The economics of HOUSING COOPERATIVES in the NEW YORK STATE

Transcription

1 undi Economics of HOUSING COOPERATIVES ALMA MATER STUDIORUM - UNIVERSITA DI BOLOGNA SCUOLA DI ECONOMIA, MANAGEMENT E STATISTICA SCHOOL OF ECONOMICS, MANAGEMENT AND STATISTICS Corso di Laurea First cycle degree In BUSINESS AND ECONOMICS The economics of HOUSING COOPERATIVES in the NEW YORK STATE PRESENTATA DA DEFENDED BY Beatrice Ramponi Sessione prima/seconda/terza / Graduation session first/second/third

2 Anno Accademico Academic year 2013/2014 Contents Abstract Introduction Cooperatives Definition and values Co-ops ability to achieve economic goals How co-ops are like other business models How co-ops differ from other business models Different types of co-ops and sectors in which they operate Housing Cooperatives in New York State Analysis Overview Business Corporation Law (BCL) Legal status Ownership and Management Shareholder Rights and Board Responsibilities Board Meetings and Voting Requirements Finance History - Co-ops in New York Metropolitan area Economic Impact - Sample Statistical Analyses CASE STUDY - Buying a House Cooperative Apartment VS. Buying a Condo Apartment in New York City Concluding Remarks Bibliography

3 During my Curricular Internship at Maison International Ltd. Real Estate Agency in New York City, I learned that behind all the massive buying and selling of house properties there are two main type of properties, Condominium Apartments/ Townhouses and Housing Cooperatives Apartments. When people look to buy an apartment in New York City they know the basic trade-offs between a Housing Co-op and a condominium and even though the approval process and building rules are usually stricter with a Housing Co-op apartment, Housing Co-ops make up a much bigger percentage of the city s housing stock. In Manhattan, it s about 75 percent co-op versus 25 percent condo, said Jonathan J. Miller, the president of the Miller Samuel appraisal firm. In the early 1990s, it was about 80/20, and in the mid-1980s it was 85/15. Through my research paper I analyze the Housing Cooperative model, which can look similar to the well known Condominium model, but has however some main differences from a legal and a financial point of view. To properly understand the economics of Housing Cooperatives, this paper starts by defining what a Cooperative means and represents in a society, its values and how it can be a powerful tool to achieve economic goals for its members. Then, I will describe the legal, managerial, and financial characteristics that outline the Housing Cooperative type. Finally, I compare what are the real advantages of choosing Co-op living and if a Co-op in NYC can be a good alternative between the other housing types.

4 DEFINITION: A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointlyowned and democratically-controlled enterprise. VALUES: Co-operatives are based on the values of self-help, selfresponsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others. Co-ops are formed to meet peoples mutual needs. They are based on the powerful idea that together, a group of people can achieve goals that none of them could achieve alone. Co-ops ability to achieve economic goals A cooperative is a business that is owned and controlled by the people who use it. Its primary purpose is to provide goods and/or services to its members for their mutual benefit. Cooperatives provide a unique tool for achieving economic goals in an increasingly competitive global economy. These goals may include: Achieving economy of size; Increasing bargaining power; Sharing costs of new technology; Adding value to agricultural products; Gaining access to new markets; Reducing risks associated with new enterprises; Obtaining new services; Purchasing in bulk to achieve lower prices; and Securing credit from financial institutions. Cooperation is most effective under economic conditions which respond to group action. For example, when individuals acting alone can t achieve sufficient economy of size to compete in the marketplace, pooling their resources and marketing together can be an effective strategy. Or there may be other barriers to market entry, a lack of sufficient capital, or an imbalance of market power which individuals alone can t effectively address. Cooperatives enable groups of people to achieve goals which are only possible through joint effort.

