COOPERATIVES AND CONDOMINIUM
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, rightsand 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.
Airspace and common elements
Interests and rights
Condominium creation
Organization and management
Owner responsibilities
A condominium is a hybrid form of ownership of multi-unit residential or commercial properties. It combines ownership of a fee simple interest in the airspace within a unit with ownership of an undivided share, as a tenant in common, of the entire property’s common elements, such as lobbies, swimming pools, and hallways.
A condominium unit is one airspace unit together with the associated interest in the common elements.
Airspace and common elements
The unique aspect of the condominium is its fee simple interest in the airspace contained within the outer walls, floors, and ceiling of the building unit. This airspace may include internal walls which are not essential to the structural support of the building.
Common elements are all portions of the property that are necessary for the
existence, operation, and maintenance of the condominium units. Common elements include:
- the land (if not leased)
- structural components of the building, such as exterior windows, roof, and foundation
- physical operating systems supporting all units, such as plumbing, power, communications installations, and central air conditioning
- recreational facilities
- building and ground areas used non-exclusively, such as stairways, elevators, hallways, and laundry rooms
The Condominium
A buyer who purchases Unit #1 of the condominium illustrated obtains a fee simple interest in the airspace of apartment 1 and a tenancy in common interest in her pro rata share of the common elements. If all units in the building have the same ownership interest, the buyer would own an indivisible one-ninth interest in the common elements– pool, parking lot, garage, pool, building structure, tree, etc.
Interests and rights The condominium unit can be owned jointly, in severalty, in trust, or in any other manner allowed by state law. Unit owners hold an exclusive interest in their individual apartments, and co-own common elements with other unit owners as tenants in common.
Possession, use, and exclusion. Unit owners exclusively possess their apartment space, but must share common areas with other owners. The property’s legal documents may create exceptions. For example, unit owners may be required to join and pay fees for use of a health club.
Unit owners as a group may exclude non-owners from portions of the common area, for instance, excluding uninvited parties from entering the building itself.
Transfer and encumbrance. Condominium units can be individually sold, mortgaged, or otherwise encumbered without interference from other unit owners. As a distinct entity, the condominium unit may also be foreclosed and liquidated. An owner may not sell interests in the apartment separately from the interest in the common elements.
Resale of a unit interest may entail limitations, such as the condominium association’s prior approval of a buyer.
Condominium units are individually assessed and taxed. The assessment pertains to the value of the exclusive interest in the apartment as well as the unit’s pro rata share of common elements.
Condominium creation
Condominium properties are created by executing and recording a condominium declaration and a master deed. The declaration must be legally correct in form and substance according to local laws. The party creating the declaration is referred to as the developer. The condominium may include ownership of the land or exclude it if the land is leased.
Declaration provisions. The condominium declaration may be required to include:
- a legal description and/or name of the property
- a survey of land, common elements, and all units
- plat maps of land and building, and floor plans with identifiers for all condominium units
- provisions for common area easements
- an identification of each unit’s share of ownership in the overall property
- organization plans for creation of the condominium association, including its bylaws
- voting rights, membership status, and liability for expenses of individual owners
- covenants and restrictions regarding use and transfer of units
Organization and management
Organization. Condominium declarations typically provide for the creation of an owner’s association to enforce the bylaws and manage the overall property. The association is often headed by a board of directors. The association board organizes how the property will be managed and by whom. It may appoint management agents, hire resident managers, and create supervisory committees. The board also oversees the property’s finances and policy administration.
Management. Condominium properties have extensive management requirements, including maintenance, sales and leasing, accounting, owner services, sanitation, security, trash removal, etc. The association engages professional management companies, resident managers, sales and rental agents, specialized maintenance personnel, and outside service contractors to fulfill these functions.
Owner responsibilities
Individual units. Owner responsibilities relating to the apartment include:
- maintaining internal systems
- maintaining the property condition
- insuring contents of the unit
Common area assessments. Unit owners bear the costs of all other property expenses, such as maintenance, insurance, management fees, supplies, legal fees, and repairs. An annual operating budget totals these expenses and passes them through as assessments to unit owners, usually on a monthly basis.
Should an owner fail to pay periodic assessments, the condominium board can initiate court action to foreclose the property to pay the amounts owed.
The unit’s pro rata share of the property’s ownership as defined in the declaration determines the amount of a unit owner’s assessment. For example, if a unit represents a 2% share of the property value, that unit owner’s assessment will be 2% of the property’s common area expenses.
Condominium disclosures
The Condominium Act. F.S. Chapter 718 (the Condominium Act) requires developers selling condominium units to provide the buyer with copies of the governing documents (Declaration, Articles of Incorporation, Bylaws, Rules of the Association, and Frequently Asked Questions sheet) and have the buyer sign a receipt for the documents. The developer must also include a disclosure with the sales contract that provides the buyer with 15 days after signing the contract and receiving the required materials to submit a written cancellation notice. The buyer may also cancel within 15 days of receiving a contract amendment that is adverse to the buyer. 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 condominium unit owners who are reselling their units to provide the buyer with copies of the governing documents, current year-end financial report, Frequently Asked Questions sheet, and a governance form. The Division of Florida Condominiums, Timeshares, and Mobile Homes created the governance form as an informal educational overview of condominium governance. It includes such topics as the role and responsibilities of the board, owners’ rights, remedies available to owners, and more. Sellers will want to have the buyer sign a receipt confirming he or she has received all of the required documents. The Act also requires the seller to include a disclosure with the sales contract that provides the buyer with the right to cancel in writing within 3 business days of signing the contract.
If the condominiums are being sold prior to construction completion, the developer must disclose a copy of the plans and specifications for the completion of the units and common areas. All contracts and disclosures must contain language that oral representations cannot be relied upon and that the right to cancel may not be waived.
