WASHINGTON DC CO-OPS

About Washington DC Cooperatives

About DC Co-ops

A co-op, or cooperative home, in the District of Columbia is housing that is collectively owned and managed by its occupants. Members do not own their individual units, instead they own shares in a non-profit corporation which holds title to the property and grants proprietary leases to unit occupants. The lease grants permanent right to occupy the unit and to use the common elements of the property according to the cooperative bylaws, rules and regulations. The number of shares owned is dictated by the size of the unit. Owners actively participate in decision making and share the work involved in running the co-op. Co-ops pay a lower tax rate due to their non-profit status.

Co-Op History

Washington DC’s first cooperative building, The Concord, appeared in 1891, whereas DC’s first condominium didn’t arrive until 1962-63. Though cooperatives preceded condominiums in Washington DC by more than forty years, condominiums have multiplied at a much faster rate and are more widely understood than cooperatives. One possible reason for this is familiarity among buyers with condominiums due to saturation in suburban areas. Most cooperative projects are located in high-density housing areas of large cities such as New York, Chicago and Washington DC, while condominiums are built and sold in many suburban areas across the United States. Go with what you know, in other words. That’s not to say that cooperatives aren’t a great concept. Edmund Flynn thought so. He helped developed the first housing cooperatives in the District of Columbia, beginning in 1920, while he was employed with the Allen E. Walker firm (the first real estate brokerage to specialize in co-ops). Soon afterwards, Flynn founded the Edmund J. Flynn Company, which has developed and converted more than sixty DC market rate cooperatives. Most early cooperatives were so-called “luxury cooperatives”, which allowed renting for profit, and which typically had high monthly carrying costs. Instead, Flynn pioneered what he called the “100% cooperative ownership” plan.  It required high down payments, low monthly carrying charges and a 100% owner occupancy rate. During the Great Depression of the 1930’s, many “luxury” cooperatives folded when owners could not find renters or buyers who could afford the high monthly rates, but Flynn’s “100%” organizations were spared collapse due to his sensible structure. Flynn’s have also historically been the most economically diverse group of cooperatives nationwide, offering high end “best address” buildings to DC’s first moderate income garden-style complex, as well as self-sustaining low-cost cooperatives. Early DC cooperative buildings include The Concord (demolished in 1962), 2852 Ontario (“The Ontario”; still standing) the Porter, the Westmoreland (built 1905 and converted 1948), Presidential, and the Broadmoor. There are approximately 120 co-op buildings in Washington DC today. If you’re shopping for a condo, have 10% or more for a down payment, and may benefit from some of the tax perks associated with co-ops, you owe it to yourself to investigate further.

Co-Op Pros

  • Typically, DC co-ops cost less per square foot than condos
  • DC Co-op maintenance fees (the equivalent of condo dues) include property taxes and some or all utilities. Some or all of the fees are tax deductible and property taxes are geerally lower for co-ops due to their non-profit status.
  • DC co-ops offer shareholders a degree of control over how their investment is managed and who their neighbors are.
  • The cooperative maintenance team often handles repairs condo owners would have to contract for on their own.
  • There are likely to be fewer investor units in co-ops projects than in condominium projects since DC co-ops encourage owner-occupancy
  • Closing costs for DC co-ops are generally lower than for a condo purchase. Because it is a stock purchase and not a transfer of real estate, there has been no transfer or recordation cost in the past, HOWEVER, in the District this is no longer true. In late 2009, D.C. withdrew that exemption and now demands the same transfer and recordation charges as a condo real property transfer (1.1% or 1.45% for sales above $400,000.). Co-op share purchasers do save on title fees and insurance, and escrows for property taxes.

