August 6, 2015
Cooperative housing is similar to a condominium, or a planned unit development. In the cooperative form of ownership, a not-for-profit corporation owns the building, and the residents own stock in the corporation. The IRS allows interest on debt used for the purchase of a co-op to be deducted from taxable income, just as the interest on a condominium or single family home is deducted (IRS Code Section 216). The cooperative is governed by a board of directors in generally the same way that a board governs a condo.
The key legal distinction between a condo and a co-op lies in ownership. In a condominium, each owner owns his/her unit, and they jointly own an undivided share in the common areas. In a cooperative, a not-for-profit corporation owns the units and the common areas, and ownership of stock in the corporation allows the owner to reside in a particular apartment, leased from the corporation. The “rent” on the apartment covers the corporation’s mortgage, and pays for maintenance and repairs, desk clerks and managers, etc., just as a condo fee does. Ownership of stock in the corporation allows the owner to vote for the board, just as ownership of an apartment does in a condominium.
The practical differences between condos and co-ops are in two areas, approval and financing. In principle, a cooperative board has the right to approve or deny the sale of shares (hence, the apartment) to a new owner. In practice, District of Columbia anti-discrimination law severely limits the ability of D.C. cooperatives to deny purchases. In general, cooperatives in the District of Columbia can deny a sale only for financial reasons, such as insufficient income to make the payments. There are a few exceptions, such as limits on the sale of units to companies as opposed to individuals, or to high-profile public figures that may disturb the peace and quiet of other residents.
The legal structure of a cooperative makes the mortgage and settlement process for cooperatives different than for condominiums. Individual owners own shares of stock, not physical property, so owners do not, technically, have mortgages. Instead the cooperative corporation may have a master mortgage (also called a blanket mortgage) in the same way that a rental building may have a commercial mortgage. Additionally, purchasers may take out a “share loan” from a lender, in which the shares of stock are pledged as collateral. In practice, there is little difference between a mortgage and a share loan. Additionally, if the coop has a blanket mortgage, the purchaser does not have to pay points or loan origination fees on that mortgage balance, as the mortgage is, for all practical purposes, assumed by the new buyer. For details of financing arrangements at Van Ness North, see Financing.
An organization of cooperative housing in the District of Columbia was formed in 1984. It has issued a brochure, Co-ops 101, that contains an overview of cooperatives in the District and is of interest to persons considering purchasing cooperative units, owners of cooperative units, real estate agents, coop boards, loan officers and property managers.