about their interests within the property which results in low default rates and low turnovers of occupants.

Sometimes celebrities are even turned away from Co-Ops, due to their attraction of fans and paparazzi, buildings may turn them away for fear of their notoriety disrupting the building’s peace and quiet.

What are the advantages about purchasing in a Co-Op?
The main feature that attracts buyers to a co-op is that co-op ownership has its tax advantages. Tax payments for the building are shared by the entire co-op which means that as a shareholder/owner you don’t receive an individual tax bill for your property. Your taxes are included in the maintenance, or carrying fees you pay to the co-op every month. All the while, as a shareholder you get to enjoy the same Federal Income Tax Deductions for your shares just like any other condo homeowner does.

In a co-op building that carries its own mortgage on the property, buyers may obtain less financing than a condo buyer would need.

Limited Liability – While you’re responsible for paying your personal loan, as a shareholder you have no personal liability for the co-op’s mortgage.

Community Control – Shareholders participate in property decision-making ideas.

Community Influence – As a collective association, co-ops can have great influence on local governments and utilities.

Surplus Revenue – In some cases, unspent funds are returned to the shareholders (think of the dividends you receive from stock in a corporation), although they may have to be reported for individual income tax purposes.
Ashraf Spahi is a Real Estate professional who specializes in Los Angeles Real Estate. If you have any questions, do not hesistate to contact us!