Co-Op Cons

  • When it’s time for a co-op shareholder to sell their shares, they may find that the bylaws dictate who they can sell to.  There may be requirements about buyers’ income and other financials, employment history and background. A prospective buyer will be vetted by the board of directors.
  • Sub-letting of a shareholder’s leased unit will have similar restrictions and there can be limits on how many shareholders can sublet at a time. Read the cooperative bylaws, rules and restrictions carefully before purchasing.
  • The board of directors has a great deal of control in a cooperative and politics can play a part in operations and decision-making.
  • There may be restrictions on renovation or remodeling of cooperative units. Co-op owners may not be able to install a new bathroom, update the unit’s kitchen or reconfigure the space as a condo owner might.
  • Interest rates and down-payment may be slightly higher for cop-ops than for condominiums.
  • Financing is different for co-ops. Instead of a conventional mortgage obtained to purchase a condominium unit for which the unit itself is collateral, co-op purchasers typically obtain a “share loan,” with their membership certificate or stock share and occupancy agreement as collateral. Only a handful of lenders offer co-op financing in the DC Metro area and they offer rates fairly comparable to conventional mortgage loans. An underlying mortgage is the initial mortgage taken on a cooperative,  most often when the cooperative was created by apartment residents or the developer. A good number of DC’s cooperatives have underlying mortgages. When renters and/or developer decide to create a cooperative, shares in the new entity are sold to owners, who sell the building(s) by transferring its debt to the corporation. If there is a mortgage needed to supplement share sales, the cooperative obtains the loan and all shareholders service the debt. Even co-ops that can afford to pay off their underlying mortgages may not want to do so because the shareholders receive a tax benefit from their shares of the monthly interest payments. It’s important to have an expert evaluate the financials of a DC co-op before purchasing shares. Your lender will also want to review them to determine percentage of maintenance represented by debt service and underlying debt per unit compared to average unit sales price, among other factors. A reasonable quantity of debt is not unhealthy for a cooperative. According to experts, debt lower than $15,000. per unit is acceptable and debt above $30,000. per unit is seen as an issue. It is important to note that each situation is different, debt guidelines change, and prospective buyers should consult an expert when reviewing financials. Qualification criteria for a cooperative share loan is similar to that for a conventional loan. The upside is that there may be good tax advantages to owning shares of a cooperative. Be sure to have a tax expert evaluate both your tax situation, and the tax structure of the cooperative to determine if tax incentives will be a benefit to you. DC co-op boards sign a recognition agreement with lenders, so be sure to check approved lenders for each cooperative prior to making an offer. A recognition agreement defines the relationship between the lender, the co-op and the borrower, and establishes the priority of claims in the event an individual borrower is in arrears on monthly maintenance fees or on the monthly mortgage payment. Co-ops do not have recognition agreements with all lenders, though almost all have several in place with one or more lenders. Be aware that institutions lending for share loans may have different policies regarding appraisal value review.
  • Co-op fees appear higher, so buyers and agents unfamiliar with co-ops often shy away unnecessarily. This can lead to longer Days On Market on resale. Unlike condos, cooperatives include property taxes and, typically, some or all utilities in the monthly fee. Maintenance of mechanicals or low cost repair options may also be included. To compare fees, divide the annual property tax on a condo by 12 and add that amount to the condo association fee. Now add an monthly average for utilities. This gives you an apples-to-apples comparison with a monthly co-op fee. They’re not always higher. Remember that co-op owners don’t get the DC Homestead Deduction. That goes to the association.
  • DC Bill 18-203 was amended on October 1, 2009 and enforced retroactively, requiring DC Recordation Tax to be collected at settlement. Here’s how it’s calculated: 2.2% of the sales price under $400,000 2.9% of the sales price equal to or above $400,000. Sellers and buyers execute an Economic Interest Deed and Transfer of Economic Interest Tax Return at settlement.  The Economic Interest Deed is recorded with the DC Recorder of Deeds for all changes in ownership of a Cooperative Unit (apartment, townhouse, garage/parking space).
  • FHA financing is not available for DC co-ops. At one time the FHA 203N mortgage loan was offered for the purchase of cooperative shares, but it is not currently among the products available from the Federal Housing Administration. Additionally, many cooperatives have regulations requiring a minimum downpayment, typically 10%, which would preclude acceptance of FHA loans with 3.5% downpayments.

What To Look For

  • The financial condition of the association or corporation managing the property. Ask for the latest financial statements and budgets, the investor ratio (how many owner-occupied units and how many rented units), maintenance fee increases, and recent sales.
  • Pending lawsuits against the development. If there are pending lawsuits, get details. If there are lawsuits that have been settled recently, find out what the decision was.
  • Bylaws and restrictions. Are they reasonable?
  • How long have the units listed for sale been on market? What are the challenges in re-selling a unit in the cooperative? The cooperative association may require its own inspection before listing and just prior to settlement and if association required repairs are not made by the current share owner, they will become the responsibility of the new owner. Buyers should hire an independent inspector to check the non-common elements of the unit as well. Association inspections cover only very specific items and an independent buyer’s inspection will be more comprehensive.

Why is The Monthly Fee So High?

  • Unlike condos, cooperatives include property taxes and, typically, some or all utilities in the monthly fee. Maintenance of mechanicals or low cost repair options may also be included. To compare fees, divide the annual property tax on a condo by 12 and add that amount to the condo association fee. Now add an monthly average for utilities. This gives you an apples-to-apples comparison with a monthly co-op fee. Remember that co-op owners don’t get the DC Homestead Deduction. That goes to the association.
  • DC Bill 18-203 was amended on October 1, 2009 and enforced retroactively, requiring DC Recordation Tax to be collected at settlement. Here’s how it’s calculated: 2.2% of the sales price under $400,000 2.9% of the sales price equal to or above $400,000. Sellers and buyers execute an Economic Interest Deed and Transfer of Economic Interest Tax Return at settlement.  The Economic Interest Deed is recorded with the DC Recorder of Deeds for all changes in ownership of a Cooperative Unit (apartment, townhouse, garage/parking space).

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