Washington DC Cooperatives
There’s a tremendous amount of info to absorb about Washington DC cooperatives. To help you apply it to your transaction, we’ve compiled a page of ‘must know’ information, along with resources and links you can use when the time is right.
The Basics on Washington DC Co-Ops
A Washington DC cooperative, or co-op, is housing that is collectively owned and managed by its shareholders. Members do not own the units in which they reside, instead they own the corporation that holds title to the entire property and grants proprietary leases to unit occupants. Additionally;
- The number of shares owned is dictated by the size of the leased unit
- The lease grants permanent right to occupy the unit and make use of the common elements of the property
- Owners share the work involved in running the co-op
- Shareholders pay association dues and abide by the rules and restrictions outlined in the CC&Rs.
Perception vs Reality
Cooperatives are seen by many as the less advantageous alternative to condominiums in Washington DC, but in some cases, ownership in a cooperative can offer greater benefit.
The perception of DC co-ops before 2008 was that they were unduly restrictive in terms of property use and ownership criteria and that assessed dues were much higher than condominium dues. But the restriction gap between co-ops and condos has narrowed considerably since the early 2000’s, primarily because condominiums have implemented new rules.
In response to the housing market crash of 2008, when investor defaults threatened the financial stability of condominiums, condo associations began to place stricter limits on investor ownership and institute rental restrictions similar to those which helped cooperatives weather the crisis.
In late 2018, the District passed legislation regulating short-term housing, and they were banned by condominiums and cooperatives alike.
There are distinct benefits to cooperative ownership that condominiums can not match:
- Cooperatives pay lower real estate taxes since they’re assessed on a smaller percentage of appraised value. The savings is enjoyed by all shareholders in cooperatives, while condominium owners’ assessmemts are based on the attributes of individual units;
- Cooperatives can mortgage the entire property utilizing blanket financing to fund renovations, systems upgrades and major repairs, providing tax deductions for eligible shareholders. A portion of the blanket mortgage is assigned to each unit, with payment of the principal and interest being added to the shareholder’s monthly co-op fee. Members may take tax deductions for the interest on their portion of the loan. This unit-specific portion of the blanket mortgage is called an “underlying mortgage” the unpaid balance of which is deducted from the shareholder’s proceeds when their shares are sold, and assumed by the buyer of the shares. The underlying mortgage is factored into the financing and sales price. Condominiums, on the other hand, must raise dues and levy taxable special assessments on all unit owners when adequate reserves aren’t available to cover repairs and improvements. Higher dues tend to damper unit sales values, and special assessments are typically the responsibility of the seller to pay before the unit transfers ownership;
- Cooperative owners enjoy a greater degree of privacy than condominium owners in relation to their ownership. Public records of ownership are related to the corporation, not individual shareholders.
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- Corporation shares, not unit ownership
- Right to occupy specified unit and utilize common areas per rules
- Participate in running the cooperative
The Isaacs Team was great at helping us navigate our DC home search. They were very knowledgeable- they brought up features of the homes that would affect it’s value (that weren’t obvious to us). They always had our long term investment in mind. They were extremely responsive. We are very happy in our home, but if we ever need to move, we would definitely contact them again.
The DC Condo Act & Legislative Updates
- The DC Condo Act of 1974 regulates condominium and cooperative creation, association governance and affairs.
COOPERATIVE SPECIFIC SECTIONS OF THE ACT
Chapter 9. General Cooperative Associations
- § 29–901. Short title.
- § 29–902. Definitions.
- § 29–903. Incorporators.
- § 29–904. Purposes for incorporation.
- § 29–905. Powers of association.
- § 29–906. Articles of incorporation — Contents.
- § 29–907. Articles of incorporation — Amendments; vote required for proposal, amendment approval
- § 29–908. Bylaws; adoption, amendment, or repeal.
- § 29–909. Bylaws — Contents.
- § 29–910. Meetings; regular and special.
- § 29–911. Meetings; regular and special — Notice.
- § 29–912. Meetings; regular and special — Units of membership.
- § 29–913. Voting — Number permitted by each member.
