By: John B. Newman, Retired
It is difficult to understand what a cooperative is without first understanding what a condominium is. A condominium is a defined three-dimensional portion of real estate, usually an apartment or a townhouse, which is owned directly by the owners. The owners receive a deed just if they were buying a house. Instead of a house and yard, the owners have a defined apartment plus a percentage share of all of the common hallways, exterior land, parking areas and common facilities. The owners pay a monthly maintenance fee to cover maintenance and upkeep of the grounds and common areas, insurance on the building and exterior and roof repairs. Usually the owners are responsible for repairs to their own heating, ventilating and air-conditioning equipment. A cooperative superficially resembles a condominium because the owners purchase an apartment and share the use and expense of the common areas. However, it is a vastly different animal.
With a cooperative, the entire building and all of the apartments along with all of the common areas are owned by the cooperative corporation. When owners “buy” an apartment they do not receive a deed and do not own any real estate. Rather, they receive what is called a proprietary lease, which is a permanent lease, along with a stock certificate for shares in the cooperative corporation which owns the building.
The differing legal structures of condominiums and cooperatives result in significant practical differences. First, the economics are different. With a cooperative there is usually a mortgage on the entire building which is paid as part of the monthly maintenance expenses. Thus, the owners of a cooperative must pay the loan on their apartment plus their pro rata share of the mortgage on the building, so the maintenance on a cooperative is generally much higher. This may or may not be reflected in a lower purchase price.
Second, because the owners receive a lease and not a deed, the law permits the cooperative corporation to determine whether or not the prospective owners are acceptable. Thus, every contract to buy a cooperative is subject to the consent of the cooperative. While laws banning discrimination in housing prevent discrimination based upon racial, ethnic or similar grounds, the cooperative corporation has a great deal of leeway in determining whether or not to approve a prospective purchaser.
A third significant difference from condominiums is that a cooperative corporation may limit the ability of shareholder-tenants to sublease their apartments. Until recently, cooperative corporations were permitted to have blanket prohibitions on shareholders’ subleasing apartments. This could cause a terrific financial hardship if someone moved and could not sell the apartment. The New Jersey legislature provides some relief by making total bans on subleasing cooperative apartments illegal. However, the law still permits cooperatives to limit the percentage of apartments in a building which may be subleased at any one time which, for many owners at any time, may be tantamount to a total ban. The flip side of the restrictions on subleasing an apartment is that once you are living in a building as a member of the cooperative, you will have the ability to exert some control over those who will live with you.
Both condominiums and cooperatives enable a person to own apartments, obtain tax deductions for interest as a homeowner and participate as a stockholder in the corporation running the building. However, there are inherent significant differences between the two forms of property ownership which should be understood before buying either.
This publication is intended for general information purposes only and does not constitute legal advice. The reader should consult legal counsel to determine how the law may apply to specific situations.