5 How co-ops are like other business models It is important to note, however, that forming a cooperative is not a guarantee for success. Co-ops are subject to the same marketplace demands and planning requirements as any business, including careful market analysis; sound business planning; competent management; and adequate capital to start-up and grow. How co-ops differ from other business models Like other businesses, cooperatives start with the recognition of a need or an opportunity. In fact, the economic motivation for starting a co-op is very much the same as for starting other businesses. Cooperatives also operate very much like other businesses. They must serve a market efficiently and effectively, they must be well managed, and they must survive financially. However, there are important distinctions that make co-ops unique. The principal ones are: Members own their co-ops. As owners, they provide the capital necessary for start-up and growth of the business. Members control their co-ops. Each member usually gets one vote, regard less of the amount of equity they have invested in the co-op. The board of directors is elected by the membership. Members benefit from their co-ops. Profits are distributed to the members in proportion to each member s use of the co-op. These distinctions mean co-ops differ from investor-oriented firms (IOF) in significant ways. Each investor in an IOF has control over the firm only to the extent to which s/he has invested capital in it, and receives profits from it on the same basis. The owners of IOF s may never even use the products or services their company produces. In fact, many IOF s are capitalized by investors whose primary motivation is obtaining the greatest return on their investment. In contrast, the member/owners of a cooperative are the primary users of its products and services. Co-op members want to generate the highest possible returns on their investment as well, but they do it by addressing their common problem.

6 Different types of co-ops and sectors in which they operate The cooperative form is highly flexible and adaptable. Several different types of cooperatives exist, each performing a different function. Co-ops also operate in a variety of industries. Given all these factors, different ways of categorizing cooperatives have been developed. This Manual and the Cooperative Development Conference which it accompanies use the following categories: AGRICULTURAL CO-OPS include producer, farm supply, and new generation co-ops. These co-ops are formed by farmers and other producers to process and market their products (including agricultural goods, crafts and manufactured products) or to provide supplies needed for their farms and businesses. During the last decade, a movement toward value-added, new generation agricultural co-ops has swelled throughout the upper Midwest. CONSUMER CO-OPS are formed to buy groceries, financial services, and many other goods and services. Examples include retail food co-ops and credit unions. BUSINESS CO-OPS are formed by a group of businesses or organizations in order to purchase supplies or services in bulk. Examples include wholesalers owned by retail hardware stores and grocery stores. WORKER CO-OPS are owned by the employees who work in them. Another form of worker ownership is the Employee Stock Ownership Plan (ESOP). HOUSING COOPERATIVES Overview A Housing co-op is an alternate form of ownership of real estate, where the property is owned by a cooperative corporation, and then purchased as shares of stock by the residents of the community. This ownership of shares gives the buyer the right to occupy a specific apartment in the building owned by the cooperative corporation in accordance with the terms of a document called a "proprietary lease. As part of the cooperative, each tenant-shareholder pays his or her pro rata share of real estate taxes assessed against the entire co-op, as well as his or her pro rata share of all of the operating expenses of the cooperative. New York Business Corporation Law Every condo and co-op has its own set of governing documents by which building administrators direct their community's day-to-day business. Bylaws, rules and regulations, and precedent-setting legal cases help keep boards within the letter of

7 the law, and offer a framework within which they can operate consistently from year to year. Several laws apply to real estate in New York: for example, condos are governed by the New York Condominium Act, and the Real Property Actions and Proceedings Law (RPAPL) deals with landlord-tenant issues between a co-op and its shareholders. Case law interprets these statutes and sets legal precedent for coop and condo owners; indeed the law governing co-ops in New York is mostly created by judge-made case law. One statute originally created to regulate businesses, the Business Corporation Law or BCL, for short primarily governs how cooperative corporations, including housing co-ops, must be run.! The BCL provides specific rules regulating the corporate governance practices of co-ops, including the manner in which boards and shareholders conduct meetings, amend bylaws, and vote, and the BCL prescribes the rights and responsibilities of boards and shareholders. Legal status The ownership of shares gives also the buyer the right to vote. Housing cooperatives are governed democratically, with each unit receiving a vote, regardless of size. Most cooperatives elect a board of directors to establish budgets, hire staff and enact policies. Bylaws and policies govern important issues like how membership shares are transferred and membership rules. Cooperatives may require that perspective buyers apply to the board of directors or a membership committee before the sale is completed. These rules and policies are consensual, since they are in the governing documents, rather than dictated by law. Like all housing, cooperatives are financed through a combination of loans and equity. Cooperative owners will usually contribute some equity toward the purchase of their share, and may also obtain share loans, which function like a mortgage loan. In addition, the cooperative corporation may have a mortgage that covers the initial construction cost or remodeling. Cooperative owners pay a share of this mortgage as part of their monthly fee, and the interest is deductible under IRS rules. Ownership and Management Shareholder Rights & Board Responsibilities In some cases, the co-op follows Rochdale Principles where each shareholder has only one vote. Most cooperatives are incorporated as limited stock companies where the number of votes an owner has is tied to the number of shares owned by the person. Whichever form of voting is employed it is necessary to conduct an

