In Portland, Oregon, an architect and a developer devise a lower-risk strategy to give aging baby boomers more control in developing and operating cooperative housing.
Difficult market and financial conditions demand that developers think creatively to limit development risk. At the same time, many in the burgeoning population of aging baby boomers seek alternatives to traditional models of housing for seniors, assisted living, and continuing care retirement communities (CCRCs). The independent cooperative housing model offers buyers more control than do those traditional models and more services than do condominiums, while at the same time sharply reducing risks for developers.
Portland, Oregon developer Mark Desbrow formed Green Light Development to pioneer a 45-unit independent living cooperative, called the Sheldon Cooperative after its Portland architect initiator, George “Bing” Sheldon. Founder of SERA Architects, Sheldon conceived the cooperative as a place for himself, his wife, and an initial group of friends seeking to downsize and live with like-minded individuals. Forty-five of the Sheldon cooperative members have paid nonrefundable deposits, and the majority has expressed a willingness to provide equity required to develop the project.
When initial key development risks are mitigated, land control finalized, and preliminary commitment from a lender obtained with confirmation of an 80 to 90 percent presale threshold, the Sheldon Cooperative will use member capital to fund the balance of predevelopment and development costs. By the time construction starts, members will have committed funds to pay half the total project costs, which will be paired with a construction loan for the other half. The Sheldon will have a construction loan for the whole cost guaranteed during construction by Portland developer Art DeMuro, chief executive of Venerable Properties LLC, now the lead developer. This loan will be repaid with individual share loans and the members’ equity payments.
Unlike the case with condominium projects, Sheldon Cooperative members become the clients for the fee developer; project costs, sources and uses of funds, including development fees, are fully disclosed to them.
A housing cooperative is a model of homeownership in which a cooperative corporation owns the land, the building, the units, and all common elements, with the residents collectively owning 100 percent of the corporation. Resident members purchase shares in the corporation in exchange for a proprietary lease that provides the exclusive right to occupy the unit and sell shares in the corporation, to which the lease for a particular unit within the cooperative has been assigned. Members are then responsible for a proportional share of the cooperative’s carrying charges, which may include mortgage payments if there is a blanket mortgage, and all operating expenses, on a weighted, pro rata share basis.
The cooperative housing model differs substantially from condominium ownership and CCRCs. In a condominium, the buyer owns fee title to a dwelling unit as well as an undivided interest in common areas. In a CCRC, residents pay a significant entrance fee, a portion of which may or may not be refundable, and occupy a unit through payment of monthly rental fees, but acquire no ownership interest.
| The ground floor of the cooperative will house elements not always available to condominium owners, such as a library, café, and community garden. |
Cooperatives may seek a single blanket mortgage, or individual shareowners may obtain individual share loans, substantively similar to individual condominium mortgages. Cooperative buyers are entitled to the same tax benefits of homeownership as condominium owners through mortgage interest and property tax deductions. A master, blanket mortgage allows for coordinated leverage if refinancing is needed to pay for major repairs and upgrades to individual units and common spaces. For condominiums, special assessments typically are used to improve common areas, leaving individual owners to find their own financing to pay for them, as well as for improvements to their own units. The effect is that cooperatives may be better able to ensure maintenance and improvement throughout their existence.
A blanket mortgage insured by the Federal Housing Administration (FHA) Section 213 cooperative housing program can entice developers with self-amortizing 40-year, nonrecourse, single construction-to-permanent-loan terms. But the program is small, time consuming, and more suited to limited-equity appreciation projects.
For these reasons, members of the Sheldon preferred the individual share loan approach, which is similar to the practice for New York City cooperatives. While a blanket mortgage can result in lower interest rates, costs, and fees, individual share loans can also have advantages. Members can set the term and amortization of share loans to fit their individual needs, incur reduced shared financial responsibility, and offer resale buyers more flexibility than provided by assumption of a portion of a preexisting blanket mortgage.
Independent cooperative buyers enjoy other advantages unavailable to condominium owners or CCRC renters. Because of the wide variety of owners involved, it is difficult for condominiums to obtain additional services at reasonable prices. In contrast, cooperative residents may choose to bargain collectively to get cheaper bulk rates for in-home services such as for maid service, food service, assistance with daily living activities, transportation, etc.
For CCRCs, decisions regarding services and amenities are generally predetermined. CCRCs are commonly privately owned, for-profit ventures. This means that residents are essentially long-term tenants—subject to higher entrance fees and monthly service fees, as well as to the possibility of increasing fees over time—with no ownership in, and little control over, their living situation. For-profit CCRC entrance fees may be nonrefundable, or refundable only at significant discounts.
