Cohousing-L Mailing List: Best Legal Structure For Cohousing

[Dan Suchman (71756.2661]

This message is in response to that of Tony Lee at Charlottesville (VA)
Cohousing, posted on March 1, 1995, which asks, in part:

>we at the Charlottesville,VA Co-Housing group would like advice on
>the best way to legally structure our cohousing project.  We are aware of a
>number of ways, but which is best?

>1) Cooperative
>2) Joint Corporation
>3) Joint Venture/Limited partnership
>4) Condominium

I assume that you are referring to the form in which the finished community will
be owned, and not merely the form of business association used by your group
prior to development.  If I am mistaken, please let me know and I'd be happy to
comment on the latter.

I also assume that your group is not interested in building rental cohousing
apartments, owned by a common "landlord", but rather intends to build dwellings
that are owned (directly or indirectly) by their occupants.  In my experience
(11 years as a real estate attorney and having grown up in a family of real
estate developers), there are only three "mainstream" alternatives (the
importance of choosing from among the mainstream alternatives is discussed later
in this message) for creating multi-unit residential developments:

        1.  Subdivision (with or without platting)
        2.  Condominium
        3.  Cooperative

Subdivision involves buying a parcel of land and then going through a procedure
governed by local law for breaking it up into smaller parcels of land (usually
referred to as "lots") upon which individually owned houses are constructed.
The subdivision may also include some "common areas" (such as a common house)
owned by a homeowner's association (a non-profit corporation) in which all of
the individual lot-owners are members.  Subdivisions can contain "single-family
(free-standing) homes" and/or "town (attached) houses".   However, they are not
well suited to "vertical" (multi-story) developments in which units above and
below have different owners.   While some states have extensive codified laws
governing the rights and responsiblities of subdivision developers and
residents, most states allow both developers and residents a lot of latitude in
structuring and managing the development.  This can be a "double edged sword":
you can write your own documents, but if they're not well written you have
nothing readily accessable to fall back on (perhaps only some archaic case law).


Condominiums usually involve common ownership by a condominium association (a
non-profit corporation) of all of the land upon which the separately owned
condominium units are constructed.  The association maintains the common areas
(sometimes called "common elements") and governs, to a large degree, the
behavior of condominium units owners while outside of their individual units but
on the common areas.  Condominiums can also contain "single-family
(free-standing) homes" and/or "town (attached) houses" constucted upon land
defined as a "unit" in the condominim documents.  Condominium is suited to both
"vertical" (multi-story) and "horizontal" (single-story and/or detached)
developments.   Many states have extensive codified laws governing condominiums.
These laws are usually tailored to protect condominium purchaser from
unscrupulous developers, and to provide default rights and remedies to the
owners and associations whose documents are less than complete or well-written.
Condominim development in some states involves onerous burdens on the developer,
resulting, partially, in higher cost to purshaser and in greater consumer
protection.  In most states, condominium developments are less flexible than
subdivision, but are none-the-less well-suited to cohousing.

Cooperatives Associations (or simply "cooperatives" or "coops" as they are
commonly known) come in a variety of shape and colors.  Their usual common
features include ownership of the land and ALL improvements (common house, as
well as individual houses/units) by the cooperative association (a type of
non-profit corporation).  That's right, nobody "owns" his or her "house".
Instead, each member in the association owns shares in the association and
receives a "proprietary lease" of the unit in which the member lives. A lot of
people think of cooperatives as a "natural" choice for a cohousing community.
The common ownership sort of "feels good".  However, cooperatives have several
problems.  First, all of the members have joint and several liability (to the
extent of the equity in their shares) for the obligations of the association.
This means that if one member stops paying his/her share of the blanket mortgage
(which usually exists), the other members have to pick up the slack.  Although
the association may have a lien against the delinquent member's shares,
enforcement (by foreclosure) can become very conrontational and in the mean time
community cash flow can be strained (especially in small coops).  Although an
analogous situation exists in condominiums, condominium units are usually
separately financed.  As a result, monthly charges payable to the association
are comprised mainly of maintenance costs and tend to be much smaller in amount
that the rent payments made to a coopertive association.  Another problem with
cooperatives is obtaining financing to purchase one's shares.  Cooperatives are
relatively few and are concentrated mainly in a few discrete parts of the
country (primarily the NE)  Most banks are unfamiliar with cooperatives and are
unwilling to finance such purchases.  In addition, FNMA, which buys loans from
banks, does not buy coop loans (this may have changed recently; I am not up to
date), further reducing available financing.  Another problem with coops is that
they can be hard to appraise (due to a lack of comparable sales).  So, you might
ask, why and how do cooperatives even exist?   In addition to a very small
number that may have been created for ideological reasons, the prevailing reason
for cooperatives is exclusivity.  That's right, cooperative owners tend to be
affluent folks that like to pick and choose their neighbors.  Most state
cooperative laws allow them to do so, making enforceable absolute restrictions
on the sale of cooperative shares to only those owners that the residents want.
So, in most cooperatives, you can't even sell your unit to whoever you want,
without first getting the consent of the association, which consent it can grant
or deny in its sole discretion. 

There are severals reason that I recommend staying within the three "mainstream"
choices (subdivision, condo or coop):  The first is the resale market, which is,
in part a function of the familiarity of buyers and their lenders with the form
of ownership.  If no one in your community knows what a coop is (let alone
cohousing), you are probably in for a tough sell.  The second reason is
refinanceability.  Its nice to have a choice of lenders when you want to take
some equity out of your house or feel that you are paying more in interest to
your current lender than you should be, given current interest rates.  Another
reason is availability of extensive laws (preferably codified) to help resolve
questions and disputes not clearly addressed by your documents.  

Even with an understanding of these differences, I do not believe that there is
one "best choice" for all cohousing communities.  Much depends upon the laws of
the state in which the development is situated, the goals and values of the
group, and other circumstances unique to your development.   For instance, even
though I consider cooperatives the least attractive alternative in most cases,
it turned out to be the appropriate choice for my community (Winslow) -- one of
the only coop cohousing communities in the U.S.  Although I was not part of the
group when the decision was made, it is my understanding that a combination of
community values, fluke availability of a coop construction loan, and a heavy
state tax on conversion from corporate to individual ownership (conversion to a
condo) drove the group to "go coop".  I strongly suggest that your group consult
with an attorney licensed in the state in which your community will be built,
and specilizing in multi-unit real esate development.  Advice that you get
before even buying the land may save you an enormous amount of expense and
aggravation later.

I hope that these notes are helpful to you.

Dan Suchman
Winslow Cohousing Group
Bainbridge Island, WA