Co-op Ownership Structure and Proprietary Lease

We have discussed co-ops, but we turn our attention to a co-op’s basic structure. Unlike a condo where you own the individual unit, you are buying shares in a corporation. Technically, you are not a homeowner. In fact, you do not own any real property but, rather, you are a corporate stockholder.
We explain what this means in practice.

A certificate and lease

You receive shares and a proprietary lease when you close on 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 are applying for a mortgage, the bank’s collateral are the co-op shares and proprietary lease.

Your ownership interest

A board can authorize any amount of shares it chooses. Once it does so, it assigns a number of shares to each unit. Obviously, this is not done equally since the apartments are not the same. There are different square footages, number of bedrooms, views, and a host of other factors that affect a unit’s value. The amount of shares for each apartment is assigned based on these valuations, but this needs a fair basis, which is typically independently verified by an appraisal firm or real estate broker.

What does it mean?

Owning a greater number of shares means you theoretically have a greater voice. You have more shares to vote for the board of directors, for instance. Since certain utilities, maintenance costs, the building’s mortgage, property taxes, and other operating costs are paid by shareholders, you also bear a higher cost.
Of course, this likely means you are living in a bigger apartment, so it is fair since you are incurring a greater portion of certain expenses.

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 shares of stock, it needs to use the funds to grow earnings since there are now additional shares outstanding.
In a co-op, additional shares are issued 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.

Inheritance

Your spouse can inherit your shares without any questions, meaning he/she can continue to live in the unit without any issues.
It becomes a thornier issue when you are passing on your co-op shares to others besides your spouse. In this instance, leaving your condo unit to your other heirs is an easier proposition. You designate the shares to whomever you like. However, that doesn’t mean he/she can live in the co-op unit. The board needs to give its stamp of approval, and he/she must present financial statements and undergo an interview. Otherwise, your heir must sell the co-op unit.