Primer on Senior Cooperative HUD Housing
Salesman on train: How far you going, friend?
Harold Hill: Wherever the people are as green as the money…friend.
--Meredith Wilson, The Music Man
So, Ewing Development has come a’ court’n, sweeping senior citizens off their feet by introducing the newest fashion in modern living -- Cooperatives! (Cooperatives Give Iowa Seniors an Alternative Way to Live – The Des Moines Register, October 8th 2013). Age segregated cooperatives may have originated in Minnesota, but residential cooperatives have been around in the United States since 1876, when the first one appeared in New York City. Cooperative apartments may be unusual for Des Moines, but we have very long history from other states from which to evaluate the proposal for Beaverdale.
On the bright side, during the first half of the Twentieth Century cooperatives proved to be an example of successful residential urban planning for persons of moderate means. They were designed with consumer interests in mind, and they were models of economy and good living.
Cooperatives began to experience problems as developer’s profits soared, sometimes as much as 100%, and excessive mortgaging increased interest rates and closing costs (points). Serious difficulties with the cooperative arrangement became apparent during the Great Depression; the collapse of a NYC building bubble in the late 1980’s and early 1990’s; and our more recent housing collapse. To appreciate the pitfalls of cooperatives one must understand some of the legal technicalities.
Cooperative apartments are a form of ownership in which a corporation owns the building and land, and people own shares in the corporation. The shares are usually tied to a specific dwelling unit. Almost uniformly, the corporation carries a mortgage for most of the appraised value of the real estate. The individual residential purchaser pays an up-front charge (the Beaverdale proposal is for a charge between $90,000 and $140,000). The resident also pays a monthly fee (the Beaverdale proposal begins at $1,100 per month for its cheapest offering). Depending upon the extent of greed present, most to all of the front money goes to the developer, and monthly payments go to pay the mortgage, taxes and maintenance. The developer takes his money and runs. The cooperative is left for the resident owners to operate. They often hire a manager to collect fees, pay charges, and manage maintenance.
Serious problems arise when too many shareholder monthly fees go unpaid. Age has its unique way of causing attrition of residents. Suppose a resident owner requires intermediate nursing care. One would need an awful lot of money to pay for a nursing facility and a cooperative apartment at the same time. How difficult is it to find a buyer for a senior apartment? Just ask Gail Nerison, who was still unable to sell her mother’s unit at The Lodge of Ashworth, five years after her mother’s death. (DM Register August 3rd 2013, Readers Watchdog: Buyer Beware…)
For whatever reason, if insufficient funds are collected, mortgage payments and taxes may go unpaid. The mortgage company may then foreclose against the cooperative, and the owner residents lose their equity, their ownership, and their residence. Even in NYC, where apartments are subject to rent controls, cooperatives have sometimes been restructured as rentals after foreclosure. The point to bear in mind is that each resident’s individual financial security is dependent upon the percentage of occupancy and the performance of the obligations of his /her fellow shareholders. The plethora of signs indicating vacant senior dwelling units along Beaver Avenue should give the target demographic pause to carefully consider the merits of the latest in modern living purveyed by Ewing Development.
If the default rate in the payment of monthly fees is not serious enough to cause a shortage of funds for mortgage or tax payments, consider the plight of the hapless resident owner in default. As indicated, the resident owner does not own real estate, he/she owns stock in a corporation. This is an important distinction.
Our society has gone to great lengths to make it difficult to divest a person of his or her portion of the American dream – home ownership. The judicial procedure of foreclosure can be time consuming and difficult. The foreclosure laws provide several opportunities for a financially distressed homeowner to hang on to his/her home while reorganizing finances, or to reclaim the home after a foreclosure followed by financial reorganization. None of these protections apply to stock ownership in a cooperative. Recourse against a security pledged to guarantee performance is governed by Article IX of the Uniform Commercial Code (UCC). While the Article IX provides an option for judicial supervision over foreclosing a security interest, it also provides a self-help remedy, almost universally elected by creditors, by which the creditor can give notice to the debtor and, if the debtor fails to cure the unpaid fees, the creditor can go ahead and auction the security. Creditor auctions tend to be uncompetitive. The odds are a shareholder in default will lose most, if not all of the front money.
To give Ewing Development its due, there are two features of its proposal that may ameliorate some of the harsh scenarios I have described. First, according to Ewing spokespersons at the recent meetings in Beaverdale, the cooperative by laws will empower the corporation to veto a sale for a period up to two months, not completely block a sale, as traditionally seen with cooperatives. Accordingly, a shareholder may be able to sell his/her share at a loss, even though the sale depresses the value of all of the units. If you imagine yourself as a surviving resident owner, you should consider the loss other residents can cause to your investment, by selling their shares at a loss. Second, Ewing purports to be selling the units at about half their value. The Developer implies that this makes the investment a sure bet.
But, value is the merger between what a willing buyer will pay and a willing seller will accept. Does anyone really believe that a “fifty-percent-off sale” is a reduction from market value?
An Ewing Development spokesperson misled his audience when addressing the possibility of foreclosure by stating that an insured mortgage would be “restructured.” “Restructure” is the term applied in NYC to converting cooperatives into rentals, after foreclosure. How likely is it that seniors could lose everything in a failed cooperative? Just ask the children and grand-children whose parents or grand-parents were resident owners of Heather Manor.
Marcellus Washburn: …Anything these Iowa people don't have already, they do without.
