How To Use it

• Types of Co-ops
• Structure and Controls
• Administration
• Developing LEHCs

Types of Co-ops

LEHCs can provide almost all types of housing, including multifamily apartments, town-houses, single-family homes, and mobile home parks. LEHCs may be concentrated in an area, or interspersed among privately owned housing. Legally, cooperatives may be either nonprofit or for profit.

There are many methods of forming LEHCs.

• New housing cooperatives from vacant buildings or through new construction.
• Conversion of tenant-occupied buildings. These conversions commonly occur in government subsidized buildings experiencing a phasing out of their public subsidies, in buildings with federal insurance and rent subsidies, or in public housing. Conversions can transform privately owned housing if the owner is willing to work through the process with the tenants. In some cases, legal action against landlords of substandard rental housing can result in cooperative conversion.
• Sweat equity cooperatives utilize members' labor as an investment in new construction or rehabilitation. Licensed contractors are hired to install or upgrade electrical, plumbing, and heating systems, as required by health and safety regulations. A construction manager supervises and trains the co-op members in other labor.
• Leasing cooperatives lease a building from the owner. One variation of leasing cooperatives syndicates the property to private investors to raise capital and qualify for financing through tax credit programs. The co-op can be the general partner of a limited partnership that owns the property and leases it to the co-op. After 15 years, the cooperative members can purchase the property from the partnership investors.

Ownership Models

There are many different ways that residents can exercise ownership or control over their development. The most important thing to remember is that if you can define what the structure should look like, a lawyer can probably make it happen.

In a co-op, residents own all the stock of a corporation that owns the development. Residents do not own their own unit, but they do completely control their development. Co-ops work best in large buildings where residents are familiar with the cooperative concept.

Resident-controlled rentals are almost exactly the same as co-ops, except that the development is owned by a non-profit controlled by the residents. Unlike a co-op, residents hold no equity in this model.

Mutual Housing Associations are also non-profits, but they typically have a board that includes residents, future residents, and representatives of the public and private sectors. They have a mission of continuing to expand to include more and more housing, and they often manage their own developments. They are useful for owning scattered sites. MHAs lease their housing to their residents.

Owners of condominiums do own their own units, and a share of all common facilities as well. Limited Equity Condominiums limit the sale price to keep the units affordable.

There are many variations on all these models including combinations with land trusts, a wide variety of partnerships, and structures in which residents have input, but not control.

Chart courtesy of Richard Schulze: (Rschultz@gis.net), weown.net

Structure and Controls

Legally, cooperatives may be stock- or membership-based nonprofit or for profit corporations. A LEHC is usually a nonprofit corporation, incorporated under state laws. State enabling legislation describes the types of cooperatives that are allowable. These laws cover resale controls and authorization to certain state financing vehicles, programs and agencies (e.g. bonds, insurance).

Typically, LEHCs are not tax exempt, 501(c)(3) corporations and must pay all applicable taxes. The corporation owns the property and issues a lease, or Occupancy Agreement, to its members, giving each the right to occupy a specific unit in the building. Articles of Incorporation describe the purposes of the corporation and the Bylaws determine how the corporation is operated, including the resale guidelines that are used to maintain long-term affordability of the co-op units.

The corporation obtains a blanket mortgage for the initial costs of the property. Members can obtain share loans for financing their particular units. When a member moves out, the new purchaser may need to obtain a share loan in order to finance the increased value of the selling member's unit.

Methods of Resale Controls or Restrictions

Maximum sale price of member shares is controlled to assure that the share value remains affordable to the low-income earners. This is accomplished by (1) granting the cooperative the right of first refusal to repurchase the share of any member who decides to leave, and (2) establishing the maximum price at which member shares can be resold.

The maximum resale price or resale control is usually determined by a formula that is specified in the Bylaws or Articles of Incorporation. Many different resale formulas can be used, ranging from original value plus one dollar to those that incorporate inflation and improvements.

Equity returns can be applied to the down payment amount or to the original value of the unit. If applied to the down payment, a modest equity gain generally is realized. If applied to the original value, the unit may deliver windfalls to the selling member and quickly become unaffordable to low-income households. Sometimes, all controls are removed at the end of the mortgage term or at a specific date, having a similar affect on affordability.

The cooperative may generate significant equity in the building in a strong real estate market. A cooperative can extract equity accumulation by refinancing or selling, taking the equity and splitting the proceeds among its members. Specific provisions in the Articles, Bylaws or financing agreements can eliminate these cost-escalating possibilities.

Provisions could allow refinancing, for example, for only specified purposes (requiring approval by a super majority of the members). These purposes can include benefiting the co-op, expanding the co-op, and benefiting the surrounding neighborhood- but would not to allow members to split up the growth in equity. Provisions can require distribution of excess proceeds from the sale of the property to another nonprofit or foundation which will be required to use the funds for a public purpose. (See Resources)

Policy Implications of Limiting Equity

Resale controls can curb gentrification pressures by removing property from the speculative market and keeping the units affordable to low-income people over time. LEHCs, instead of focusing on equity accrual to individual households, create community benefits. Most public policy around homeownership and asset accrual is heading in the individual direction, however.

Today, extensive discussion and programmatic development is devoted to increasing homeownership as a means of building equity for low-income people. U.S. Department of Housing and Urban Development, HOME, Community Development Block Grant, and extensive foundation dollars provide homeownership subsidies that accrue to the individual. LEHC policy, on the other hand, channels these extensive public subsidies to housing both current and future low-income households.

