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What is a Co-Op and How Does it Work?

May 01, 2024
Practice Area:  Real Estate  |  Residential Properties
Contributor:   Michal Mirski

There are more than one million units of cooperative housing (“co-op”)in the United States, mostly common in major cities. The first co-op was established on West 18th Street in New York City in 1876. Estimates suggest that in New York City there are twice as many co-ops as condominiums. The discrepancy can largely be attributed to the so-called “Co-op Boom” of the 1980s, with many existing rental apartment buildings converting into co-ops.

Co-op housing provides an alternative to the traditional methods of acquiring a condominium or an ordinary single-family home. When you buy into a co-op, you invest in shares of a corporation rather than holding title to the property directly. Co-ops can be apartment buildings, duplexes, townhomes, and other traditional residential structures – but they operate under different rules. Co-ops offer some advantages over condominiums, but they also have their drawbacks. Here is everything you should know and consider about how co-ops work and how they compare to other housing options.

How Do Co-Ops Work?

When you buy a single-family home, condominium, or other type of residential property, you are purchasing a piece of property or unit in the building and granted a deed allocated to a particular section, block, and lot number. Co-ops work differently. When you are purchasing a co-op unit, you are purchasing a fixed number of shares in a corporation (based in part on the relative size and the value of the unit) that owns the entire building where the unit is located. Since you are purchasing shares, considered personal property, you won’t get a deed or title to the real property itself; instead, you will get a stock certificate. As a shareholder, you are entitled to an exclusive right to occupy the apartment and to use the common areas of the building. This right is embodied in a long-term lease, called a proprietary lease. The co-op corporation, which owns the entire building, serves as the landlord (the “proprietary lessor”), while the shareholder serves as the tenant (the “proprietary lessees”).

The proprietary lease establishes many of the rights and duties held by the co-op and the shareholders. The most important of these is the shareholder’s duty to pay to the co-op “maintenance fees”. This charge covers the shareholder’s pro-rata share of the co-op’s expenses, including property taxes, utility bills, amenities, the building’s underlining mortgage and interest, capital improvements, and reserve funds. Other provisions in the proprietary lease deal with the right to sublet, the right to make alterations, the co-op’s house rules, the duty to make repairs, and the shareholders’ rights if they default on the lease.

The management of the co-op is performed by a board of directors, elected by the shareholders in accordance with the governing bylaws. The Co-op board runs the building in accordance with the articles of incorporation, the by-laws, the proprietary lease, and the co-op’s rules and regulations.

The Co-op Application Process

Purchasing a co-op involves a demanding application process, including an in-person interview with the members of the board. The prospective purchaser will have to submit a board package, normally prepared by the real estate agent, if any. Although the board purchase applications vary by building. All co-ops use the application as a means of reviewing the finances of the applicant to ensure that not only can they afford to buy the apartment initially but also afford to pay for the ongoing maintenance fees during the period of the ownership. Most board applications will require buyers to fill out a financial statement and may ask to submit character references.

Co-op boards can reject a prospective purchaser for any reason or for no reason at all, and they do not even have to tell the reasoning for denying the application. However, boards must comply with the Federal Fair Housing Act, which precludes discrimination based on “race, color, creed, age, national origin, alienage or citizenship status, gender, sexual orientation, disability, marital status, partnership status,” and more.

Co-op Financing

Co-op financing differs from financing for a traditional home mortgage because co-op shareholders do not own real estate, instead, the buyer is purchasing shares of stock in the corporation that owns the building. To finance with a co-op loan, a lender will review the co-op’s financials, the co-op’s operation, its board of directors, and the property’s underlying mortgage in addition to the borrower. A co-op loan is not as easy to come by as other types of mortgages, the financing options are more limited but there are lenders that specialize in them.

What’s Different About Buying a Co-op?

There are a few key differences a prospective purchaser should be aware of prior making the decision to buy into a co-op.


Compared to condominium units, co-op units tend to trade lower in sales price and closing costs due to the arduous approval process and stringent policies. However, a co-op will typically have higher monthly costs for maintenance and other recurring expenses. From a seller’s perspective, the demanding application process not only limits the buying pool but also the value of a co-op unit does not always appreciate at the same rate as condominiums. Since the board of directors can deny prospective buyers for any reason, the seller will then have to relist the unit on the market, which will result in higher closing costs.

Tax Benefits

One of the attractive features of co-op ownership is the tax advantages. Payments of taxes for the building are shared by the entire co-op. As a shareholder you do not receive an individual tax bill, rather your portion of the tax is integrated into the maintenance fees that you pay on a monthly basis. Also, if you itemize your tax deduction, you can deduct interest on the loan for your shares of the property and you can also deduct your property taxes up to a certain amount. Some maintenance fees may be tax deductible, too. Lastly, since a co-op loan is not on real property, there is no mortgage tax imposed by New York State and New York City.

Board Approval Restrictions

As an owner of a condo or a single-family home, you can sell your property to practically anyone, however, in cooperative housing, the bylaws require that any potential shareholder be approved by the board of directors. This process can impose more challenges to resell your shares in a co-op and divest the real estate holdings. The board approval process does not only apply to prospective purchasers, but also to current shareholders who wish to make renovations in the unit. If you are planning on renovating your new apartment, check the bylaws before buying. Sublease is another policy that will require board approval. Some co-ops restrict subletting by placing time limits or other criteria to preserve the low turnover of occupants in order to minimize the disruption of the building’s peace and quiet.

Primary Residency

Co-ops are usually exclusive communities of shareholders, and the board of directors tend to approve applicants who are planning to be residents over prospective purchasers who are willing to buy a co-op as an investment property and sublease it.

How an NYC Real Estate Attorney Can Help

While New York law does not strictly require purchasers to engage the services of an attorney to conduct residential real estate transactions, it is strongly advised to retain one. Navigating the purchase or sale of a co-op unit in NYC poses special challenges, making the guidance of an attorney with expertise in co-op transactions particularly critical. Cooperative apartment transactions require prospective purchasers to conduct more in-depth due diligence and sellers and owners to understand the cooperative corporation rules regarding the alteration, transfer, or sale of their units. An experienced New York City coop attorney will guide purchases by thoroughly reviewing the coop offering plan and amendments, the building’s house rules, corporation financial statements, alteration agreements, and recent board meeting minutes. The attorney will also advise the buyer of factors outlined in the coop documents that will affect any future sale of the unit, including whether the building’s finances properly managed, does the building has sufficient financial reserves, what are the terms of the underlying mortgage, the policy toward pets, and the ability to make changes to the unit.

Consult the Real Estate Team at Holm & O’Hara

Co-ops are tightly-knit communities that often have complex management procedures in place. The guidance of a seasoned attorney is invaluable. Holm & O’Hara LLP’s real estate team brings decades of experience to the table and is proud to guide you through every step of the residential transaction process.

When you purchase a co-op, you invest in shares of a cooperative housing rather than own title to the property, which would be the case with traditional homeownership. In areas where the cost of living is high, such as NYC, co-ops are generally considered the more affordable option since the co-op’s operation method is on an at-cost basis, collecting money from residents to pay outstanding bills. However, their governing boards and bylaws typically place many restrictions on co-op shareholders’ rights in addition to higher monthly expenses and charges. The decision to buy a co-op depends on your individual circumstances and you will need to take into consideration all those factors about the ownership structure before investing.


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