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Cooperative Housing

Arizona Co-Op Community Real Estate

An example case in Co-Op Opportunities: "I am noticing more and more 'younger', generation 'Y' -- as people call it -- looking to buy real estate. They phone me up all gung ho -- ready to be an adult and buy their first home. Most of the 'Y's' get a bit of sticker shock and they become scared. Don't be scared. Here is an affordable option of real estate that you can buy: Co-ops. What are they? A co-op is a cooperative setting. Meaning the owner of the property does not own the property -- instead they own shares in the stock. With each co-op the amount of shares vary. It is a very interesting alternative, with all the perks of owning your own home." --Pat K.

The Pepper Group Diversified Real Estate Company is your source of information on working with housing cooperatives. TPGD fills this niche, by focusing exclusively on issues important to housing co-ops. It can be a great benefit for housing cooperatives to use professionals who are familiar with the specific nuances of cooperative housing. For that reason, housing co-ops look for professionals who keep up-to-date on issues important to housing cooperatives. To connect co-ops with experienced cooperative professionals is our passion. In addition, The Pepper Group Diversified can provide you with access to housing cooperatives throughout the nation who may be interested in you as a resident. Inquire about our Housing Cooperative information packages at: or (520) 977-0003.

Buying Into a Housing Co-Op

Benefits of Housing Cooperatives


Lower down payment, much lower closing costs, economies of scale, longer mortgage term all make co-ops more affordable than other ownership housing.

Living in a Co-op Stays Affordable
Members have no reason to substantially increase monthly charges unless taxes or operating costs go up, so monthly charges remain reasonable.

Tax Deductions
For income tax purposes, the co-op member is usually considered a homeowner and, as such, can deduct his or her share of the real estate taxes and mortgage interest paid by the cooperative.

Co-ops can provide for accumulation of individual member equity. For market-rate co-ops, the accumulation of equity and resale prices are based on the market. Limited-equity co-ops establish limitations on the accumulation of equity to assure long-term affordability to new members.

Limited Liability
Members have no personal liability on the co-op mortgage. The cooperative association is responsible for paying off any mortgage loans. This can often make it possible for persons whose income might not qualify them for an individual mortgage to buy a membership in a limited equity co-op.

Consumer Action
Through their cooperative association, members can jointly exert influence in order to change tax rates and utility prices and obtain improved services from local governments. The co-op, as consumer advocate, can also join with other organizations.

Co-op members can benefit from economy of scale in co-op operating costs as well as from not-for-profit operation. Also, when there are "transfers", only the out-going member's equity must be financed by the incoming member. Transfers of shares are subject to fewer settlement costs.


Elimination of Outside Landlord
Co-ops offer control of one's living environment and a security of tenure not available in rental housing.

Community Control
As mutual owners, member residents participate at various levels in the decision-making process. This is not true of tenants who usually do not have the opportunity to exercise responsibility. Members own the cooperative together and have the security of being able to remain in their homes for as long as they wish, as long as they meet their monthly obligations, and abide by the co-op bylaws, rules, and regulations.

Cultural Diversity
Many co-op members indicate that the possibility for interaction with people from different backgrounds, cultures, and income levels is a positive factor in their decision to become a member.

Extended Services
By establishing cooperative procedures and working together, people are able to provide services for themselves that otherwise would be impossible to obtain. When one cooperatively organized venture is successful it often becomes clear that people can be successful in another area as well. As a result, the original effort often can be strengthened. Examples include athletic teams, co-op preschools, credit unions, tutoring, food-buying clubs, arts and crafts, and senior health care and support services.


Shared Maintenance Responsibilities
Co-op members usually have limited direct maintenance responsibilities. The cooperative association is responsible for major repairs, insurance, replacement of worn-out equipment, and upkeep of common grounds and facilities.

Vandalism and Security
Co-op members vigorously protect their association's property. An important benefit of converting rental properties to co-op ownership is reduction in vandalism and abuse of property and improved and shared security arrangements. And recent studies show that the co-ops presence in the neighborhood brings neighborhood crime down.

