Copyright National Association of Housing and Redevelopment Officials Nov/Dec 2005 COMMUNITY development agencies and housing authorities face increasing challenges to creating affordable homeownership opportunities. Rising land prices and construction costs, pressures to participate in smart growth strategies that discourage single-family development, and decreasing public subsidies are all hurdles in the path to affordable housing. Most authorities are also dealing with expiring Low Income Housing Tax Credits (LIHTC) and HUD mortgage buildings. Backed by studies that have shown cooperative housing performs better financially than rental housing and creates substantial social benefits, several local governments are recognizing cooperatives provide a better means than condos in meeting their community development goals.
What Is a Housing Cooperative?
A housing cooperative is formed when people join together to own the buildings in which they live. Residents form a corporation and pay a fixed monthly amountcalled maintenance or carrying charges-that covers operating expenses and the building's mortgage. Residents buy shares or membership in the co-op, which entitles them to a "proprietary lease," or the right to occupy a specific unit. The cooperative owns the building, land and any common areas. Costs are typically less than either rental or single-family housing in the same neighborhood or block.
Ben Franklin, the father of American cooperatives, founded the first cooperative in Philadelphia in 1752. Today there are more than 1.6 million cooperative housing units in the United States. While most co-ops are in larger cities, they exist in almost every state and in rural, urban and suburban areas. Regardless of location, all cooperatives are based on the values of self-help, democracy and equality.
Advantages of Affordable Cooperatives
The cooperative housing model provides a holistic approach to many of the problems plaguing today's low- and moderate-income neighborhoods. Cooperatives do more than provide a place to live. Studies show that cooperative residents report fewer problems with crime and drugs, live in their homes longer, take better care of their homes, have lower operating costs, report a higher quality of life and are more involved in their communities. Cooperatives are often the most efficient, cost-effective, low-risk and stable means to affordable homeownership.
For residents, cooperatives provide access to the nation's most powerful engine for wealth creation: homeownership. For marketrate co-ops, as the value of the cooperative increases, residents are able to build equity and accumulate wealth. Affordable cooperatives often have some limitations on resale prices or recapture of government subsidies to assure long-term affordability. However, all cooperative residents yield the benefits of homeownership, including property tax and mortgage deductions.
In addition to wealth creation, there are several long-term benefits of cooperative housing. Studies have found that maintenance and operating costs are lower than in rental housing. One study, for example, found that operating costs for cooperatives were 21 percent lower than for rental housing-savings that can reduce reliance on other government subsidies. Furthermore, mortgages on cooperative housing perform better than mortgages on rental housing and have a lower default rate. Several studies demonstrate numerous social benefits including lower turnover, decreased crime, and higher social interaction and voter participation than in rental housing.
John Perfitt of the Community Redevelopment Agency (CRA) of Los Angeles, which recently started a financing program for affordable cooperatives in Hollywood, says "in addition to providing individual families with the benefits of homeownership, affordable cooperative conversions can serve to stabilize neighborhoods and lower the high annual turnover rates in some public schools."
For developers, cooperatives provide an advantage when dealing with expiring Low Income Housing Tax Credit (LIHTC) projects. LIHTC properties that convert to tenant ownership after the 15-year compliance period are exempt from future tax credit-related restrictions. Local housing agencies have the ability to create their own affordability requirements without having to report to the state tax credit administrating agency or abide by Internal Revenue Service (1RS) requirements.
Advantages of Cooperatives as Compared to Condominiums
While condos are prevalent in most markets, there are distinct advantages to developing cooperatives when providing affordable housing. First, cooperatives offer more flexibility in financing. In rental housing, financing can only be used for the building. With condominiums, financing can only be used for the individual units (Exhibit l).With cooperatives, financing is available for both the building ("the blanket debt") and to the individual shareholder for their unit ("the share loan").
