Browse Proptionary encyclopedia

Build your real estate vocabulary to be able to communicate and invest more effectively and professionally.

Stock Cooperative

DEFINITION

Type of subdivision where the owners of the property are technically shareholders of the property and hold a share in the corporation that holds title to the property. Shareholder status ensures each owning party has the right to collect rent, use, or sale their portion of the property.

EXPLANATION

California Civil Code 1351 (m) defines a stock cooperative as “a corporation which is formed for the primary purpose of holding title to improved real property, either in a fee simple or a term of years.”

A stock cooperative relates to the purchase of real property as an investor. Rather than actually purchase a unit, or a portion of the property, an investor purchases stock in a property. Therefore, stock cooperatives are not a type of real property, but rather a business structure that grants a shareholder position in a corporation.

Investment in a stock cooperative grants an investor the ability to use the property and to claim a portion of its income. However, it does not grant an investor ownership of real property. Many lenders will not lend to owners of stock cooperatives even if they have equity, as there is no property to serve as collateral.

Another disadvantage is that because stock cooperatives have one property tax bill, which means the failure of one or more shareholders to pay their share of taxes may result in a tax lien, increased property tax payments, or possible foreclosure. Additionally, ownership under undivided interests means that because there is only one deed, if one or a few owners do not contribute their portion of the mortgage payments, the property may go into foreclosure.

Investors, or shareholders, have the right to sell their entitled portion of stock. Prior to selling stock, however, a Board of Directors must approve a new buyer. This is done to prevent potential nonpayment.

As a property deed is shared by multiple investors in a stock cooperative, a lender has a difficult time recouping an investment in the event of a borrower’s default. Therefore, it is difficult to retain financing for a stock cooperative.

A stock cooperative is the shared ownership of a property, typically in the form of an ownership stake in an apartment building. Stock holders are essentially part owners of the property and hold an interest in the property. Their interest is dependent on their initial investment. Shareholders have the right of exclusive occupancy and can transfer their interest to collect rental income.

A Stock Cooperative Is An Example of a Common Interest Subdivision

A common interest subdivision is an ownership scenario where individuals own a percentage of property-condominiums, planned communities, time-shares, and stock cooperative projects. The most common type of subdivision is a condominium unit in a residential building.

Features Of A Co-op

Co-ops operate on an at-cost basis, this means that money is collected from the inhabitants of the building to pay bills off. They are often thought of as less expensive than a normal apartment due to its affordable method of billing.

Specific laws that are created for fair housing also apply for Co-ops. The ownership requirements that are imposed on  a Co-op tend to be slightly more prohibitive when compared to other housing alternatives. The partners of the corporation that own the co-op dictate the terms for an individual who is looking to buy shares.

There are some Co-ops that are meant for a specific group of people. For example, there are some co-ops that exist which are designed solely for the elderly. With the specificity that comes with these type of Co-ops, the ownership requirements tend to be a bit more restrictive. There are some structures that may prevent an owner from subleasing their property to other tenants.

Due to the structure of a Co-ops system, all partners must pull their own weight in terms of covering the costs of the building. If one partner is unable to pay their portion of the costs, it can ultimately result in the other members having to cover for them out of their own pockets though  situations like these are few and far in between.

Some of the more favored co-ops are:

Limited Equity Co-ops- Rules and regulations on the prices of the shares that will be bought and sold

Leasing Co-ops – The corporation who owns the building leases the building itself. This builds no equity and many of these corporations keep cash stored in case the building is eventually put up for sale

Market Rate Co-op -These allow for partners to buy and sell shares at market price no matter how high or how low the costs are

Social Aspect of a Co-op

Social interaction is a large part of many Co-ops because of the level of inclusivity that is associated with them. A smaller Co-op will have many of its residents act as a unit in order to take care of maintenance, rules, and landscaping along with all of the costs. A board of directors or committee is usually constructed for larger groups. The act of making decisions and sharing responsibilities is inherent to this type of lifestyle which individuals must take into account when they are deciding to buy into a Co-op.

[quiz-new]