Fun Facts About Cooperatives

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. It will also have Articles of Incorporation incorporating the Cooperative under Minnesota Statutes Chapter 308A, or possibly under 308B. Under MCIOA, a cooperative does not have to have a CIC plat if the interests are not real property. Coops formed prior to June 1, 1994 typically only have bylaws and do not have a declaration or covenants that are recorded against the property. Cooperatives 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 regulate the use and occupancy of the units and can levy assessments against the members’ interests and foreclose their lien if the assessments are not paid, though the foreclosure process looks a little different, as described below.

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 actually 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. 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. Although the members in a cooperative do not own real estate per se, under MCIOA, the member’s interest in the unit based on the proprietary lease or occupancy agreement is considered an ownership interest for purposes of claiming homestead and for property tax purposes.

In contrast, the cooperative may borrow money and grant a mortgage on the entire real estate to secure that loan. Many loans obtained by cooperatives are underwritten by the US Department of Housing and Urban Development (“HUD”). HUD typically will then require the cooperative to enter into a regulatory agreement that is recorded against the property that gives HUD certain oversight and approval rights with regard to certain actions by the cooperative, including the right to approve any amendments of the governing documents. The regulatory agreement will also usually include certain reporting requirements and oversight of the cooperative’s budget and assessments, as well as specific requirements for operating and replacement reserves.

With regard to sales of coop shares, it is also important to note that under Minnesota Statutes, the cooperative always has the right of first purchase when a member is looking to sell. This means that the member must first offer to sell their membership interest back to the cooperative before they are free to sell it to an outside purchaser. The bylaws will typically detail what type of notice the selling member is required to give to the board and how long the cooperative has to exercise its right of first purchase before the member is allowed to enter into a purchase agreement with another buyer. Some cooperatives routinely exercise the right of first purchase in order to control the sale of the membership, particularly if the cooperative has a long wait list of people wanting to buy into it. Other cooperatives do not typically exercise this right and may establish different procedures for the sale of a membership whereby the cooperative waives its right to purchase. 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 or zero 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.

As indicated above, since a member’s interest is a personal property interest and not a real estate interest, the process for foreclosing a lien against that interest is different from the normal process used to foreclose a mortgage or an assessment lien against real property. The process will be detailed in the Cooperative’s governing documents, but typically follow the same procedures as the enforcement of a security interest against other personal property, whereby the Cooperative can take possession of the stock or share certificate and conduct a public or private sale of that certificate and then use the proceeds to offset the amounts owed by the defaulting member. Because this process can be cumbersome, most cooperatives that I have worked with choose instead to terminate a defaulting member’s membership as described below rather than foreclose on the lien.

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. 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. For cooperatives that are set up as low-income housing, the board will also have to verify that the prospective member meets the income requirements set forth in the governing documents. 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.

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, including for failure to pay assessments (or carrying charges, as they are often referred to). 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. If the terminated member does not voluntarily vacate the property, the Cooperative can also evict them as a holdover tenant.

There are also some differences in the operation of a housing cooperative based on the cooperative corporate statutes. For example, while most townhome and condominium associations formed under Chapter 317A allow for proxies to be used in conjunction with member meetings and voting, which allow a member who cannot attend the meeting to designate someone else to attend and vote in their place, Cooperatives are not permitted to use proxies. Chapter 308A permits cooperative members to vote by absentee ballot but not by proxy. That can get tricky for cooperatives that are governed by MCIOA, however, because MCIOA prohibits the use of a vote by mail ballot in connection with a vote at a meeting.

Another difference is that under Chapter 308A, a spouse of the member who is not on title to the membership is automatically allowed to vote the member’s share unless the member has notified the board that they do not want their spouse to vote their share. Contrast this to townhome and condominium associations where a spouse not on title would not be permitted to attend a meeting or vote in place of the member unless he or she has a power of attorney or a proxy from the member. There are also differences in regard to the removal of directors and officers and other similar corporate matters.

Boards and managers that are used to working with townhome and condominium associations might find cooperatives a bit intimidating at first. But once you understand how cooperatives are similar to, and different from, these other types of community associations, they are much easier to work with and to govern.