Thinking of buying a cooperatively owned house or apartment? If you are, you may have noticed that housing co-ops are a bit different than other types of homeownership. Here is what's involved with a sale:

What is a housing cooperative?
A housing cooperative is formed when people join with each other on a democratic basis to own or control the housing and/or related community facilities in which they live. Usually they do this by forming a not-for-profit cooperative corporation. Each month they simply pay an amount that covers their share of the operating expenses of their cooperative corporation. Personal income tax deductions, lower turnover rates, lower real estate tax assessments (in some local areas), controlled maintenance costs, and resident participation and control are some of the benefits of choosing cooperative homeownership.

What do you actually own?
The main distinction between a housing co-op and other forms of homeownership is that in a housing co-op you don't directly own real estate. But if you don't own real estate, what exactly are you buying? You are buying shares or a membership in a cooperative housing corporation. The corporation owns or leases all real estate. As part of your membership (being a shareholder) in the cooperative you have an exclusive right to live in a specific unit (this is established thorough a occupancy agreement or proprietary lease) for as long as you want, as long as you don't break any of the rules or regulations of the cooperative. As part of your membership, you also have a vote in the affairs of the corporation.

What does the share or membership purchase price involve?
When you buy a share or membership in a housing cooperative, you are paying for just that: a share of the cooperative housing corporation. The purchase price will vary depending on what kind of neighborhood it is in, how big the unit is, whether the co-op limits resale prices, and whether the co-op has an underlying mortgage for the entire property

What is a share loan?
Let's say you were going to buy a $100,000 home. Most likely you would not be able to pay the seller $100,000 in cash for the house. Instead, you would pay a down payment, and you would get a mortgage from a lender to cover the rest of the purchase price. In a co-op, since you are actually buying a share(s) in a corporation rather than real estate, you get a type of loan called a share loan from a lender. A share loan is like a mortgage. It provides you with borrowed funds to buy the share(s) from the seller. You then make monthly payments on the share loan to the lenders and monthly carrying charge (maintenance) payments to the co-op.

How do I accumulate equity?
It actually depends on what type of cooperative you are buying into. There are three different types of housing cooperatives as far as equity is concerned.

  • Market-rate housing cooperatives
    In a market-rate cooperative you can buy or sell a membership or shares at whatever price the market will bear. Purchase prices and equity accumulation are very similar to condominium or single-family ownership.

  • Limited-equity housing cooperatives
    In a limited-equity housing cooperative (LEC) there are restrictions on what outgoing members can get from sale of their shares. These are usually imposed because the co-op's members benefit from below-market interest rate mortgage loans, grants, real estate tax abatement, or other features that make the housing more "affordable" to both the initial and future residents for a specified period of time. In some co-ops these limitations are voluntarily imposed by the members. These restrictions are usually found in the cooperative's bylaws. The documents may also establish maximum income limits for new members to further target the special benefits of the housing to families who need them the most.

  • Leasing cooperatives (or zero-equity)
    In a leasing cooperative, the cooperative corporation leases the property from an outside investor (often a nonprofit corporation that is set up specifically for this purpose). Since the cooperative corporation does not own any real estate, the cooperative is not in a position to build up any equity (just as a renter doesn't build any equity). However, as a corporation, the cooperative is often in a position to buy the property if it comes up for sale later and convert to a market rate or limited-equity cooperative. And some leasing cooperatives allow outgoing members to take with them at least part of their share of the cash reserves built up by the cooperative corporation while they were in occupancy.

What are the monthly charges for?
Almost all co-ops charge residents a monthly carrying charge (often called a monthly maintenance fee). The amount of the monthly charge varies from co-op to co-op. The charges cover your proportionate share of operating and maintaining the cooperative, which can include blanket mortgage payments, property taxes, management fees, maintenance costs, insurance premiums, utilities, and contributions to reserve funds.

Do I pay real estate taxes?
Taxes are assessed on the cooperative corporation, as owner of the property. Your monthly payments to the co-op are, in part, used by the co-op to pay the real estate taxes. Even though you don't pay real estate taxes directly, federal tax law allows you to deduct your share of the co-op tax payments, as well as your mortgage interest payments, on your personal income tax return.

