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Housing Cooperatives
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Housing Cooperatives

Why?

The right to adequate housing is enshrined in several United Nations declarations and conventions. For housing to be adequate, it needs to be safe, secure, and stable. These goals are at odds with housing as an investment commodity. Unfortunately, as George “Mac” McCarthy, president of the Lincoln Land Institute emphasizes, real estate serves both the occupants and the investor, and in a bidding war, investors nearly always win.

At best, residents in investor-owned housing must pay for not only the costs of a mortgage, taxes, maintenance and repair, fees, possibly capital improvements, and possibly services, but also for a profit to the owner(s), without building any wealth for themselves. Even if residents are owners, if they’ve had to buy the property at market rates, they are paying for the seller’s profit. At worst, residents “pay” for investor profits through their decreased well-being, due to crowding, mold, heat, cold, fire risk, flood risk, or other potentially life-threatening conditions.[1] The fabric of a community and its social capital is damaged too by rapid dislocation of residents, an “externality” that real estate investors need not take into account.

Building and preserving housing affordability can be achieved through collective ownership and governance that removes housing from an investor marketplace. Sometimes it takes time for affordability to rise, but studies have shown that costs do rise slower in resident-owned and controlled housing than in market-rate housing.

What?

There are many forms that collective ownership and governance of housing can take. There is a good overview in the article “What are the types of housing co-ops?” Two key dimensions that differentiate different types of shared housing set-ups are to what extent residents share in the equity built up over time, and to what extent residents share living space. Both of these can vary, from a lot to little or none.

Housing cooperatives have three main types: market equity, limited equity, and group equity (often student co-ops). In market equity co-ops, residents become members by buying a share at whatever the market will bear, and can in turn sell their share at market prices. This can allow resident-members to gain equity in their home, but it doesn’t do anything to preserve affordability. In limited-equity models, the price at which members can sell their share may be limited with a cap, percentage increase, or other restriction. This splits the difference between providing some scope for building equity for residents and maintaining affordability. An example would be RAISE-Op in Lewiston, Maine. Finally, in a group equity, shared equity, or no-equity cooperative, the cooperative corporation retains all of the equity, and members benefit only from reduced monthly expenses. This allows the greatest preservation of affordability, as well as giving the cooperative a solid basis from which to grow and acquire more properties if that is its mission. Group equity co-ops, such as student housing co-ops, are generally owned by a non-profit organization, but the residents have a lease that requires them to contribute to operating and management tasks such as cleaning, cooking, and other tasks in order to save costs for everyone.

Other dimensions that vary include the extent of shared living expenses, as well as the extent to which the cooperative is run democratically. In a cooperative, every member household has one share of the overall corporation, which entitles them to one living space and one vote for the board of directors. The cost of the share depends on size, location, and specific amenities a particular living space has, as well as whether the cooperative is market-rate, limited-equity, or group equity. In a condominium association, members own their living space and share ownership of outside and common areas. In many land trusts or resident-owned manufactured home communities, residents own their homes and the land trust or co-op owns the land on which the homes sit.

A relatively new model that combines certain aspects of cooperatives, such as resident participation in governance and lower living costs through participating in maintenance, is the Renter Equity model, first pioneered by Cornerstone in Cincinnati in 2002 and now being carried forward by Renting Partnerships. In this model, a nonprofit owns the housing, but renters can earn equity credits by paying on time, attending meetings, and pitching in to maintenance projects. The money saved by reducing vacancies is credited to renters, who can even borrow against their equity accounts.

How?

Shared housing can be as simple as a group of roommates deciding democratically how to run their rental apartment and contributing to household chores and expenses. It can also be as vast and complex as Co-op City, a development housing 50,000 residents with its own zip code, power generation, shops, etc. The main elements include: financing, legal ownership, governance, management, and member agreements.

Financing

Shared housing development can range from a cluster of tiny homes to multi-unit developments of up to hundreds of units. Obviously larger developments that involve buying and possibly rehabilitating, or building housing will have a very large budget. One challenge can be inflated property costs if you are competing against (or buying from) investors who hope to cash in on recent property value hikes.

Financing is through various sources, including private and public grants, private investors, loans, tax credits, and member equity. The combination of sources depends on the scale of the development, the potential cash flow of the project, and members’ ability to pay. Limited equity co-ops, since they preserve affordability, will have more access to subsidies from housing programs.

Market rate member financing works just like a mortgage, but the mortgage is for the member’s share rather than the property. You may see a market-rate co-op unit on a realtor’s site and, until you see the financing documents, it looks just like any other condominium or house for sale.