Public agencies can also decide how to best invest their subsidy financing. Subsidy financing to the cooperative corporation can place restrictions on all units in the building, while subsidy financing to the shareholder can enable equity appreciation or limitation, depending on the goals of the locality and/or housing authority. In some cases, agencies may subsidize both. The cooperative model allows public agencies to determine with more precision than other homeownership programs the balance between permitting equity appreciation and wealth accumulation for residents versus long-term affordability.
Cooperatives' financing flexibility creates several advantages:
1. Flexibility on share prices: A majority of low-income families have difficulty qualifying for mortgages. When targeting such populations, share prices can be set at an amount that requires either no mortgage or only a small mortgage for the shareholder, with a majority of the financing to the building.
2. Financing for major repairs: Unfortunately, even with modern building technology, most buildings will require at least one major system upgrade or replacement every 20 years. In cooperative housing the cost of those repairs can be spread over several years through mortgage financing. Since condominium associations do not typically own any mortgageable real property, the cost of such repairs and replacements must generally be recouped in costly one-time assessments, which can be onerous for low-income owners. Financing for major repairs also leads to another benefit: lenders generally require lower upfront reserves for cooperatives as compared to condominiums.
| [Photograph] |
| Windows are replaced as part of the Capital Manor Cooperative renovations. |
3. Balancing long-term affordability with equity appreciation: One of the challenges of developing or financing affordable homeownership is the difficulty of preserving long-term affordability while enabling equity appreciation. In a cooperative there is flexibility to meet goals that reflect local needs.
4. Improved enforcement: Providing subsidy financing to the cooperative corporation as well as the individual unit enables "double protection" for enforcing affordability requirements. A cooperative corporation is not likely to enable a selling shareholder to violate resale restrictions or take a windfall profit if it threatens recapturing their subsidy financing.
In addition to the benefits related to increased financing options, cooperatives also promote strengthened communities. Since the residents operate the cooperative corporation, the democratic decision making and building oversight create increased resident interaction and sense of community. Most cooperative corporations create some restrictions on the subleasing of units, discouraging "investor" owners, and maintain some role in resident selection.
Conclusion
Cooperative housing can be a valuable tool for the affordable housing and community development field. It provides the opportunity for homeownership in multi-family housing (including expiring tax credit projects); provides a costeffective, smart-growth-friendly method for increasing homeownership; and has a proven track record on financial stability and community building.
"Homeownership serves as an anchor for a community and is vital to a neighborhood's long-term stability," said New York City Housing Development Corporation President Emily Youssouf, whose organization has recently created a new subsidy program for affordable and mixed income cooperatives. "Our cooperative financing program encourages the increased production of this housing resource so more New Yorkers have the opportunity to be homeowners."
| [Photograph] |
| District of Columbia Mayor Anthony Williams helps break ground at the Capital Manor Cooperative. |
| [Sidebar] |
| Cooperatives are often the most efficient, cost-effective, low-risk and stable means to affordable homeownership. |
| [Sidebar] |
| Case Study: |
| The Warren Street Cooperative (Brooklyn, NY) |
| In 2000, the Fifth Avenue Committee (FAC) completed its first affordable housing mixed-income cooperative. FAC is a not-for-profit organization that develops, preserves, and manages community-based affordable housing for low-income, special needs, and working people in Brooklyn, New York. |
| The Warren Street Cooperative project is a precedent-setting model for FAC. This 11-unit project provided a model for FAC on creating and managing mixed-income affordable cooperative housing that is accessible to those making between 50-120% of Area Median Income (AMI). The prices ranged from $42,000 to $98,000 for two-bedroom units and $105,000 to $205,000 for three-bedroom units. Lessons learned from this project include the financing strategy, offering plan, the board structure, and how the building functions with families from different income levels. |
| Based on the success of Warren Street, FAC has started two other mixed income cooperatives. Red Hook Homes, which recently started construction, will be a 61-unit mixed-income cooperative building with 20 units at 50% AMI, 20 at 80% AMI, and 20 at market rate. More than twenty-two city- and privately-owned lots and ten funding sources were assembled for this project. |
