Cooperative living first appeared in New York City in the 1870's (called "home clubs" back then). The basic "ownership model" was pretty much as it is today. A stock company was created, shares were sold and an apartment building constructed. Shareholders received long-term leases to an apartment. Apartment transfers had to be approved by club members. The die was basically cast, even though these "home clubs" disbanded after a decade or so, and the creation of the modern coop had to wait until the early 1900’s.

The 1920's were somewhat of a golden age for coops. Many were built as luxury apartments, though some were priced for the middle-class of the time. By the early 1930's, three-fourths of the coops in New York had been wiped out by the market crash and great depression. Many were sold at foreclosure sales. Cooperatives took off again after WWII, and for the most part have been going strong ever since.

Some coops were planned as new developments right from the start. Much of the current supply, however, came about as a result of rent control laws. Such laws have been in existence since the late 1940's.

Over the decades, fixed rents coupled with rising maintenance costs became the impetus for many landlords to convert their rental buildings to coops. Conversions continue to this day, though the last major wave of conversions occurred in the 1980's. There is virtually no new construction of coop buildings at present.

A coop comes into existence as a corporation and is subject to the business laws of the state of New York. The original owner or developer is called the sponsor of the cooperative. The sponsor transfers ownership of real property to the corporation in exchange for its capital (all of its stock). The new corporation (the coop) often assumes liability for a mortgage on the property as part of the ownership transfer.

When the cooperative corporation first forms, the sponsor controls all of the shares. The sponsor determines the number of shares assigned to each apartment based on an evaluation of the unit's relative value. Larger units and those on higher floors are typically assigned more shares than the smaller or "view challenged" apartments. Owner's purchase shares from the sponsor and in return receive a stock certificate and an exclusive occupancy agreement called a proprietary lease. Many leases are for 99 years, some for as little as 25 years. Check out the lease details and provisions for lease renewal when you purchase.

Note that if you buy an apartment from the original sponsor, you don’t have to obtain board approval. It doesn't matter if the sponsor sells to you on the first day apartments are available, or if he sells you a unit 20 years later – if he feels you are qualified to buy, you're in.

When an ordinary owner (not the sponsor) in the future sells his shares, a new stock certificate and lease is issued to the new buyer. Transference of shares has to be approved by the board. This is why board approval is basic to selling or purchasing a coop apartment.

Note also that the transfer of ownership is a stock transfer of personal property, not "real property" (in legal terms) as in the case of condominiums. This fact means that when you finance part of the purchase, you don’t pay a mortgage recording tax or for title insurance – greatly reducing closing costs.

Like any corporation, a coop is governed by an elected Board of Directors. Initially the sponsor selects the Board, and then after a predetermined number of units are sold – usually 50% -- elections are held and the transfer of power to a new board made up of new shareholders begins.

Note, however, that as long as the Sponsor owns a specified number of unsold shares (say 20-25%), he generally can continue to appoint one or more board members at the time of annual elections (for a period of up to 5 years after conversion). You’ll have to look at the by-laws to see what the sponsors inalienable rights are in a specific building.

Here are some common scenarios: sometimes a sponsor by choice doesn't sell all of the available units. Other times the market is slow and he can't sell what's available. Or, most commonly, he converted a building occupied by tenants protected by rent control or rent stabilization laws. The most common conversion method is termed a "non-evict" (no eviction of tenants) plan where at least 15% of the tenants must choose to buy an apartment if the conversion is to proceed (the alternative, which has rarely been used, is an "evict" plan which requires 51% of the tenants or "insiders" to buy voluntarily and those that don't have to vacate within 3 years). In many cases the sponsor offered significant discounts or insider prices as an incentive for the tenant to buy (in the 1980’s a 25-40% price discount was common – sometimes the discount was as high as 75% -- but alas, those days are now gone).

What is useful to know is that in most of the "non-evict" conversions there are invariably a certain number of renters that choose to stay put and rent per the terms of their existing leases. They can legally do this until they die. Most coops in New York have at least one or two apartments that are still rented by an original tenant or descendant.

In any of these cases, the sponsor continues to own the original unsold shares. The number of retained shares and their attendant voting rights may allow him a measure of control or influence over the makeup of the board for many years to come. In some cases, even beyond the normal 5-year limit on his board appointment rights. Consult the by-laws for details.

The existence, duties and powers of the Board are derived from three basic documents: the certificate of incorporation, the by-laws, and proprietary lease.

The Board of Directors has the power to make major decisions regarding building finances, and generally they don't need owner approval to do so. (A condo Board of Managers, in contrast, usually has to receive approval from two-thirds of the owners to make major budget or expenditure decisions.) The Coop Board overseas payment of all building expenses, sets the rent or maintenance paid by each shareholder, can add to building debt at their discretion, determines the right (if any) to sublet, and approves apartment purchases and alterations.

What does a coop owner actually own? Not a deed to real property, as with condo owners, but shares of stock. And the stock imparts the right to rent a unit from the corporation (as long as the corporation remains in existence) by paying a monthly rent called maintenance. The maintenance in turn pays the owners share of the buildings operating expenses, including principle and interest on any underlying building mortgage.

The apartment owner gets an income tax deduction for her share of the interest paid by the corporation on the underlying mortgage, and a deduction for the pro rata share of the property taxes. If the owner obtained financing to purchase her specific apartment, applicable interest on this loan is also deductible. Consult with an accountant for specifics.

A coop owner is in a unique position legally, and has some benefits not available to condo owners as a result. The corporation is technically a landlord. Because of an owner’s legal status as a tenant, he or she is protected by state and city landlord/tenant laws. Sometimes these laws can be used as leverage to force an unresponsive coop board (the landlord’s representative) to correct common area deficiencies, or to repair damage inside a unit that resulted from plumbing, electrical or structural failures originating in the common areas of the building.

