Now that you have decided to purchase your apartment complex, you might want to consider turning it into a housing cooperative.
This form of ownership is a joint operation of an incorporated housing development by those who live in it.All property of the cooperative is owned by th corporation and the corporation is controlled and directed by its stockholders. The individual tenant does not directly own a unit or an apartement within the complex.
Rather, the corporation owns all of the units, and each stockholder has the exclusive right to occupy one unit within that cooperative. Every stockholder generally has one vote toward the operation and control of the cooperative.
There are several advantages to the cooperative form of housing. The corporation insulates individual members from liability, but at the same time the individual shareholder is entitled to deduct for tax purposes the proportionate share of taxes and mortgage interest payments on the entire cooperative.
For all practical purposes, there are little, if any, tax differences between condominium and cooperative ownership.
Additionally, in a cooperative, the tenants themselves - through their elected board of directors - control building maintenance and make the operating rules of conduct. Tenants have the power in cooperatives to select new members as well as to remove members who do not follow the rules of the cooperatives.
How is a building actually converted into a cooperative in the District? Although this column cannot describe all of the requires of the District law, here is a brief outline.
1. To obtain the necessary research materials, you will need the following documents: The D.C. Cooperative Association Act of 1940 (Section 29-801 of the D.C. code) and the Second Emergency Cooperative Regulation Act of 1978 (Act 2-171). Under this most recent emergency act, the administrator of the Neighborhood Improvement Administration will soon issue rules and regulations implementing that new emergency legislation. For additional information on the rules and regulations, you can contact the administrator (724-8849).
2. There are some important preliminary considerations which must be recognized. If you are to have a successful cooperative, it is absolutely imperative to involve - to the maximum extent possible - all of the tenants within the apartment complex. The success of every cooperative directly depends on the individual shareholder (tenant) involvement.
Additionally, you mut analyze the physical condition of the building. What repairs and alterations will be necessary, and what is the projected useful life of the building? An architect or contractor should be consulted to inspect the building and point out structural and mechanical problems.
It is also important to have an economic feasibility study made. This includes analysis of such costs as renovations, taxes, outstanding mortgages and other debts and annual maintenance. These costs must be offset against the building's projected monthly income. After all, since each tenant will ultimately have to pay a proportionate share of the monthly maintenace expenses, you must make sure that these costs will be reasonable.
3. Once a comprehensive plan has been developed, a certificate of eligibility to convert to a cooperative must be obtained from the Neighborhood Improvement Administration. Under the emergency legislation recently enacted, conversions of cooperatives are prohibited unless 51 percent of the tenants agree in writing to the conversion, less than 50 percent of the building's units are occupied, or if the building constitutes a "high-rent housing accomodation" within the meaning of the act.
Since the concept and definition of such an accomodation has been shifting rapidly with new legislation, it is advisable to check with the Neighborhood Improvement Administration for any changes in the law.
4. After you obtain a certificate of eligibility, professional help should be obtained. An attorney should be consulted to help draft the articles of incorporation and the bylaws of the corporation. These are the basic documents that bind the corporation to the purposes and policies desired by the tenants. Informulating these policies, tenants should give careful consideration to the following:
The amount of each unit's share of the down payment and the monthly assessment for each unit to cover mortgage payments and operation expenses.
Membership criteria and provisions for removal.
The structure of the organization and the relation of the members to each other.
The method for distribution of any excess income and for allowing for a return of equity when a tenant sells the interest in the cooperative.
5. Arranging financing. As in any other financial endeavor, this will probably be the most difficult act of the tenants' association. Not only are we in a tight money market, but lenders will be reluctant to commit themselves to a group of tenants. A sales job must convince the lender that the project has sufficient backing and is feasible.
Here are some possible sources of assistance for low-income cooperative housing:
The D.C. Department of Housing and Community Development has authority to lend money to a qualified nonprofit cooperative groups for the purpose of rehabilitation once the cooperative has acquired the building.
The Federal Department of Housing and Urban Development has mortgage insurance programs for qualified low-income cooperatives. To determine if your cooperative would qualify, you can check with the D.C. area office of HUD, located at 1875 Connecticut Ave, NW.
Finally, the tenants' organization must determine the method of management. Self-management is not generally allowed by a lender, and clearly professional expertise in the beginning is likely to avoid many of the pitfalls. In selecting a management agency, the tenants' association should look to experience, flexibility and a willingness on the part of the manager to train the individual tenants to involve themselves in their own project.
Next: Controlling your own destiny.