-- The Music Man
Harold Hill: Wherever the people are as green as the money…friend.
--Meredith Wilson, The Music Man
So, Ewing Development has come a’ court’n, sweeping senior citizens off their feet by introducing the newest fashion in modern living -- Cooperatives! (Cooperatives Give Iowa Seniors an Alternative Way to Live – The Des Moines Register, October 8th 2013). Age segregated cooperatives may have originated in Minnesota, but residential cooperatives have been around in the United States since 1876, when the first one appeared in New York City. Cooperative apartments may be unusual for Des Moines, but we have very long history from other states from which to evaluate the proposal for Beaverdale.
On the bright side, during the first half of the Twentieth Century cooperatives proved to be an example of successful residential urban planning for persons of moderate means. They were designed with consumer interests in mind, and they were models of economy and good living.
Cooperatives began to experience problems as developer’s profits soared, sometimes as much as 100%, and excessive mortgaging increased interest rates and closing costs (points). Serious difficulties with the cooperative arrangement became apparent during the Great Depression; the collapse of a NYC building bubble in the late 1980’s and early 1990’s; and our more recent housing collapse. To appreciate the pitfalls of cooperatives one must understand some of the legal technicalities.
Cooperative apartments are a form of ownership in which a corporation owns the building and land, and people own shares in the corporation. The shares are usually tied to a specific dwelling unit. Almost uniformly, the corporation carries a mortgage for most of the appraised value of the real estate. The individual residential purchaser pays an up-front charge (the Beaverdale proposal is for a charge between $90,000 and $140,000). The resident also pays a monthly fee (the Beaverdale proposal begins at $1,100 per month for its cheapest offering). Depending upon the extent of greed present, most to all of the front money goes to the developer, and monthly payments go to pay the mortgage, taxes and maintenance. The developer takes his money and runs. The cooperative is left for the resident owners to operate. They often hire a manager to collect fees, pay charges, and manage maintenance.
Serious problems arise when too many shareholder monthly fees go unpaid. Age has its unique way of causing attrition of residents. Suppose a resident owner requires intermediate nursing care. One would need an awful lot of money to pay for a nursing facility and a cooperative apartment at the same time. How difficult is it to find a buyer for a senior apartment? Just ask Gail Nerison, who was still unable to sell her mother’s unit at The Lodge of Ashworth, five years after her mother’s death. (DM Register August 3rd 2013, Readers Watchdog: Buyer Beware…)
For whatever reason, if insufficient funds are collected, mortgage payments and taxes may go unpaid. The mortgage company may then foreclose against the cooperative, and the owner residents lose their equity, their ownership, and their residence. Even in NYC, where apartments are subject to rent controls, cooperatives have sometimes been restructured as rentals after foreclosure. The point to bear in mind is that each resident’s individual financial security is dependent upon the percentage of occupancy and the performance of the obligations of his /her fellow shareholders. The plethora of signs indicating vacant senior dwelling units along Beaver Avenue should give the target demographic pause to carefully consider the merits of the latest in modern living purveyed by Ewing Development.
If the default rate in the payment of monthly fees is not serious enough to cause a shortage of funds for mortgage or tax payments, consider the plight of the hapless resident owner in default. As indicated, the resident owner does not own real estate, he/she owns stock in a corporation. This is an important distinction.
Our society has gone to great lengths to make it difficult to divest a person of his or her portion of the American dream – home ownership. The judicial procedure of foreclosure can be time consuming and difficult. The foreclosure laws provide several opportunities for a financially distressed homeowner to hang on to his/her home while reorganizing finances, or to reclaim the home after a foreclosure followed by financial reorganization. None of these protections apply to stock ownership in a cooperative. Recourse against a security pledged to guarantee performance is governed by Article IX of the Uniform Commercial Code (UCC). While the Article IX provides an option for judicial supervision over foreclosing a security interest, it also provides a self-help remedy, almost universally elected by creditors, by which the creditor can give notice to the debtor and, if the debtor fails to cure the unpaid fees, the creditor can go ahead and auction the security. Creditor auctions tend to be uncompetitive. The odds are a shareholder in default will lose most, if not all of the front money.
To give Ewing Development its due, there are two features of its proposal that may ameliorate some of the harsh scenarios I have described. First, according to Ewing spokespersons at the recent meetings in Beaverdale, the cooperative by laws will empower the corporation to veto a sale for a period up to two months, not completely block a sale, as traditionally seen with cooperatives. Accordingly, a shareholder may be able to sell his/her share at a loss, even though the sale depresses the value of all of the units. If you imagine yourself as a surviving resident owner, you should consider the loss other residents can cause to your investment, by selling their shares at a loss. Second, Ewing purports to be selling the units at about half their value. The Developer implies that this makes the investment a sure bet.
But, value is the merger between what a willing buyer will pay and a willing seller will accept. Does anyone really believe that a “fifty-percent-off sale” is a reduction from market value?
An Ewing Development spokesperson misled his audience when addressing the possibility of foreclosure by stating that an insured mortgage would be “restructured.” “Restructure” is the term applied in NYC to converting cooperatives into rentals, after foreclosure. How likely is it that seniors could lose everything in a failed cooperative? Just ask the children and grand-children whose parents or grand-parents were resident owners of Heather Manor.
Marcellus Washburn: …Anything these Iowa people don't have already, they do without.
-- The Music Man