Sometimes these laws can also aid a tenant in resolving disputes centered around the board's efforts to evict roommates or pets. The legalities can be complex depending on the by-laws and details of the proprietary lease. But statutory legal support may be available to help with the resolution of certain disputes between owners and the board. Consult your attorney if such circumstances arise.

Lastly, some buildings in New York City are hybrids. They are part coop and part condo. They are termed condops. The condo portion is for various retail businesses that typically occupy part of the first floor or two of the building. The original sponsor usually retains ownership of the retail spaces and receives the rental income.

The residential part taken in its entirety (all apartments and associated common areas) is technically a single condo that was purchased by a cooperative corporation. The apartments are sold as coops and the form of governance is cooperative. When you buy, you own shares of stock. With regard to financing restrictions, board approval and sublet policy, many condops are indistinguishable from any other coop in the city.

Some, however, function under more liberal condo-like rules. They typically don't require board approval to sell, the rules of sublet are liberal and they let the financial markets (as with condos) set debt to income ratios if you need to finance.

One more thing, today the word condop has morphed (through repeated misuse) to mean either of two things: one, a true "condop" based on a legal ownership structure as just described above (business condos and coop apartments in the same building); and two, any coop that doesn’t require board approval to purchase.

Here in Summary are the essentials of Coops (see this section's table of contents for more details on many of these topics):

1) When you buy, you own shares of stock and a proprietary lease (the exclusive right to occupy an apartment). Look to the original Offering Plan prepared by the sponsor for the shares allocated to each apartment in your building.

2) In most cases the value of your stock can rise or fall with the real estate market based on normal laws of supply and demand. Some coops, however, were established under programs designed to preserve affordable housing (called limited equity or subsidized cooperatives). The potential appreciation of this kind of stock is limited per formulas in the by-laws. If you are paying market rates, you’re not buying into a limited equity coop. Ask your lawyer or real estate agent if you have concerns.

3) The coop by-laws usually restrict the percentage of the purchase price that can be financed. This percent is variable, but 70-80% is typical. Which means the average minimum down payment is 25%. Some coops require 50% down, and a few allow no financing at all.

4) Check the Proprietary Lease (including the appended House Rules) for your rights and obligations as an owner, how maintenance is calculated, the coop's sublet policy, pet policy, renovation requirements, and what repairs the Board has responsibility for and those the unit owners must take care of.

5) If you want to sublet, there are usually severe restrictions relative to condos. Typically you'll be able to sublet for a 6-12 month period, but that's it, then the renter must go. The board, by the way, has to approve any lessee – just as it did you. A number of coops don't allow any subletting. Consult the proprietary lease for details.

6) Rent restrictions do mean, however, that your neighbors are generally fellow shareholders (not interlopers), the building population as a whole tends to be more stable, less transient than condos. To some, these factors enhance the shared quality of life.

7) The coop is governed by a Board of Directors made up of elected shareholders.

8) The board sets a budget to cover the costs of running the building. The board usually hires a management company to handle day-to-day operations. Each owner's share of the operating costs is paid monthly and is called a maintenance fee (or rent). It covers such operating expenses as salaries, property management fees, utilities, heating, mortgage payments, real estate taxes and insurance.

Note: your share of the buildings real estate taxes and mortgage payment (if a building mortgage exists) is included in the maintenance. If you also financed the purchase of your apartment, you will make that additional mortgage payment as well. In condos, each owner gets an individual tax bill from the local taxing authority, and makes mortgage payments (if they financed the purchase) only on their particular unit. Condo common charges do not include payments toward real estate taxes or a building mortgage.

9) Your purchase cannot be completed without Board approval. And the process is usually more rigorous and invasive than for condo buyers. The simple fact is, if you don’t want to bare your financial soul, don't buy a coop. You may have to show receipts for how much you spent on "dining out" the past 6 months…..in addition to all of the normal information you provided the bank when you got a share loan. The Board will want to see a credit report and documentation of your income, employment, investments, assets, liabilities and net worth. You’ll need to provide a number of personal and professional references. You will be invited for a Board interview. They can reject you for almost any reason, short of violating state and federal discrimination laws. As you would expect they can turn you down if you don't meet their financial requirements, but also they can reject a person if he or she is perceived as rude, offensive or deceptive. If you do get turned down, to add insult to injury, they don’t have to give you a reason. Our advice: be honest, open, friendly and sincere, but keep your answers relatively short and to the point.

10) When you close on the purchase, there's good news. The costs are typically about one-third the expense associated with condominiums. If you plan on closing costs equal to approximately 1-2% of the purchase price, you’re going to be in the right ballpark.

11) Down the road when you want to sell, the buyer will have to go through what you did and be approved by the Board. Selling a coop can take a lot longer than selling a condo, many months longer in some cases. If this might be an issue because of the likelihood of a job transfer or other circumstance, be forewarned.

Note: some coops have a "flip-tax". It is part of the proprietary lease. It is a provision that requires payment of a fee for the privilege of exiting the building. It typically is 1-3% of the sales price, though it can be much more in some cases. And there are many variations of this "tax" and how it’s calculated. It can be based on a fixed fee per share sold. Or just on the profit you make. Have your lawyer explain the details.

12) Some key questions to ask your real estate agent and lawyer:

Does the coop corporation own the land the building sits on?

If not, does the corporation hold a long-term (99 year) building lease?

When does it come due?

What are the renewal terms?

When is the underlying mortgage (assuming there is one) due for refinance? (If interest rates are heading up, a refinance may raise maintenance payments.)

Is the building mortgage payment an interest only payment?

If an interest only mortgage, how is the building debt being retired?

13) Are all of these factors satisfactory to you?

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