8 election among shareholders to determine who will represent them on the board of directors (if one exists), the governing body of the co-operative. The board of directors is generally responsible for the business decisions including the financial requirements and sustainability of the co-operative. Although politics vary from co-op to co-op and depend largely on the wishes of its members, it is a general rule that a majority vote of the board is necessary to make business decisions. There are two sections of the BCL for boards and shareholders to pay close attention to: Article 6, which deals with shareholder rights, and Article 7, which deals with how the corporation is managed, explaining the rights and responsibilities of directors and officers. In larger co-ops, members of a co-op typically elect a board of directors from amongst the shareholders at a general meeting, usually the annual general meeting. In smaller co-ops, all members sit on the board. Board Meetings & Voting Requirements A housing cooperative s Board of Directors is elected by the membership, providing a voice and representation in the governance of the property. 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 homes. The BCL provides detailed regulations on the manner in which boards and shareholders conduct meetings and do business. The rules outlined in the BCL have the potential to empower shareholders to ensure their boards are performing lawfully. Shareholders also have the right under case law to review the corporation s other books and records, so long as the inspection is sought in good faith and for a purpose consistent with the shareholder s right to monitor his investment in the corporation. As far as voting requirements, Article 6 of the BCL also provides that a majority of all outstanding shares is required to amend a co-op s bylaws. The BCL also permits shareholder action by less than unanimous (but not less than majority) written consent if the certificate of incorporation so provides. For shareholder meetings, Section 602 of the BCL allows cooperatives to create their own rules in the bylaws, as these meetings may be held at such place, within or without this state, as may be fixed by or under the bylaws, or if not so fixed, at the office of the corporation in this state. The BCL does prescribe, however, that annual meetings must be held for the election of directors and transaction of other business. To make things easier for the owners of the co-op shares, meetings via conference call or video conference are now permitted by the BCL as long as everyone in the meeting can hear each other at the same time. Finance - Market-rate cooperative allows the market to set the purchase price of housing for new members. With market rate, the share price is allowed to rise on the open

9 market and shareholders may sell at whatever price the market will bear when they want to move out. In many ways market rate is thus similar financially to owning a condominium, with the difference being that often the co-op may carry a mortgage, resulting in a much higher monthly fee paid to the co-op than would be so in a condominium. The purchase price of a comparable unit in the co-op is typically much lower, however. - Limited equity co-op places a limit on how much equity can be accumulated in order to keep purchase prices affordable. With limited equity, the co-op has rules regarding pricing of shares when sold. The idea behind limited equity is to maintain affordable housing. A sub-set of the limited equity model is the no-equity model, which looks very much like renting, with a very low purchase price (comparable to a rental security deposit) and a monthly fee in lieu of rent. When selling, all that is re-couped is that very low purchase price. - Subsidized co-op is one which has received a subsidy of some kind from government or other sources in order to lower the cost of membership and housing. - Leasing co-op does not own the property as most co-ops do; it leases the property (sometimes with an option to buy it), and operates it as a cooperative. - Senior housing co-op is one which has been designed to make the building more accessible and appropriate for seniors. - Mutual housing association is a non-profit organization which develops and operates housing. In most cases, the association is owned and controlled by the residents of the housing it produces. A housing cooperative is normally de facto non-profit, since usually most of its income comes from the rents paid by its residents (if in a formal corporation, then shareholders), who are invariably its members. There is no point in creating a deliberate surplus except for operational requirements such as setting aside funds for replacement of assets since that simply means that the rents paid by members are set higher than the expenses. (Note, however, that it's quite possible for a housing co-op to own other revenue-generating assets, such as a subsidiary business which could produce surplus income to offset the cost of the housing, but in those cases the housing rents are usually reduced to compensate for the additional revenue.) It is relatively difficult to start a housing co-op because if the idea is, for instance, to build a building or group of buildings to house the members, this usually takes a significant mortgage loan for which a financial institution will want assurances of responsibility. It may also take a year or more for the members to organize the design and construction, as well as time and foresight to establish even basic organizational policies. It is rare that these kinds of skills of organization are available in a random group of people who often have pressures on their existing housing. It may be somewhat easier to organize a group of closely related housing