- § 29–914. Voting — Proxy prohibited.
- § 29–915. Voting — By mail or by electronic mail.
- § 29–916. Voting provisions — By mail or electronic mail.
- § 29–917. Voting provisions — Application to voting by delegates.
- § 29–918. Directors.
- § 29–919. Officers.
- § 29–920. Removal of directors & officers; vote required for approval
- § 29–921. Referendum on acts of directors.
- § 29–922. Limitations upon the return on capital.
- § 29–923. Eligibility & membership admission.
- § 29–924. Subscribers.
- § 29–925. Share & membership certificates; issuance & contents.
- § 29–926. Transfer of shares and memberships; withdrawal.
- § 29–927. Share and membership certificates — Recall.
- § 29–928. Share & membership certificates — Exemption for attachment, execution & garnishment.
- § 29–929. Liability of members.
- § 29–930. Expulsion of members; procedure; purchase of holdings.
- § 29–931. Allocation/distribution of net savings.
- § 29–932. Bonding of officers & employees.
- § 29–933. Audit.
- § 29–934. Dissolution; methods; vote required for approval; distribution of assets.
- § 29–935. Existing cooperatives; acceptance of act; filing & recordation of bylaws, amended articles
- § 29–936. Foreign corporations and associations; admission to do business.
- § 29–937. Compliance with chapter; not in restraint of trade.
- § 29–938. Chapter 3 of this title applicable to associations.
- § 29–939. Taxation; annual license fee.
§ 29–901. General Cooperative Association Act of 2010. July 2, 2011, D.C. Law 18-378, § 2, 58 DCR 1720
This section is referenced in § 42-3401.03.
Homestead housing preparation program, “condominium or unit owners association” defined, see § 42-2103.
Rental housing conversions and sales, “cooperative” and “Cooperative Act” defined, see § 42-3401.03.
A Brief Washington DC Cooperative History
Washington DC’s first cooperative building, The Concord, appeared in 1891, whereas DC’s first condominium didn’t arrive until 1962-63. Though cooperatives preceded condominiums in Washington DC by more than forty years, condominiums have multiplied at a much faster rate and are more widely understood than cooperatives. One possible reason for this is familiarity among buyers with condominiums due to saturation in suburban areas. Most cooperative projects are located in high-density housing areas of large cities such as New York, Chicago and Washington DC, while condominiums are built and sold in many suburban areas across the United States.
That’s not to say that cooperatives aren’t a great concept. Edmund Flynn thought so. He helped developed the first housing cooperatives in the District of Columbia, beginning in 1920, while he was employed with the Allen E. Walker firm (the first real estate brokerage to specialize in co-ops). Soon afterwards, Flynn founded the Edmund J. Flynn Company, which has developed and converted more than sixty DC market rate cooperatives.
Cooperative rental and down payment restrictions were also pioneered by Flynn. Most early cooperatives were so-called “luxury cooperatives”, which allowed renting for profit, and typically had high monthly carrying costs. Flynn called his model the “100% cooperative ownership” plan. It required high down payments, low monthly carrying charges and a 100% owner occupancy rate.
Early DC cooperative buildings include The Concord (demolished in 1962), 2852 Ontario (“The Ontario”; still standing) the Porter, the Westmoreland (built 1905 and converted 1948), Presidential, and the Broadmoor. There are approximately 120 co-op buildings in Washington DC today. If you’re shopping for a condo, have 10% or more for a down payment, and may benefit from some of the tax perks associated with co-ops, you owe it to yourself to investigate further.
