Most housing falls into two categories: what you can rent, and what you can own. Renters are bound by leases, while owners are responsible for mortgage payments, insurance, and taxes on their properties. Rentals are maintained for the renters, while owners are on their own when it comes to maintenance and improvements. Still, each has its advantages.
Establishing or joining a housing cooperative, or co-op, offers a mix of these approaches. A housing cooperative represents corporate ownership of real estate, but with a twist. The residents (also called member-owners) own shares of the cooperative, which is democratically controlled by elected members who are also residents. Money stays within the corporation and does not leak out to a third-party investor. Cost savings are passed along to the members of the co-op. This can help stabilize member-owners’ expenses over time and may allow them to build equity in their individual shares.
Deb Trocha of the Indiana Cooperative Development Center is involved with building such communities. Her nonprofit organization is funded through the U.S. Department of Agriculture Rural Development’s Rural Cooperative Development Grant, so many of the organization’s services are free to those who start rural cooperatives. However, she’s looking for new grant funding for suburban and urban cooperatives as well.
“There’s so many opportunities in urban communities for all types of co-ops, and the housing co-op model is very flexible. The biggest problem is lack of knowledge about the co-op model. A lot of times, people patronize the co-op model without even realizing it. If you bank at a credit union, that’s a co-op. If you live in a rural community and you get your power from a rural electric, that’s a co-op. A lot of products you buy in the grocery store are produced by ag co-ops, so they’re everywhere.”
Cooperative refers to the organizational structure of the enterprise, not the unit type. The cooperative model can be used for single family homes, townhomes, apartments, mobile home parks—virtually any type of housing construction. Housing cooperatives are established to address the identified needs of members. In this respect, housing cooperatives can include upscale developments for the relatively wealthy and developments that offer homeownership to those who cannot afford to purchase a home at market price.
Housing cooperatives are also helpful to those who want more control over their housing situation. “Indiana has, from my understanding, very poor laws for protecting people who rent.” Trocha mentioned a recent conversation with a housing expert, who told her that Indiana ranks first or second in the United States in evictions, along with New York. A proliferation of corporate landlords based out-of-state adds to this problem, too. “It’s kind of frightening, the lack of rights that people who rent are faced with.”
With landlord-friendly laws, Indiana attracts a large share of out-of-state investments, which harms renters as well as homeowners. Trocha cited statistics that 60% of Indiana’s rental property owners reside in Illinois, California, Georgia, Texas, and Florida; at the end of 2021, 26% of residential property purchases in Indiana were made by investors; and that Indiana’s on track to have more than 30% of all residential property purchases to be made by investors.
How can a housing cooperative get started? When people who identify a common problem get together, setting up a cooperative is one potential solution. Trocha said, “Generally we’ll start with a smaller group of people who’ve identified—we know each other, we all have a similar problem, can we come together to find a solution or resolution—and then it grows from there.”
Since they’re made up of land and individual dwellings, mobile home parks are another option for cooperative ownership. Keeping ownership of the land among the residents allows them to anticipate their monthly lot fees; there are no surprise price hikes from a landlord. Setups like these enable ownership, stability, and comfort for the member-owners.
State governments can empower renters by putting forth legislation for right of first refusal, which allows residents the first opportunity to buy an apartment building, mobile home park, or other type of structure. Nationally, this is known as TOPA or Tenant Opportunity to Purchase Act.
“We have to educate our legislators about the co-op model. Co-ops are all about shared ownership or community ownership. It’s simply people coming together to solve a shared problem or need. It’s a form of business which is owned and run jointly by its members, who share the profits or benefits. That’s all a co-op is,” Trocha said.
Brian Donovan of Cooperation Group in Michigan presented information about different types of housing cooperatives at a recent seminar. He defined cooperative as a form of ownership, whereby people come together to own and control assets or processes that are critical to their (economic) well-being.
“In a cooperative, there’s a one-to-one relationship between the owners of the business and the people who use its assets. In an investor-owned business, which is really the water we’re swimming in here in the United States, the users are third parties not even connected to governance or ownership. So all these businesses that are reaching out to you to be their customer, but they’re not offering you any share of the ownership. You don’t get any say on the board of directors. Just come spend your money with us. This is the way things work now! A cooperative is entirely different, where the people who use the assets own the assets.”