10 units. This opportunity may arise, for example, if an existing apartment building's owner is thinking about selling it. In the lifecycle of buildings, the replacement of assets (capital repairs) requires significant funds which can be obtained through a variety of ways: assessments on current owners; sales of Treasury Stock (former rental units) to new shareholders; draw downs of reserves; unsecured loans; opera If you need to take out a mortgage to purchase housing in a co-op, the loan you receive will not actually be a mortgage, but a loan to purchase shares. Most of these co-op loans, or share loans, will require the purchaser to come up with a down payment of 10 to 20 percent of the purchase price. A major factor distinguishing a co-op from a standard residential unit is the maintenance fees involved. Shareholders are required to pay a monthly maintenance fee to cover communal expenses such as repairs, utilities and taxes. These maintenance fees range from negligible to substantial, so it is imperative to ask before purchasing. Note that a portion of the maintenance fee may be tax-deductible.

11 History Housing cooperatives and condominiums are both examples of shared interest housing, providing opportunities for people to own units within multi-family buildings. Both models were developed in Europe as an alternative to the rental model. The first cooperative in the U.S. was built in New York City in 1876, 75 years before the first condominiums. Most of the early cooperatives were in luxury buildings, but there were also several affordable housing cooperatives built by labor unions during the period before World War II. The history of housing is linked closely to Federal, state, and local policies. Although the earliest cooperatives were designed for people with high incomes, the limited equity cooperatives housing model was developed to encourag long-term affordability by restricting the appreciation of share value when membership shares are sold. These cooperatives were usually built with some private or public subsidy and required a low initial membership fee. In New York Metropolitan Area the first significant government program supporting housing cooperative development was the New York Limited Dividend Housing Companies Act of Thirteen cooperatives were built under this Act. A subsequent New York law, known as the Mitchell-Lama Act, was passed in 1955 and supported the development of 60,000 affordable units, mostly in the 1960s and 1970s. Labor unions and housing activists built 40,000 more units, for a total of 100,000 affordable housing cooperative units in New York state. On a federal level, cooperatives were largely left out of the immediate post-world War II support for affordable housing, but they were included in several important subsidized mortgage programs passed by Congress in the 1960s. By 1995, an estimated 137,000 cooperatively owned affordable units had been built with Federal support in 29 states. During this period, cooperatives continued to be built for the higher income market, and cooperative owners benefited from Federal tax policies that encouraged home ownership. By 1960, 1% of all multi-family dwellings were cooperatively owned. In 1976, this figure was 2.2%, but by this time every state had a condominium statute and condominiums had replaced cooperatives as the preferred owner-occupied model (Sazama, 2000). Economic impact - Sample Statistical Analyses Most research on the impact of cooperative housing has focused on the value of the public investment in cooperative affordable housing. Susan Saegert investigated the impact of housing ownership form in >400 multi-family properties that were acquired by NYC for non-payment of taxes and then sold to tenant-owned cooperatives, nonprofits, and private landlords (Saegert, 1998). Her

12 study found that cooperative ownership was positively associated with building quality, better safety and security, and more evidence of prosocial norms. Tenants with higher incomes and better education tended to stay in the cooperative and invest resources in improving their living conditions. Longevity of cooperative tenants was also noted in a Chicago study (Chicago Mutual Housing Network, 2004) and positively associated with community stability. A survey of middle income senior cooperative members had similar results. Members reported improved social contact, life satisfaction, sense of personal safety, and happiness after moving into the cooperative. A small study in the 1990s used a different approach to analyze the impact of cooperative housing, by examining the effect of resident ownership on the variable aspects of housing costs. Researchers concluded that cooperative ownership significantly reduced operating costs (including marketing, administration, operating, and maintenance costs). Finally, another 1990s survey of members of senior housing cooperatives reported positive health impacts and greater happiness, life satisfaction, social contact, and personal safety from living in a cooperative(nolan, 2001).