Co-Ops vs Condos
- Typically, Washington DC co-ops have a lower price per square foot than condos;
- Co-op maintenance fees (the equivalent of condo dues) include property taxes and often, some or all utilities, plus limited maintenance;
- Many co-op fees are tax deductible;
- Property taxes are lower for co-ops;
- Homestead and senior/disabled deductions are applied to the corporation, to the benefit of all shareholders;
- Co-ops offer shareholders a degree of control over how their investment is managed and encourage participation in its operation, fostering a sense of community;
- Co-ops offer shareholders the ability to determine the qualifications for those purchasing shares;
- The cooperative’s maintenance team handles specified repairs condo owners would pay for individually;
- There are likely to be fewer investor units in co-ops than condominiums since DC cooperatives encourage owner-occupancy;
- Closing costs for DC co-ops are slightly lower versus those for a condo purchase. Pre-2009, because co-ops represent a stock purchase, not a transfer of real estate, hefty DC transfer and recordation costs were not applied to co-op transactions. But in late 2009, the District chose to withdraw that exemption and now demands the same transfer and recordation charges applied to condo real property transfers. Cooperative share purchasers do, however, save on title fees and insurance, along with escrows for property taxes;
- Some of the most beautiful ‘best address’ buildings in Washington DC are cooperatives.
Compare these points to the ‘cons’ on the right. You may find that many are not ‘downsides’ as much as they are ‘options.’ Choosing between a condo and co-op becomes easier when buyers understand which options might work best for their needs and circumstances.
- When it’s time for a co-op shareholder to sell their shares, they may find that the bylaws dictate who they can sell to. There may be requirements for buyers’ income, debt-to-income ratio, and other financials, employment history and background. To some degree, depending on the specific cooperative’s guidelines, prospective buyer may be vetted by the board of directors, who must comply with DC’s extensive Equal Housing laws. Some cooperatives have very few rules pertaining to purchasers, others are more stringent;
- Similar to condominium rental restrictions, co-op sub-letting of a shareholder’s leased unit may be restricted, and there can be limits on how many shareholders can sublet at a time. Read the bylaws, rules and restrictions for both condos and co-ops before purchasing;
- There may be restrictions on renovation or remodeling of cooperative units. Co-op owners may not be able to install a new bathroom, update the unit’s kitchen or reconfigure the space as easily as a condo owner might, though many simply require similar design/architectural board approval to that required by DC condominiums;
- Financing interest rates and down-payment may be slightly higher for co-ops than for condominiums
- Co-op monthly dues often appear to be higher than those of condominiums, primarily due to inclusion of the property taxes a condo owner pays separately (but remember that co-op property taxes are lower). The fee also includes some or all utilities and maintenance and potentially services like Internet. This ‘higher fees’ misconception can lead to a longer listing cycle when co-op shares are sold;
- Shares in a co-op association are considered intangible personal property, which is why co-op financing requires a special lending process. This means lines of credit or home equity loans probably aren’t an option;
- There are fewer co-op lending and title options in DC than for condos;
- Those who qualify for senior/disabled property benefits such as homestead deduction or tas relief will not individually receive the benefit, which applies to the corporation, instead, but the upside is that all shareholders reap the benefit.
CAN I BORROW AGAINST MY CO-OP EQUITY?
Cooperatives may limit how much shareholders can borrow against their shares, or nix equity lines. Check the co-op’s bylaws to see if this is the case, since many Washington DC cooperatives do allow home equity lines of credit (HELOCs).
MARKET RATE | MARKET RATE EQUITY
- The property’s equity is distributed equally across each share and owners are at liberty to sell their shares, relinquishing their proprietary lease. Share price is determined by the current market rate, so when DC home values rise, so does the value of a cooperative unit, accordnig to its individual attributes and those of the co-op as a whole.
- Price-limited membership shares. (See our explainer to the right in this section)
- The co-op doesn’t own the building, or perhaps the property it sits on, instead it leases from another entity. There is no equity build for members in this type of arrangement,
WHAT'S A LIMITED EQUITY COOPERATIVE?
Residents purchase shares in the cooperative and commit to reselling their shares at a price determined by an appreciation formula that maintains affordability over the long term.
When the LEC is created, initial affordability is usually aided with a government-sponosred program offering incentives such as construction subsidies and low-interest financing. The price restrictions built into the resale formula limit the equity that LEC residents can achieve when they sell their ownership share. Some limited equity cooperatives allow little or no growth of homeowner equity, while others adopt a shared equity approach, balancing the twin goals of long-term affordability and individual wealth creation.
DC has approximately 4400 units of LEC housing in 99 co-op buildings, with many located in gentrifying and gentrified neighborhoods.
