Limited Equity vs. Market-Rate

Saturday, September 10, 2005

In the Minnesota area, some senior co-ops are marketed with a limited equity feature, while others have a more conventional market-rate equity arrangement.

What's the difference?

With limited equity, owners buy a co-op share and it appreciates at a fixed rate per year, usually 1 to 3 percent. The share price, analogous to a down payment on a house, is usually 25 to 38 percent of the total share value. If the share price were $50,000, the annual equity gain would be $500 to $1,500. Assuming that the share price is 25 percent, the total share value would be $200,000.

This arrangement sounds crazy, but it has an advantage. Over time, a unit will become increasingly easier to sell because its price will be significantly lower than similar properties that appreciated at the market rate.

The limited equity co-ops also have financing advantages. Generally, all the owners collectively hold a 40-year master mortgage, with lower individual monthly payments than would be the case with 30-year loans. When the owners sell a unit, their portion of the master mortgage can be assumed by their buyers.

With market-rate equity senior co-ops, a co-op share price can appreciate, or depreciate, at the same rate as the general housing market, and owners must secure their own financing. When owners sell, they may get substantially more cash, but their buyers will have to secure their own financing. The unit may be harder to sell because the price will be the same as any other unit of similar size and location.

Which is better, limited equity or market-rate equity? Most of the advantages of the limited equity option accrue to subsequent buyers who get a really good deal. With the market-rate equity co-op, the advantages accrue to the seller, who assumes more risk because the future market prices are unpredictable.

With either type of senior co-op, the co-op management will sell the unit, usually to someone on its waiting list, though some owners have engaged a real estate agent to reach a broader market.

-- Katherine Salant


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