Are co-ops allowed to discriminate?
Like any other form of housing, cooperatives may not discriminate based on the protected classes listed in the Fair Housing Act, which includes race, color, religion, sex, familial status, national origin, or disability. Historically, the basic cooperative principles include both open membership without restriction as provided by law and non-partisan in politics and non-sectarian in religion. However, many co-ops are selective in approving memberships. As communities of people who share a financial obligation and responsibility for governing how they want to live together, it is important for co-ops to ensure that incoming members can meet their financial obligation and will abide by the rules of the community.

What do most housing cooperatives look like?
Co-ops can be almost any time of housing, and there is a wide variety in terms of what housing cooperatives look like. Housing cooperatives can be high-rise apartment buildings, garden-style apartments, townhouses, single-family homes, and senior housing.

There are other kinds of housing cooperatives. Mobile home park cooperatives usually own the land, utilities, and community facilities; their members own the individual "mobile homes." Some other housing cooperatives own land and community facilities and use legal documents including recorded covenants as the basis for maintaining the desired cooperative controls over functioning of the cooperative community.

What questions should I ask before buying into a cooperative?
Remember, since you are buying a share of a corporation that owns real estate, you will want to find out about the financial health of the corporation. You will also want a clear understanding of what your financial obligations to the cooperative will be. Be sure to find out what all the rules and regulations of the community are. Here are some sample questions to ask before making your investment:

  • What is the share price?
  • Where can I obtain share loan financing?
  • How much are the monthly carrying charges?
  • What is the underlying mortgage?
  • What is your pet policy?
  • What is your subletting policy?
  • What is the policy for making alterations to my unit?

If you have any legal questions about co-ops, you should be sure to consult an attorney.

I'm interested in moving into a housing cooperative, how can I find a co-op?
A local real estate professional cooperative specialist should be able to offer assistance. Make sure that they are well versed in the co-op market. You can enquire about our Housing Cooperative information packages at: or (520) 977-0003.

Starting A New Co-op

Cooperative housing is a proven form of multifamily homeownership. It has many benefits and has been used to meet a variety of needs for all sorts of people. Cooperative housing has a number of similarities and differences to other forms of housing. The Cooperative Housing Coalition also offers a Development Guide to help you with the process.

The following chart provides a comparison of housing cooperatives
to rental units, single-family ownership, and condominiums:

Cooperative Rental Single Family Condominium
The residents are shareholders in a corporation that owns the property. Owning a share entitles you to occupy a unit.

Tenants own nothing. On expiration of lease, tenants may be forced to vacate.

Owners acquire individual title to their dwellings and yard.

Unit "airspace" owned by individual, plus an undivided share of common elements.
Monthly Cost:
Members pay the Co-op for their share of the actual operating cost, building mortgage, and real estate taxes, based on the non-profit operation of entire community.

Tenants pay rent specified in lease.

Owner must make his or her purchases of whatever is needed, often at higher retail costs. Owner makes mortgage and tax payments to lender.

Same as cooperative, except mortgage payments and taxes are paid directly to the lender.
Move-in Cost:
New members buy their share in the cooperative and also pay the first monthly charge in advance.

Usually one month's rent is paid as a security deposit, plus the first month's rent.

Purchaser must buy the property, usually with a mortgage with a down payment of at least 5% and closing costs of 3% or more.

Same as single family, plus first month's condo fee and often a "contribution to capital" of 1-2 months' fee.
Community Control:
Co-op resident members elect their board of directors, which decides all policy matters. The Board usually sets up several committees to help run the community.

Renters usually have no voice at all in establishing and maintaining community standards.

Individual owners have no jurisdiction over their neighbors.

Condo owners, like cooperatives, elect a board of directors.
Community Service:
Co-ops provide a natural base for service and activity desired by its members.

Provided at discretion of landlords.

On your own.
Condos similar to co-ops, unless limited by state law.
Federal Tax Benefits
to Individuals:
Your share of mortgage interest and real estate taxes are deductible on personal income tax return.

No benefit.

Mortgage interest and real estate taxes are deductible on personal income tax return.

Mortgage interest and real estate taxes are deductible on personal income tax return.

