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We have discussed co-ops, but we turn to a co-op’s basic structure. Unlike a condo, where you own the individual unit, you buy shares in a corporation. Technically, you are not a homeowner. You do not own any real property; instead, you are a corporate stockholder. We explain what this means in practice.
A certificate and leaseA certificate and lease
You receive shares and a proprietary lease when you close your co-op purchase. The shares are your ownership in the corporation, while the proprietary lease allows you to live in a particular unit in the building. This means you are a building tenant. The proprietary lease outlines the house rules, your rights, and obligations, such as whether you can sublet the apartment, your monthly maintenance charges, and the rules regarding the sale of shares. If you apply for a mortgage, the bank’s collaterals are the co-op shares and proprietary lease.
Your ownership interestYour ownership interest
A board can authorize any amount of shares it chooses. Once it does so, it assigns several shares to each unit. This is not done equally since the apartments are not the same. Different square feet, bedrooms, views, and other factors affect a unit’s value. The amount of shares for each apartment is assigned based on these valuations, but this needs a fair basis, typically independently verified by an appraisal firm or real estate broker.
What does it mean?What does it mean?
Owning a more significant number of shares means you theoretically have a greater voice. For instance, you have more shares to vote for the board of directors. Since certain utilities, maintenance costs, the building’s mortgage, property taxes, and other operating costs are paid by shareholders; you also bear a higher price.
Of course, this likely means you live in a bigger apartment, which is fair since you incur a more significant portion of certain expenses.
What happens when more shares are issued?What happens when more shares are issued?
Generally, the share count is fixed. The board needs to authorize the issuance of more shares. Unlike a regular corporation, this does not necessarily mean more dilution. When Microsoft issues more stock shares, it needs to use the funds to grow earnings since additional shares are outstanding.
Additional shares are issued in a co-op if the board has decided to expand the building’s residential space. While this may mean more competition when you are ready to sell, the additional shares should not impact your unit’s market value.
Your spouse can inherit your shares without questions, meaning they can continue living in the unit without any issues.
It becomes a thornier issue when you pass on your co-op shares to others besides your spouse. In this instance, leaving your condo unit to your other heirs is a more straightforward proposition. You designate the shares to whomever you like. However, that doesn’t mean they can live in the co-op unit. The board must give its stamp of approval, present financial statements, and undergo an interview. Otherwise, your heir must sell the co-op unit.