Jake Sipe of Indiana Housing & Community Development Authority (IHCDA) shared some of the state’s housing challenges in a recent presentation. For example, 47% of Hoosier households are cost burdened, 61% of households earn less than $50,000 per year, and 45% of Indiana homes were built before 1970. “Every community in our state has some type of challenge. Not just housing but something else. Transportation. Healthcare. Education. Career development. Small businesses and supporting entrepreneurship. When we develop housing throughout our state, we need to think about how to connect those other community challenges to housing. Housing can have a positive impact on quality of life.” After presenting examples of cooperatives throughout Indiana that support communities with affordable housing and encourage investment in downtowns and small businesses, Sipe also provided financing opportunities for individuals, cooperatives, and nonprofits.
Jerrel Duffy is a Vice President at National Cooperative Bank, which finances different kinds of cooperatives. Generally, National Cooperative Bank offers two kinds of loans to housing cooperatives: blanket mortgages that apply to an entire property, for which the cooperative acts as the borrower; and shareholder loans that apply to units within the building, for which the members act as the borrower. (Members also pay for a portion of the cooperative’s operating expenses.) The bank also has guidelines in place on how the cooperative business ought to be managed after it’s established.
“The biggest benefit of cooperative ownership is democratic control, enabling tenants to have a say in how their building is run,” Duffy said. Each member household owns a share in the corporation, which entitles them to occupy a unit of housing. “The cooperative approves who comes into the building, either through sale or subleasing.”
He explained that agencies such as HUD are less flexible and take longer to process financing, while bank financing could offer more options and arrive faster. “Lending is more of an art than science. There’s always some level of tradeoff.”
Once established, a cooperative needs to be managed by the elected board members. This offers member-owners an opportunity to learn leadership skills. Guidelines for buying and selling shares, which are part of the by-laws of the cooperative’s corporation, protect member-owners from predatory lending practices and transaction costs. Cooperatives can buy in bulk, whether it’s groceries for the members or insurance for the buildings, and this leads to cost savings for everyone. This is why, in a time of economic disparity, cooperatives are a more viable option for so many people who work but cannot afford market rate properties.
Housing cooperatives can vary, depending on their location and function. Some popular forms of housing cooperatives include:
- Market Rate Cooperative: Shares sell for what the housing market will bear. New buyers have to be approved by the cooperative before an offer can be accepted.
- Limited Equity Cooperative: The value of a share increases according to a prescribed price or percentage. For example, a share could appreciate 1% per year.
- Group Equity Cooperatives and Mutual Housing Associations: These offer short-term solutions, such as student housing near a university. An example of this type of cooperative is Inter-Cooperative Council at Ann Arbor, Michigan. They don’t allow for wealth creation, but they do enable members to save money on rent.
- Shared Housing: This type of co-op works better for single people than for families. One example of a shared housing cooperative is made up of a small group of gig workers who bought distressed homes and organized them as a cooperative. For their organization, located in Pennsylvania, all members are required to buy into the cooperative on a monthly basis (investing $12,000 over five years), pay a monthly rent to cover the mortgage, and also cover their share of utilities. The arrangement is much less expensive than renting an apartment. Residents who stay for five years become vested, and their $12,000 investment can then be returned to them over a five-year period.
- Renting Partnership: This type of nonprofit organizes multifamily housing cooperatives in which the members don’t have an ownership share but do accumulate equity. For example, residents can earn “sweat equity” by doing jobs around the property, such as lawn work or maintenance. Each job has an assigned rate that translates into dollars that go into an equity account with a vesting period. This type of cooperative setup helps people be more invested in their units, and gives them a sense of ownership and pride.
- Low Income Housing Tax Credit Cooperatives: This unique form of a housing cooperative is formed through tax credits when companies who owe a lot of corporate taxes choose to support affordable housing. However, they can be turned into a vehicle to maximize profits for the corporation if not managed correctly. Therefore, an agreement to only sell the development to cooperative members at a reasonable price should be in place when a LIHTC cooperative is established.
Carol Smith, who co-founded Renting Partnerships in Cincinnati, Ohio, has seen several drawbacks to LIHTC cooperatives. “The LIHTC has been the main source for the loss of truly affordable housing because that has created this profitability of housing. They get these tax credits to subsidize construction and rehabilitation of housing developments with strict income limits for the tenants. It misses a market in between (the tenants) being able to purchase the home and be on subsidy.”
Smith shared information about a film called Push, which is about the financialization of housing. When housing is treated like a commodity and used to generate profits, people and communities suffer. “Renting Partnerships’ whole purpose is to keep housing affordable and allow renters to build equity. We have a strategy we use to address the affordability, the sustainability, and the community-building for renters. Housing should be a right. People are being displaced out of their housing, especially affordable housing.”
The cooperative structure allows organizations like Renting Partnerships to take housing out of the financial market. Cooperatives provide stability to the members, maintaining the corporate structures and managing the cooperative’s business so that the community may thrive. By removing greed from the equation, both renters and homeowners win.