One of the most common methods of developing new cooperatives today is converting an existing rental building or buildings into cooperative housing owned by the tenants. If you are thinking of converting an existing property to a cooperative, be realistic about the feasibility of the project and be sure to research the costs thoroughly. Often existing buildings will require major repairs, rehab, and/or replacement of appliances, especially if the landlord hasn't taken good care of the property. A detailed physical inspection and consultation with contractors will be needed to determine the condition of the existing property and the rehab costs. In addition, you will need to examine the demographics of the current residents. Will most residents have the financial means to qualify for membership in the co-op? How will costs compare to other housing in the area? Also, it is important to investigate what level of interest potential residents have in cooperative ownership. These are important considerations for the success of the cooperative.

Cooperatives can also be built from the ground up as brand new housing. A great deal of affordable cooperative housing was developed this way during the 1960's and 70's using federal government subsidy programs. However, most of these programs are no longer available, and new construction co-ops are less common today, though there are some. Cooperatives for low and moderate income families today are being financed by local government or using a federal property disposition program. A number of senior housing cooperatives have been built in the last decade and a few new cohousing communities have been developed using cooperative ownership. As with any new construction, it is important to determine the financial feasibility of the project and what residents in the area will be able to afford.

One issue that will need to be determined is what type of equity model you plan to use for the cooperative. As in other forms of homeownership, equity accrual is generally an important concern for homeowners. In market-rate cooperatives, cooperative shares can be bought and sold at whatever the market will bear and members can build equity on their investment. However, if there is a desire to keep the housing permanently affordable, the limited-equity or zero-equity models might be good options to consider.

Also, keep in mind that cooperative housing does not always have to mean ownership of the housing. In a leasing co-op, the cooperative does not own the housing, but rather leases it from a landlord. Though obviously this model lacks the benefits of full ownership, it does have some advantages over rental housing. The cooperative may be able to secure a long-term lease at more affordable rates than if each tenant was renting separately, giving cooperative members more security and control over their living environment.

Cooperatives are a flexible tool that can be applied in many different ways to meet a variety of special needs. Seniors, artists, college students, manufactured housing park residents, and people with disabilities are all groups that have used the cooperative model to their mutual benefit.

Regardless of the type of cooperative that you are interested in starting there are a number of questions that are critical to address:

  • Is cooperative ownership the most appropriate option available?
  • What will the mission of the cooperative be and what type of
    cooperative structure will best suit that mission?
  • Is the project financially feasible and where can financing be obtained?
  • What types of legal documents will need to be drawn up?
  • What types of technical assistance and support will be needed
    (and what will the costs be) to make the cooperative a success?

Typically, you'll need professional help from a number of sources (The Development Team) in order to plan and implement a new housing cooperative.

The Development Team

Below are the typical professional services involved in starting a new housing co-ops.

The Cooperative Organizer
The CEO who encourages, trains, coordinates the efforts of all the others involved -- architects, lawyers, builders, managers and above all members.

Legal Counsel
The legal counsel prepares all of the legal aspects and handles the detailed negotiations involved in acquiring the property. You will want legal help in negotiating the best terms for the contract in being sure you are gaining a good title. Because each state has its own laws affecting the holding of real estate, your attorney should review all the co-op's documents (bylaws, occupancy agreement, etc.) to be sure they conform to the laws of your state. Co-op and real estate law varies from state to state. At the closing, when the title passes into the co-op's hands, there are many details regarding the title, the mortgage, the loan note, and other documents that must be checked over by the attorney. Your attorney should also review the agreement before you hire management.

Architectural/Engineering Services
You will need an architect or engineer involved in the earliest stages of planning. If you will be buying an existing building, they will assess and draw up plans for the rehab work. If you will be building from the ground up, you'll need an architect to prepare a blueprints for the construction.

A large portion of the total costs will be the cost of construction or rehabilitation. The contractor/builder will provide you with estimates of the costs of these services and when ready, will bring in subcontractors to get the work done.

Marketing Agent
Depending on the size of the cooperative you are starting, you may need a marketing agent. The marketing agent will handle talking to prospective members to explain what the co-op is, how it works, the members rights and obligations, what the various documents mean, and what the costs will be. Sometimes in a tenant conversion, the tenants can handle this themselves, especially if the co-op is small. For larger properties, the marketing agent plays a key role in preparing brochures and other advertising, and setting up the sales office. The marketing agent also develops a marketing plan, including the printed materials, media events, public relations with community groups. The marketing agent accepts applications from prospective members and processes them. The marketing agent also works closely with management to coordinate move-ins when the homes are ready.