| FAC's The Atlantic Terrace project will be an 80-unit mixed-income "cond-op" (mixture of 7 market rate condominiums and 73 cooperative units) building with retail space on the first floor and sub-grade parking. Forty of the co-op units with share prices below $100,000 will be affordable to families at or below 80% AMI. The remaining units will have varying levels of affordability (including at 75% of median income) and will have prices from $150,000 up to market rate units at close to $1 million. Additionally, Atlantic Terrace is hoping to be the first affordable homeownership project in Brooklyn with Leadership in Energy and Environmental Design (LEED) Gold certification. |
| Gretchen Maneval, FAC's Director of Housing Development, said, "Mixed-income homeownership opportunities with deep affordability are paramount to the preservation of diversity in Brooklyn's rapidly gentrifying neighborhoods. Affordable cooperatives allow low- and moderate-income tenants to benefit from the opportunity to build equity and invest financially in their own communities." |
| Exhibit 1: |
| Financing available for a condominium |
| Different levels of debt and equity for each individual unit and unitowner |
| The following exhibits illustrate the benefits of co-op financing over condo financing. |
| Option 1, 2 and 3: Financing available for cooperatives |
| Co-op Option 1 |
| 30% blanket debt with various levels of share debt and equity for each member-owner |
| Co-op Option 2 |
| No blanket debt with various levels of share debt and equity for each member-owner (similar to condo financing) |
| Co-op Option 3 |
| 100% blanket debt. This model has a minimal share price, which avoids the resident's need to obtain a share loan. |
| [Sidebar] |
| Tenants Avoid Displacement and Become Homeowners |
| In mid-2001, tenants of Capital Manor Apartments in Washington, D.C. discovered that their building had been put up for sale. If the property were sold, they would need to find new housing, or to purchase the buildings themselves. seeking to save their homes, the residents formed a tenants association in October 2001, and began to assemble a strong development team to help them with their cause. Fourteen months later, in December 2002, the Tenants Association was awarded $2 million in financing from the D.C.'s Department of Housing and Community Development (DHCD) to purchase the buildings. |
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| [Sidebar] |
| However, the funding would not be available by the purchase deadline. In January 2003, NCB Development Corporation, the nonprofit affiliate of National Cooperative Bank, was approached to provide a $3.5 million acquisition loan for the approaching deadline. |
| Shortly after, the tenant association established the Capital Manor Cooperative. Terry Simonette, President and CEO of NCB Development Corporation, said, "Capital Manor fits perfectly with our mission to preserve affordable housing, support cooperative conversion, and most of all, provide the means for low- and moderate-income Americans to become homeowners." |
| Deborah Thomas, Capital Manor's Board President, said, "I had doubts that we could own our homes. But now it's a reality and a dream come true." |
| Almost immediately, Capital Manor began to plan for longoverdue capital improvements, and contacted the bank again for an $8.1 million construction loan from NCB Development Corporation and NCB, FSB, a subsidiary of NCB. |
| Today, Capital Manor is a renovated 102-unit, limited-equity cooperative, with a low buy-in price and restricted share re-sales to households earning less than 80 percent of the Area Median Income (AMI) to ensure long term affordability for moderate-income households, and allow for modest investment appreciation. Ownership shares are priced from $1,500 to $3,500 depending upon unit size, but the real value lies in living in an affordable home. |
| [Author Affiliation] |
| Jim Gray, the Vice-President of NCB Development Corporation, has worked in housing and economic development in both the private and public sectors for more than 10 years. Since joining NCBDC in 2000, he has spearheaded the Together We Can initiative to expand cooperative homeownership opportunities throughout the U.S. |
| Jay Marcus, the NCBDC New York Project Director, has more than 15 years of experience in leadership positions in the government and non-profit sector, developing and overseeing housing and economic development projects totaling more than $250 million. He is on the board of the Native American CDC and was appointed by the Manhattan Borough president to Community Board #4. |
| Jolie Marie Carey is participating in NCB Development Corporation's training program. She recently graduated from Columbia University's School of International and Public Affairs with a master's degree in International Affairs focusing on economic and community development. |
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