Financing DC Cooperatives
- Instead of a conventional mortgage obtained to purchase a condominium unit for which the unit itself is collateral, co-op purchasers typically obtain a “share loan,” with their membership certificate or stock share and occupancy agreement as collateral.
- Share loans are not widely available in Washington DC. Financing for cooperative shares can theoretically be obtained from banks or other institutional lenders, however many DCMA lenders do not finance co-ops. Additionally, individual co-op boards have recognition agreements lenders must enter into in order to provide financing to buyers. These agreements define the relationship between the lender, co-op and borrower, and create the priority for claims if the borrower falls into arrears on fees or the mortgage.
- Co-ops may carry an underlying mortgage. which is the initial mortgage taken to establish a cooperative. A good number of DC’s cooperatives have underlying mortgages. When renters and/or developer decide to create a cooperative, shares in the new entity are sold to owners, who sell the building(s) by transferring its debt to the corporation. If there is a mortgage needed to supplement share sales, the cooperative obtains the loan and all shareholders service the debt. Even co-ops that can afford to pay off their underlying mortgages may not want to do so because the shareholders receive a tax benefit from their shares of the monthly interest payments. It’s important to have an expert evaluate the financials of a Washington DC co-op before purchasing shares. Your lender will also want to review them to determine percentage of maintenance represented by debt service and underlying debt per unit compared to average unit sales price, among other factors. A reasonable quantity of debt is not unhealthy for a cooperative. According to experts, debt lower than $15,000. per unit is acceptable and debt above $30,000. per unit is seen as an issue. It is important to note that each situation is different and debt guidelines change.
- Each cooperative may implement their own rules regarding down payment percentage, as well. Some require between 10% and 15% minimum in order to purchase.
- FHA financing is not available for co-ops. At one time the FHA 203N mortgage loan was offered for the purchase of cooperative shares, but it is not currently among the products available from the Federal Housing Administration.
- When an individual cooperative loan is fully paid, the lender will return the original stock and lease to the purchaser and forward a “UCC-3 Termination Statement” filed by the borrower in order to terminate the bank’s security interest.
ADDITIONAL FINANCING POINTS
- The owners/members of a cooperative may decide to mortgage the co-op to fund major building improvements. This differs from fund-raising methods used by condominiums, where fee increases and/or special assessments are utilized to raise funds for unforeseen expenses. The co-op version is called such a “blanket” or “master” mortgage. A portion is allocated to each unit, assumed by the purchaser, and deducted from the seller’s proceeds at the time of settlement.
- Real estate taxes and interest on blanket mortgages are paid by the cooperative, then allocated to owners/members. They are tax-deductible.
Ressale Certificate Packages
Commonly known as “condo docs,” this package provides buyers of DC condos and cooperative shares with a overview of the property’s finances, rules and regulations, pursuant to “DC Code Section 42-1904.11. Resale by unit owner.” Here’s what’s typically included:
The unit owner shall obtain from the unit owners’ association and furnish to the purchaser on or prior to the 10th business day following the date of ratification of the contract of sale, a copy of the condominium instruments and a certificate setting forth the following:
- Appropriate statements pursuant to Section 42-1903.13(h) and, if applicable, Section 42-1903.15, which need not to be in recordable form;
- A statement of any capital expenditures anticipated by the unit owners’ association within the current or succeeding 2 fiscal years;
- A statement of the status and amount of any reserves for capital expenditures, contingencies, and improvements, and any portion of such reserves earmarked for any specified project by the executive board;
- A copy of the statement of financial condition for the unit owners’ association for the then most recent fiscal year for which such statement is available and the current operating budget, if any;
- A statement of the status of any pending suits or any judgments to which the unit owners’ association is a party;
- A statement setting forth what insurance coverage is provided for all unit owners by the unit owners’ association and a statement whether such coverage includes public liability, loss or damage, or fire and extended coverage insurance with respect to the unit and its contents;
- A statement that any improvements or alterations made to the unit, or the limited common elements assigned thereto, by the prior unit owner are not in violation of the condominium instruments;
- A statement of the remaining term of any leasehold estate affecting the condominium or the condominium unit and the provisions governing any extension or renewal thereof; and
- The date of issuance of the certificate.
