Most real estate agents have at least a working knowledge of what a homeowner’s association is and how townhomes and condominiums work. However, it has been my experience that very few agents know anything about housing cooperatives. While coops in general may not be as popular here as they are in New York or some other states, Minnesota leads the nation in the number of senior housing cooperatives, and more are being developed every day. As such, you are likely to run into one at some point in your career. This article will provide a basic outline of what a housing cooperative is, how it works and what makes it different from other types of community associations.
What is a housing cooperative?
A cooperative is a type of community association not entirely unlike a condominium or a townhome association. Coops that were created on or after June 1, 1994 are subject to the Minnesota Common Interest Ownership Act (MCIOA) and are required to have a declaration and bylaws, along with any rules and regulations. Coops formed prior to June 1, 1994 typically only have bylaws and do not have a declaration. A sale of an interest in a coop is subject to the resale disclosure requirements of MCIOA, regardless of when the coop was formed. Coops are governed by a board of directors elected by their members and in many ways operate in a very similar manner as other types of community associations. Coops can levy assessments against the members’ interests and foreclose their lien if the assessments are not paid.
Differences between coops and condos/townhomes
While there are many similarities between coops and other types of common interest communities, there are also some major differences. Although it is possible to have a coop in Minnesota where the members’ interests are deemed real estate, I have yet to run into one where this is the case. By and large, housing coops are set up such that the coop owns all of the real estate and members purchase a share in the corporation, which then entitles them to lease a particular unit within the property. The member’s interest is deemed to be personal property just like any other stock certificate and the member becomes a shareholder and a tenant of the cooperative but does not own any real estate. If the member obtains financing to purchase their share in the cooperative, the lender may take a security interest in the share certificate (also known as a share loan) but will not have a mortgage on any real property. In contrast, the cooperative may borrow money and grant a mortgage on the entire real estate to secure that loan. Because the member is not buying any interest in real estate, the purchase and sale of an interest in a cooperative does not follow the normal procedure for residential real estate transactions and does not require the services of a traditional title company. In fact, many cooperatives handle these transfers completely in house or with the assistance of the coop’s legal counsel.
The right to first purchase
With regard to sales of coop shares, it is also important to note that under Minnesota Statutes, the coop always has the right of first purchase when a member is looking to sell. Therefore, if you are representing a seller in this situation, you will need to make sure that you give first notice to the cooperative of your client’s intent to sell and wait the required period of time for the association to determine whether it is going to exercise its right to purchase the share and/or obtain a written waiver of that right before your client accepts any other purchase offer. It should also be noted that most cooperatives do not permit their members to sublease their units or to hold an interest in more than one share certificate and many have restrictions on the amount of equity that a member can receive for the sale of a membership (these are called limited equity coops), so these generally are not good options for investors and should be considered only for buyers who wish to occupy the property as their residence.
Prospective members must be approved by the board
Another feature that is unique to cooperatives is that any prospective member must be approved by the coop’s board of directors before he or she can purchase a membership. Any purchase agreement should therefore contain a contingency for the buyer to be approved for membership. As part of the approval process, the cooperative will likely conduct a credit check, criminal background check and review any other documentation necessary to determine whether the prospective buyer meets the established membership criteria. As the majority of housing cooperatives in Minnesota are senior (55+) communities, the approval process for these particular cooperatives will also include verification that the prospective buyer meets the age requirements established in the governing documents for residency in the property. The approval process will apply to anyone who acquires an interest in a membership, including through inheritance, foreclosure or other means, and who wishes to hold or retain that membership in his/her own name.
You can be evicted for violating the terms of your governing agreement
Finally, unlike most condominium or townhome associations, cooperatives not only have the ability to determine who can and cannot be a member in the first place, but they also have the ability to terminate someone’s membership and evict them from the property for serious and/or repeated violations of the cooperatives governing documents. In a recent published decision, Rolling Meadows Cooperative v. MacAtee, the Minnesota Court of Appeals held that once a membership in a cooperative has been terminated for cause, that member does not have any right to reinstate his or her membership or occupancy rights by retroactively curing any defaults that led to the termination. When a membership is terminated for cause, unless the cooperative has foreclosed its lien against the membership, the governing documents typically will provide that the cooperative will then exercise its right to repurchase the membership and will need to pay the terminated member for the value of that membership less any permitted deductions for legal fees, refurbishing costs and any assessments or other amounts that the prior member may owe.
Housing cooperatives are a unique hybrid between a condominium-type association and rental property. Agents representing buyers or sellers of cooperative membership interests need to have a basic working knowledge of how coops are similar to and different from other types of community associations in order to properly advise and represent their clients.
Phaedra Howard is a partner in Hellmuth & Johnson’s real estate and development practice group where she brings her creative and strategic acumen to real estate and community association law. Phaedra provides advice on a wide variety of issues affecting community associations and also represents property owners and others in the real estate sector. She can be reached at (952) 746-2142 and [email protected]
This article is republished with permission and originally appeared in Real Estate Agent Magazine.