Definition:

A cooperative is a corporation that owns a building. Each apartment is allocated a number of shares of stock, the sum of which equals all the shares outstanding of the corporation. These shares of stock are the evidence of ownership. In addition to the shares, each apartment receives a proprietary lease, which affirms the owner’s right to occupy a specific apartment. “Tenant shareholders” pay a monthly charge, called maintenance, which covers their allocable costs of operating the building, the building’s real estate taxes, and the debt service on the building’s mortgage (generally referred to as the “underlying mortgage”). Coop owners are entitled to a tax deduction for their portion of the building’s real estate tax and their portion of the building’s interest payment on its mortgage. They are also entitled to deduct the interest payment on their own apartment loan.

Generally:

Cooperative corporations began as social clubs and as a means of restricting who could move into a building. This form of ownership grew in popularity in the 1960s, 70s and 80s, however, not because of any exclusionary impulse but as a result of the restrictive rent laws in the city at that time. Although operating costs were rising dramatically because of inflation and exploding fuel costs, government limits on rent increases made it impossible for landlords to cover the increasing cost of operating their buildings. Conversion to coop ownership became a way to escape this burden and was desirable for the following reasons:

·The New York State law regulating the conversion of apartment buildings to cooperative ownership (the Martin Act, Section 352, New York General Business Law, including added regulations) was relatively clear and had worked effectively in New York over the years.

·When coop conversions were at their peak, banks were resistant to issuing new mortgages and charged extremely high interest rates when they did. But mortgages on many buildings had no restrictions on conversion so the existing low interest rate loans could be maintained. This proved enticing to landlords because it permitted them to cash out of their economic predicament and at the same time offer a marketable product at a low monthly cost to the buyer.

·Coops were qualified to pass on to the individual tenant-stockholders the same federal and state tax deductions available for other forms of home ownership (with some limitations).

·A bandwagon effect took place. Successful coop conversions inspired emulation, which created a trend.

Advantages of Cooperative Ownership:

1. Tax Deductibility: The owner is entitled to a tax deduction for real estate taxes and mortgage interest under federal and state law.
   
   
2. Board Approval: A coop will normally require any prospective owner to go through an approval process. This ensures that the owner meets certain standards that the Board of Directors, as representatives of the apartment owners in the building, feel are appropriate. It allows the Board to determine if potential new members of the coop are financially capable of supporting their home and carrying their share of the building’s expenses. It also allows the Board to screen out those who would not make desirable neighbors (subject to federal, state, and local discrimination laws).
   
   
3. Popularity: Approximately 75% of all apartments owned in New York City are coops. Therefore, this form of apartment ownership offers a buyer the greatest selection of buildings to choose from.

Disadvantages of Cooperative Ownership:

1. Limitation of tax deductibility under certain circumstances: There are legal criteria a cooperative must meet to qualify for state and federal tax advantages. If a building fails to meet these criteria, apartment owners will not be permitted to take the tax deductions otherwise normally allowed. This restriction does not exist in other forms of home ownership.
   
   
2. Board-approval process: The approval process requires disclosure of significant personal and financial information, which some prospective buyers prefer not to reveal. The process also makes the purchase more uncertain, because its successful conclusion is contingent on board approval.
   
   
3. Limited right to rent: Although most cooperative corporations do allow owners to rent under limited circumstances and for a limited duration, it is often a cumbersome procedure that requires prospective tenants to go through an approval process prior to taking occupancy. Therefore, renting a coop apartment is usually more difficult than renting a condo or single family home. In addition, coops often charge a sublet fee, which varies in amount but can be material.
   
   
4. Higher interest rate on home loans: The interest rate on a cooperative apartment loan is generally higher than the rate for a condominium apartment or a house by approximately 0.5%.
   
   
5. Equity requirement: While condominiums allow buyers to finance up to 90% of their purchase, coop boards rarely permit this. Financing is commonly limited to 75% of the purchase price and in many cooperative buildings is even more restrictive. Indeed, some buildings require all-equity cash purchases.