Legal Ownership

Ownership is generally a bundle of rights, and the bundle can be assembled or distributed in various ways. In a cooperative, the typical set-up is that a group of residents forms a corporation, and that corporation takes on a mortgage and purchases the real estate, or takes on a lease (see below). Residents have the opportunity to buy a membership share of the corporation, which entitles them to occupy a unit. (The cooperative may or may not allow non-member residents such as non-member tenants.) A membership share acts in some ways like a security deposit, and can vary in size from very large to quite small, and is returned when resident-members leave. Resident households pay “carrying charges” or some other monthly fee, rather than rent, and this amount is set to cover the cooperative corporation’s costs.

In a community land trust, community members form a corporation that buys land and/or buildings. Typically the corporation is a non-profit, and nobody owns shares of the corporation. Community land trusts commit to maintain housing affordability in perpetuity (forever) and not to sell. An emerging form of ownership is a land commons, in which either one nonprofit or between 3 and 35 nonprofits form an entity to hold title to land, and offer long-term leases to agricultural producers.

Legal ownership may be restricted by deed restrictions, conservation or farming preservation easements, covenants, or other terms that put particular boundaries on what owners may or may not do – such as transfer their ownership, use or modify the land or buildings in certain ways, sell for above a certain amount, use the property as collateral for loans, or charge a certain rent. This might be the case for example if a certain source of beneficial funding was used to buy the property, and it came with restrictions.

Governance

The governance of a cooperative or land trust refers to the board, a group of people who are elected to make big decisions about how the entity will function, and watch over the operations to make sure that things are going well. In a cooperative, each member household has one vote, and may run for the board. The resident members may also have the right to vote on the annual budget and other important policies. The board works out what monthly charges will cover what services, maintenance and repairs, capital improvements, etc. The board may also develop policies on membership approval, fee collection, marketing vacancies, and so on.

In a land trust, the board will typically have both residents and other community members, including possibly professionals. The bylaws may spell out if seats are reserved for a particular group, how elections or nominations are carried out, what decisions are reserved for at-large membership, and other elements of “deciding who decides and how to decide”. Similarly, in a land commons, the board would include representatives from the nonprofit(s) that own the land-holding entity, as well as the leaseholder(s) and community members.

Not to be dramatic, but a governing board must take its role seriously. The worst-case scenario is something like the Surfside condominium collapse in Miami in 2021. A best-case is when a resident-governed board makes decisions that keep people safe, as in the Pasadena Trails resident-owned community outside Houston that installed flood-mitigation infrastructure–a huge win when Hurricane Harvey hit in 2017.

Management
In either a cooperative or a land trust, the board decides whether to practice self-management or to pay for professional property management. Sometimes it’s just a resident handyperson, sometimes it’s a business that specializes in property management. It’s important for the board to understand its role in defining what the property managers are supposed to do, checking that it’s getting done correctly, and providing feedback or taking corrective action if things are not going well. Property managers are the “face” of the entity to most residents. They collect payments, fix things that are broken, maybe do or supervise maintenance, market vacant units, process applications, and so on. It is best to work with a management company that has experience working with volunteer boards.

Member Agreements

In any kind of shared arrangement, it is important to make clear the agreements, rights, and responsibilities of residents or members. Besides voting and paying fees, a member agreement could cover rules for collection, forbearance, site additions or modifications, noise, pets, children, guests, volunteer participation/chores, conflict resolution, or anything else that is an important part of sharing space.

Who?

While a group of determined residents can certainly band together and make a cooperative happen for themselves, it’s often helpful to have some institutional and technical support. Nonprofit developers, community development financial institutions, congregations (see e.g. Lucy Stone House and Nehemiah Housing), municipalities, unions, investment cooperatives (such as East Bay Permanent Real Estate Cooperative or the Northwest Pennsylvania Investment Cooperative), and trusts, have all supported the establishment of co-ops, land trusts, and other shared housing arrangements.

What Else?

One of the rewarding things about housing cooperatives is that they can be a platform for other enterprises and programs that serve the needs of residents and the community. For example, it may be possible to establish new or contract with existing worker co-ops that can do property management, snow removal, landscaping, home care, or transportation. Pairing a housing co-op with childcare could be a beneficial win-win, increasing the services available to residents and decreasing the rent charged to the childcare operation. Some housing co-ops that engage in shared cooking can consider spinning off a catering operation. There are housing co-ops that significantly decrease the cost to residents by renting out commercial spaces on the ground floor, event spaces, or rooms for short-term stays. Housing in rural areas may be paired with an agricultural operation. Some housing is designed to support disabled residents, for example with developmental disabilities, and builds programming as well as employment opportunities into the residential fabric.

Help!

Housing can be complicated, but at least there are a lot of people working on it! There’s great information from the following organizations:

[1] Thanks to Craig Saddlemire for this important insight!