Cooperative buyers can resell their shares in the corporation, which not only preserves their investment, but also means they may enjoy capital appreciation, unlike the case for a CCRC. In a cooperative, shares are transferable to heirs and other parties, and the cooperative itself may have a right of first refusal on the share transfer so there is likely to be a market for transfer to the cooperative supported by those resident owners most interested in maintaining compatibility. Also, in the case where there is an outstanding blanket mortgage, when there are transfers, only the outgoing member’s equity need be financed by the incoming member. Transfers of shares are subject to fewer settlement costs.
Unlike the situation with either condominiums or CCRCs, participation as a cooperative member gives residents some ability to control who is a member of the cooperative. In order to protect their investment, residents may limit the number of units in the cooperative that may be rented to outside parties, as well as demand approval of individual renters or future purchasers, thereby ensuring a high proportion of owner-occupied units on the one hand, and increasing the likelihood of compatibility with future shareholders on the other. A cooperative may allow its members to have landlord-like control of who can purchase shares. Members must follow antidiscrimination laws, but can choose tenants on the basis of their history.
Early purchase of cooperative interests offers buyers much greater participation in the design of the units and the building, as well as in deciding which services will be provided. Greater control over the day-to-day services and functions, as well as over the makeup of the cooperative—in contrast with condominium or CCRC governance—gives members somewhat greater predictability regarding their living environment and investment. The fact that shares rather than deeds are transferred may mean greater opportunity to protect the privacy and security of cooperative shareholders and transferors.
| Cooperative buyers enjoy greater services |
Cooperative buyers may face less risk than condominium buyers. Housing cooperatives typically have high presale requirements, meaning early buyers face significantly less risk than do early buyers in condominium properties, especially during the recovery from the current recession. Many condominium buyers bought units at nearly full price only to see developers default on construction loans and have remaining units sold at bank auctions at sharply discounted prices.
Cooperative buyers enjoy greater services inside their units than are available to condominium buyers. Because the cooperative corporation owns the entire building, not just the common areas, it may be responsible for maintenance of the interior of the units, including the repair and replacement of appliances, just as is the case for rental apartments. In condominiums, the owner must perform all internal repairs from the walls inward because the condominium association owns only the common areas. Usually those additional expenses also include the costs of maintaining, repairing, and replacing doors, windows, and decks or other so-called limited common elements, even if those services are performed by the association.
Developers may also be intrigued by the unique advantages offered by cooperative housing. Because cooperatives are sold through a process requiring high presales, buyer equity can substitute for much more expensive investor equity now needed to develop condominiums. A substantial amount of equity is provided via share purchases during the presale period, and the balance may be funded through a blanket mortgage. This is especially important in the case of the growing population of empty-nest baby boomers who in many cases have recently sold a single-family home and realized up to $250,000 to $500,000 of tax-free equity gains through their capital gains tax exclusion. Even though the market is depressed, aging baby boomers often have a very-low-cost tax basis in larger homes purchased decades before.
The more than 50 percent equity raised for the Sheldon, even without a blanket mortgage, reduces the lender’s risk. The low loan-to-cost ratio, coupled with high presale levels, may enable developers to obtain a nonrecourse construction loan—rarely available to condominium or CCRC developers. Essentially not only is the loan-to-cost ratio very low, but also the building is nearly fully absorbed into the market: the developer is asking for a 50 percent loan on a building that is 90 percent occupied before ground breaking.
Also, developer risk is mitigated by several factors. Minimal out-of-pocket equity requirements, high presale requirements, attractive nonrecourse financing options, low turnover rates, and increased interest in cooperative housing from adults in the 55 to 70 age group—especially in urban settings—create an attractive, relatively low-risk investment for cooperative developers. However, considerable predevelopment risk does exist because all capital required to get a project to the point of construction—the point at which members purchase their shares—must be provided by outside-developer investment, unless cooperative buyers agree to provide member capital to fund predevelopment costs.
A growing market for the cooperative model of ownership exists, especially among aging baby boomers desiring more control over their next-stage living decisions. Traditional risks associated with residential condominium projects are minimized not only through high presale requirements, but also by the ability to market and create affinity communities through word of mouth during presales. More than 85 percent of the 45 cooperative buyers of the Sheldon found out about the opportunity this way.
“Independent cooperative housing development turns conventional senior housing on its head,” says Desbrow. “Rather than risk capital, build speculatively, and hope to find buyers, the cooperative developer grows a community of like-minded people who seek more control to pool their resources to build the cooperative for those actual owner-residents in a design and operation they choose.” Green Light is working on a second cooperative project on Bainbridge Island, Washington, with local developer Asani Development.
Graduate student Atha Mansoory researched the subject. Developer Mark Desbrow is a former student of Macht.