If the required instruments and certificate are not furnished to the purchaser on or prior to the 10th business day following the ratification date of the contract of sale, the purchaser shall have the right to cancel the contract by giving notice in writing to the seller prior to receipt of the condominium instruments and certificate, but not after conveyance under the contract.
Right Of Rescission
The corporation or association/ representatives must furnish to the unit seller for delivery to the purchaser the certificate detailed in §(a) of DC Code Section 42-1904.11. upon the written request of the unit owner or purchaser within 10 days of the receipt of request.
If the resale instruments and certificate are furnished to the purchaser on or prior to execution of the contract of sale by the purchaser, the 3 business-day period for review commences when the contract is executed by the purchaser.
Except as provided in p.5 of § 42–1904.11., the purchaser has the right for a period of 3 business days following the purchaser’s receipt of the resale instruments and certificate (i.e. not counting the date of receipt), whether or not receipt occurs within the time period described in §(a), to cancel the contract by giving notice in writing and returning the resale instruments and certificate to the seller.
From and after the earlier of:
- Expiration of the 3 business-day period for review
- Extension of the 3 business-day period agreed to in writing and signed by the parties
- Conveyance under the contract;
(Please read the full statute for clarification as this section of our page has been paraphrased)
EXCEPTIONS AND RECOMMENDATIONS
Smaller associations and self-managed associations may not be required to offer the same resale packages as larger, professionally managed associations. Check the provisions in the DC Condo Act for clarity, and consult a professional to assist you with review.
Buyer Due Diligence
RESALE CERTIFICATE PACKAGE
- Current budget and financial condition, reserve funds
- Current Bylaws, architectural guidelines and CC&Rs (Covenants, Conditions and Restrictions) that define the rules and regulations for co-op shareholders
- Association Fee Breakdown
- Master Insurance Policy coverage
- Occupation limitations (number of people who may occupy a unit)
- Statement of unpaid fee assessments, special assessments, and/or upcoming assessments
- Records of any pending legal action or judgements by or against the association
- Certification of filing for the association’s annual report to state board (some associations exempt)
- Records of approved alterations to the unit
- Violation notices to current unit shareholder(s)
PAY PARTICULAR ATTENTION TO:
- The financial condition of the association or corporation managing the property. Financial statements and budgets
- Do board members have term limits?
- How long have the units listed for sale been on market? What are the challenges in re-selling a unit in the cooperative?
- Are there any levied or upsoming special assessments?
- Are there any liens or judgements against the cooperative?
- Are there any repairs in progress, or a schedule of planned repairs?
- Check the frequency of dues increases, and their increments. Is there an annual cap on raises?
- Does the association have sufficient reserves for major repairs or improvements?
- Ask about the age and condition of major components such as roofs, HVAC systems, plumbing and electrical.
- Ask for copies of association meeting minutes for the past 3-6 meetings. Review for discussions of expenditures, repairs, legal proceedings and other issues that might shed light on the association’s future spending and assessment plans, or issues the association or residents are experiencing.
THE DC HOMESTEAD DEDUCTION
Owners of cooperative shares are not eligible to receive the benefits of the District of Columbia Homestead Tax Dedcuction individually. If the unit occupant qualifies, the benefit goes to the cooperative association instead.
To qualify for the Homestead Deduction in the case of a cooperative housing association, the unit must be occupied by the shareholder (or member) as his/her principal residence (domicile), and the benefit is granted to the cooperative (which will supply and collect the applications).
In the case of property transferred to a trust, the property may qualify for the Homestead benefit if:
- The property was eligible for the Homestead benefit before the transfer;
- The property is transferred to a revocable trust;
The transfer is not for money (or other consideration); and
The property remains the principal place of residence of the applicant/transferor/trustor before and after the transfer.
Information provided on this page is intended as a helpful guide and posted for educational purposes only. It is not to be construed as legal, tax or financial planning advice. Citations are not intended as endorsements.