Individual Development Accounts (IDA), an emerging mechanism that provides incentives for low-income families to save, can work well with LEHCs. Living in a co-op with reduced housing costs allows families to accrue assets through savings. In this way, cooperative policy gives equal importance to community and individual assets.

Balancing long-term affordability with growth of individual assets should be addressed in the creation of each new co-op.

When Members Sell
Ultimately, the use of resale controls must seek balance among potentially conflicting needs:

• Control resale prices so that the units remain affordable to future low-income residents and the property does not add to the neighborhood's real estate market pressures.
• Provide adequate incentives to maintain the interest, support and participation of its members.
• Create a structure that outside parties - lenders, public agencies, etc. - can support.

Administration

The LEHC Board
A board of directors makes decisions for the cooperative. Each member has one vote in the election of the board. The board plays a major role in creating policy and managing the cooperative. Board committees, which include both board and non-board members, accomplish the tasks needed to operate the property.

The board of the cooperative has major responsibility for:

• Oversight. The board oversees property management, either through "self-managing" members or a hired management agent.
• Budget. Board oversight of the budget maintains reasonable living costs by keeping monthly maintenance costs as low as is prudent.
• Finances. The board is responsible for all financial aspects, including, purchasing, record keeping, bookkeeping, setting reserve amounts and uses, auditing and reporting, financing or refinancing decisions.
• Resales. The board manages the resale process, including interviewing and approving new members and purchasing and reselling members' shares. It also regulates improvements and valuation of improvements to individual units.
• Evictions. The board determines the need for any evictions (within the constraints of local just cause eviction regulations).
• Committees. The members join various committees that support the work of the board. Committees are central to the co-op's operations and depend on the participation of a reasonable percentage of the membership.

Participation, Organizing, and Training

Participation is the lifeblood of a cooperative. Cooperatives and the requirements of cooperative living are unfamiliar territory to most residents. Real estate development and operation is a demanding process that requires constant attention. To be successful, a co-op needs a core of very committed people willing to contribute a great deal of time. and a second tier of supportive members who are willing to work. Insufficient participation can result in anger and resentment and ultimately undermine a co-op.

Co-op members have to be clear about the type of contribution they seek from applicants. Co-ops can require a minimum participation of members to address this issue; sweat equity co-ops require this during the construction phase.

An experienced organizer is key. Successful recruitment of members depends on the capacity to provide a clear understanding of the roles and skills needed to create and maintain a co-op.

Special skills are needed. Co-op management involves preparing budgets, reading financial statements, supervising personnel, hiring and firing, negotiating contracts, understanding property management and maintenance, and group process skills. The resources spent training on these skills will result in much greater long-term savings.

The organizing process is not merely marketing a product. It is the creation of a community. It provides potential members with information about what their options are, what the costs will be and what their personal and corporate responsibilities are. Then they have the need for information and skills to learn how to run the co-op.

Organizing a Co-op is similar to community organizing. Someone helps to bring people together to meet a common goal. This activity is needed at several different points in time in the life of a co-op:

• very early in the process, organizing encourages people to come together to create the co-op. The initiative may come from someone interested in starting and living in a co-op or from an organization interested in sponsoring co-ops for others. Either case requires finding other people to join the co-op; these people may know little about responsibilities and requirements of a co-op.
• at the conversion of an existing residential rental building into a cooperative, this process is critical. Residents will know little about co-ops; the idea may come from residents or from an outside organization concerned with the future of the building and its residents. Organizing assures that everyone involved builds a clear understanding.

Organizing also plays an important role on an ongoing basis after the co-op is formed, continuing to build participation for the original members. It eases the transition for new co-op members and makes it easier for them to take part in the co-op's life.

Both organizing and training cost money. Once the co-op is running, there should be a line item cost in the budget each year for these items, which may also include other costs (e.g. conferences) as the co-op solidifies over time.

Developing LEHCs

Selecting the Developer
A developer typically is needed to manage the complexities of creating a LEHC. While tenants, however, can perform this role by hiring consultants to undertake technical work, usually a nonprofit developer is involved. Tenants or a developer can initiate the development process. There needs to be trust and good communication since the interests of each party are different. The sponsors must be clear about who makes decisions and how they are made. The developer must be committed to the additional time of working through resident participation and decision making.

Many low-income housing developments run into opposition from other residents in the neighborhood. Because cooperatives are a form of home ownership, they may be more acceptable to neighbors than rental housing.

Knowing When to Purchase
A key to developing a strong LEHC is a sound purchase. In gentrifying neighborhoods, the market is moving quickly. There are ready buyers, usually with higher incomes than the people presently living there and with the capacity to buy quickly. Nonprofit and cooperative developers of low-income housing usually do not have the capacity to compete financially or move as quickly with these other buyers. The best time to buy is before gentrification pressures begin. For communities that develop plans to increase resident ownership through increasing LEHCs, it is important to recognize the real estate cycles and act when the time and opportunity is most appropriate.

Other Considerations in the Development Process
A key issue in the development of a co-op is the size, usually measured by the number of units. For any type of resident-controlled housing, the minimum size is generally 12 to 20 units. The need for participation from a large number of households is difficult to meet in smaller buildings. Some organizations prefer a minimum size of 50 units, because this is the threshold at which Fannie Mae will purchase share loans.

Another development issue is the geography of the co-op. If the co-op is in one large building, there is generally not much of an issue. However, if the co-op is scattered among several buildings and interspersed with other housing, the tasks of development and management become more difficult.