COOPERATIVES

Interests, rights, and obligations
Organization and management

Cooperative disclosures

 

In a cooperative, or co-op, one owns shares in a non-profit corporation or cooperative association, which in turn acquires and owns an apartment building as its principal asset. Along with this stock, the shareholder acquires a proprietary lease to occupy one of the apartment units.

The number of shares purchased reflects the value of the apartment unit in relation to the property’s total value. The ratio of the unit’s value to total value also establishes what portions of the property’s expenses the owner must pay.

The Cooperative

The exhibit shows a nine-unit apartment building. A cooperative corporation buys the building for $900,000. All nine units are of equal size, so the corporation decides that each apartment represents a value of $100,000, or 1/9 of the total. The co-op buyer pays the corporation $100,000 and receives 1/9 of the corporation’s stock. The shareholder also receives a proprietary lease for apartment 1. The shareholder is now responsible for the apartment unit’s pro rata share of the corporation’s expenses, or 11.11%.

Interests, rights and obligations           

Cooperative association’s interest. The corporate entity of the cooperative association is the only party in the cooperative with a real property interest. The association’s interest is an undivided interest in the entire property. There is no ownership interest in individual units, as with a condominium.

Shareholder’s interest. In owning stock and a lease, a co-op unit owner’s interest is personal property that is subject to control by the corporation. Unlike condominium ownership, the co-op owner owns neither a unit nor an undivided interest in the common elements.

Proprietary lease. The co-op lease is called a proprietary lease because the tenant is an owner (proprietor) of the corporation that owns the property. The lease has no stated or fixed rent. Instead, the proprietor-tenant is responsible for the unit’s pro rata share of the corporation’s expenses in supporting the cooperative. Unit owners pay monthly assessments. The proprietary lease has no stated term and remains in effect over the owner’s period of ownership. When the unit is sold, the lease is assigned to the new owner.

Expense liability. The failure of individual shareholders to pay monthly expense assessments can destroy the investment of all the other co-op owners if the co-op cannot pay the bills by other means.

Since the corporation owns an undivided interest in the property, debts and financial obligations apply to the property as a whole, not to individual units. Should the corporation fail to meet its obligations, creditors and mortgagees may foreclose on the entire property. A completed foreclosure would terminate the shareholders’ proprietary lease, and bankrupt the owning corporation. Compare this situation with that of a condominium, in which an individual’s failure to pay endangers only that individual’s unit, not the entire property.

Transfers. The co-op interest is transferred by assigning both the stock certificates and lease to the buyer.

Organization and management               

A developer creates a cooperative by forming the cooperative association, which subsequently buys the cooperative property. The association’s articles of incorporation, bylaws, and other legal documents establish operating policies, rules, and restrictions.

The shareholders elect a board of directors. The board assumes the responsibility for maintaining and operating the cooperative, much like a condominium board. Cooperative associations, however, also control the use and ownership of individual apartment units, since they are the legal owners. A shareholder’s voting power is proportional to the number of shares owned.

Cooperative disclosures                 

The Cooperative Act.  F.S. Chapter 719 (the Cooperative Act) requires developers to disclose to prospective cooperative buyers within the sale or lease contract the right to cancel the contract. The disclosure must be made in “conspicuous” type and include language providing the buyer the right to cancel the contract in writing within 15 days after the buyer signed the contract. The buyer may also cancel the contract within 15 days if the contract has been amended in such a way that the offering is materially altered or modified in an adverse way to the buyer. This right to cancel may not be waived. The disclosure must also include language that the budget provided to the buyer contains estimates which, if they do not match actual costs, do not constitute adverse changes to the offering.

The Act requires non-developers selling their shares in the association to disclose the buyer’s right to cancel in writing within 3 business days of signing the contract. This disclosure also is to include language that the buyer has been provided current copies of the associations governing documents: the Articles of Incorporation, Bylaws, Rules of the Association, and a Question and Answer sheet prior to signing the contract.

If the cooperative parcels are being sold or leased prior to construction completion, the developer must disclose a copy of the plans and specifications for the completion of the unit and common areas. All contracts and disclosures must contain language that oral representations cannot be relied upon.