13 CASE STUDY - Buying a House Cooperative Apartment VS. buying a Condo in New York City Condo VS. Co-ops No interviews required Application & Approval process if all financials and references are in order Interview an co-op board approval required Minimum of 10% down Financing Minimum of 20% down 1 to 2 months after contract signing Allowed with proper board approvals Based on square footage of the unit Owner pays typical homeowner taxes Typically allowed Free to sell at will Estimated Closing Time Renovations Monthly Charges Taxes Subletting varies based on building rules and regulations Selling 3 to 4 months after contract signing Allowed with proper board approvals Based on the number of shares owned in the building Owner pays taxes that have been rolled into their maintenance fees Taken to board for consideration Subject to selling taxes and board restrictions on who they sell it CLOSING COST ESTIMATES Co-op Apartments FOR THE PURCHASER ESTIMATED COST Purchaser s Attorney Varies. $1,500-$2,500+ Managing Agent Fee $500+ Move-in Deposit Mansion Tax $500-$1,000+ (usually refundable if no damage) 1% of purchase price when price is $1M or more Lien Search $350 Maintenance Adjustment Points - Origination Costs Pro-rated for month of closing 0 to 3% of loan value Application, Credit Check, etc. $500+ Appraisal $425+ Bank Attorney $650-$1,000+ UCC-1 Filling $75+

14 Condominium Apartments/Townhouses FOR THE PURCHASER ESTIMATED COST Purchaser s Attorney Varies. $1,500-$2,500+ Building Application $500+ Move-in Deposit Title Insurance, Title Search, and Recording Fees $500-$1,000+ (usually refundable if no damage) 0.6% of purchase price and up Title Closer Customary Fee $200 Mansion Tax Common Charges, Property taxes, and Insurance Premium Points - Origination Costs 1% of total purchase price when price is $1M or more Adjustments pro-rated as of closing 0 to 3% of loan value Application, Credit Check, etc. $750+ Appraisal $425+ Bank Attorney $650-$1,000+ Mortgage Recording Tax 2.05% for all mortgages less than $500,000 and 2.175% for all mortgages of $500,000 and more, minus $30 for townhouses Real Estate Tax Escrow NYC Real Property Transfer Tax 0 to 6 months, depending on lender requirements % of purchase price NYS Transfer Tax 0.4% of purchase price Sponsor Attorney $1,500+ Working Capital Found Contribution One-time fee equal to 1 or two months on common charges, depending on condo Note: Some of the above fees are estimates. All information is subject to errors, omissions, and changes in facts or circumstances.

15 Pros and cons of choosing co-op living Disadvantages The monthly maintenance fees can be quite steep. Also, because co-op owners do not own their specific units, they are not allowed to make any improvements without board approval. Sometimes the board is rife with politics and perceived favoritism, which can make the petitioning process unpleasant. There are also a number of restrictions regarding to whom owners can sell their shares and on what terms. Advantages Democratic Control and Participatory Decision-making Housing co-ops are run by the people who live in them, providing members the opportunity to participate in decisions that affect their home lives. Because cooperatives operate on a one-member, one-vote basis, all members have the same amount of control. Predictable Monthly Costs Since members collectively set the monthly housing costs, those costs cannot be changed without warning; nor is there any reason to alter them unless taxes or other costs change. Tax Advantages In most cases, members of housing co-ops are considered homeowners for income tax purposes, and therefore receive the same tax benefits that homeowners receive. Equity Accumulation Individual members of housing co-ops can accumulate equity on their shares over time (with the exception of limited equity co-ops). Social and Cultural Advantages Cooperatives often provide opportunities for social contact with a variety of people from different backgrounds. In addition, because residents know one another and screen prospective members, housing co-ops statistically have lower crime rates than many other types of housing.

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