Management Agent
Though some co-ops are managed by the members, almost all larger co-ops require professional staff to manage the day to day operations of the cooperative. Initially, management will need to set up the books and financial records for the co-op, work with any contractors, and assist with the marketing agent in getting people moved in and completing the necessary paperwork, such as setting up the initial membership files.

Forming a cooperative is not a simple task and can often be a long process, though generally a rewarding one. Resources for Starting a New Co-op: The USDA has a free publication titled "Cooperative Housing for Rural America," available as a PDF file. In addition, there are a number of nonprofit organizations that can be a resource for developing a new cooperative. Contact The Pepper Group Diversified about our Arizona Housing Cooperative information packages at: or (520) 977-0003.

Living in a Housing Cooperative

As a cooperative homeowner, you have certain rights and responsibilities. These are outlined in your cooperative's documents, which typically include the articles of incorporation, bylaws, proprietary lease or occupancy agreement, subscription agreement, and house rules. As a shareholder, you have a right to elect board members, to remove board members, and to amend the bylaws. You also have the responsibility to pay your monthly charges on time as well as follow all other rules and regulations of the cooperative.

Here are some commonly asked questions from residents in housing cooperatives:

Do I need homeowners insurance?
Yes, you need a special policy (HO-6), which is similar to renter's insurance. Your co-op generally carries a blanket insurance policy that covers damage to the cooperative's property from fire, water, or other disasters. However, this policy generally does not cover any damage to personal belonging inside your unit. Additional insurance is recommended to cover your personal possessions and for your personal liability in the event of an accident in your home.

How do property tax deductions work for cooperative homeowners?
Co-op housing residents have the same potential tax benefits as other homeowners, including taking their share of the mortgage interest and real estate taxes as a deduction on Schedule A of their 1040 federal income tax return. The deduction can be substantial, but only if your co-op is able to pass the deduction on to its members (complex rules apply to co-ops with substantial commercial income), and you itemize your deductions on your tax return. If your co-op is able to pass through the deduction, you should receive notification from them of the amount by January 31st of each year. Section 216 is the section of the Internal Revenue Code that allows the pass-though of mortgage interest and real property tax deductions from the cooperative housing corporation to the shareholders.

Am I responsible for capital gains taxes when I sell my membership/share?
By act of Congress, co-op shareholders are treated the same as single family homeowners when they sell. If your co-op has been your primary residence for two of the five years prior to selling, the first $250,000 ($500,000 if married) of gain is excluded from federal income tax. You can use the exclusion more than once.

Like single family homeowners, if, for some reason, you do not meet the residency requirement when you sell (such as having to sell in the first two years of ownership), you should consult your tax advisor because you may be liable for taxes on all or a portion of any capital gain that you realize upon sale. Capital gain is calculated by adding the cost of capital improvements to the original purchase price, and then subtracting that adjusted basis from the selling price. Contributions to capital repair reserves are treated as if they were capital improvements, so keep records of information from the co-op each year. Tax laws change frequently and are re-interpreted by IRS and the courts from time to time, so ask your tax advisor for specifics before buying or selling.

Can I rent out my unit?
Some co-ops are generous in allowing subletting, but most cooperatives severely restrict subletting in order to preserve the owner/occupant character of the community. Co-ops that do allow subletting often have restrictions on the length of time for which you may sublet. Be sure to check what the policy of your co-op is. The policy can usually be found in your occupancy agreement or proprietary lease.

What are my rights and responsibilities as a cooperative member?
As a democratic organization that follows the cooperative principles, cooperatives give you a voice in the operation of your co-op. The rights and responsibilities of shareholders are set forth in the various co-op documents, including the bylaws, occupancy agreement/proprietary lease, and articles of incorporation. All shareholders are entitled to copies of these documents. You can request them from your co-op's office or from your co-op's management. If the co-op doesn't have a manager, ask the president or secretary.

We at The Pepper Group™ Diversified Real Estate are proud supporters of Cooperative inspired real estate. Arizona property, land, and construction building that support the Cooperative ideal are available...

For a complete information package on Arizona Cooperative Housing opportunities
please contact us exclusively at:
(520) 977-0003
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3865 E Via Del Verdemar Tucson, AZ 85718
Tucson Real Estate