United States

Department of

Agriculture

USDA.

iIiii~ e-..._"....._

Service Report 44

Keys to Successful

Co-op Housi, ,
Abstract Successful housing cooperatives usually have key operating practices and phi losophies in common. These include a need for understanding some basic cooperative

concepts such as the joint ownership and user-owner nature of the cooperative form of

bus iness, as well as at-cost operation and democratic control processes. In addition, a

sound background in management, operational, and financial aspects of coo peratives

aids in ensuring the success of new or extstinq hou sing cooperatives.

Key words: cooperative. housing cooperative

Keys to Successful Cooperative Housing

Tracey Kennedy

Andrew Jerrnolowicz

Mary Anne Lambert

John Reilly

Beverly Rotan

Cooperative Se rvices Program

Rural Business and Cooperative Development Service

U.S. Department of Agriculture

Service Report 44

February 1995

Sl ightly revised August 2004
Preface In the following pages some practicesand attributesassociatedwith successfully

developing and operating a housing cooperative are reviewed. Included are practices

useful in planning and organizing cooperatives. as well as policies and procedures to

help established housingcooperatives remain financially sound and responsive to

memberneeds.Although this guide was written with cooperatives geared toward lowincome residents in mind, these keysto successcan be applied to any type of housing

cooperative.

The purpose of this guide is to highlight some methods practiced by successful housing cooperatives. It is not intended as a comprehensive manual. More detailed infor

matianabout the operationof cooperative housingcan be found by contactingthe

sources listed on page 11.
Contents

ii

INTRODUCTION ... . •..... ... . .. .. ... • • • ... . . ..... • ••..... . .. • • ..... •1

UNDERSTANDING THE COOPERATIVE CONCEPT .. .. .... ... . . .. ••.... •. •1

KEYS:

JointOwnership •..... . ... ...... ••. .. ...... ••.. . ....... ... • .1

The User-Owner Natureof Cooperatives . . . . . ...• . . . ..... •.. . .. . .1

Operation at Cost ... ....... .. • • . ........ • • • .... • • . .. •..... •.1

Democratic Control .. •.. .. • . • . .. ... . .. . . •..... • ••. . ..... . ••. .1

Cooperative Structure •...•. . . . . . . ... ..... . . . . .. . . .. . . . . ..• . . .2

Cooperatives and OtherTypes of Homeownership •• . . ... .. . .•• . . . . .

PLANNING ANDORGANIZING A HOUSING COOPERATIVE • . . . .•... .•. . ..••2

KEYS:

Getting a Sponsor and Other Assistance . ••. . .... . . •... ......... 2

Keep Members Involved . .. . . . . . ...••. . .. . . ..•. . . •.• .. .• . . . . .3

Avoid Unrealistic Expectations 3

InstillMemberCommitment ... . •... .... . . ..... ...... .. .. ...•..3

MANAGEMENT ANDOPERATION OFTHE COOPERATIVE ... • • .... .. .. ••...3

KEYS:

The Role of Directors and Managers . .. ............. .... . .. . . .•.3

Rolesand Responsibilities in Self-Managed Housing .. ••........ • • .4

Operating Policies and Practices 4

Maintenance Policies and Plans •.. ........ .... . ..... . ... ...•.. .5

Sound FeeCollection Policies ....... ••......... •..... • ... . ....5

Resale Policies .. • . ............. ..... .... ..... ........... ...6

COOPERATIVE FINANCES • .. . . . . .. .. . . .•• . . . . . .• ...• . . . . .. . . . . . . . . .• .6

KEYS:

Cooperative Capitalization 6
Contents Internal Cooperative Finances 6

Cooperative Budgeting 7

Fee Adjustment Policies 7

Reserve Funds 7

COOPERATIVE MEMBERSHIP 8

KEYS :

Keep Members Involved and Informed 8

MemberEdlX:aOOn Is Critical 8

CCNCLUSION • .. .. ... . .. . .. . . . . . . . .. . . .... . .. . . . .. ... .. . .. • • .... . . . .9

OTHER SOURCES OF INFORMATION ABOUT COOPERATIVE HOUSING 11

REFERENCES .. .. .. . . . ... . . . . . . . . . . . • • • • . . . . . . . . . • . . . . . • • . . . . , 12

iii
Keys to Successful Cooperative Housing

Introduction

Ensuring that a hccslng cooperative will be a

success begins long before the foundation is poured

and contin ues throughoct the life of the cooperative.

Successful cooperatives usually have key operating

practices and philosoph.es in common.

In the following pages, some practices and attributes associated with successfully developing and operating a hou sing coopera tive are reviewed. Included are

practices useful in planning and organizing cooperarives, as well as poli cies and procedures to he lp established housing cooperatwes remain fina ncially sound

and responsi ve to member needs. Although this guide

was wri tten with cooperativ es geared toward lowincome residents in mind, these keys 10success can be

applied to any type of housing cooperative.

This g uide highltgnts some of the methods practiced by successful bou slng cooperatives. It is not

intended as a comprehen sive manual. For more

d elailed information about the operation of coope rative housing see the sou rce list on page 11.

Understanding The Cooperative Concept

Persons considering a cooperative as a housing

option mu st understan d cooperative structures and

how they differ from ot'rer types of bu siness an d housing.

KEV: JolnlOwnorsh,p

Cooperatives are OJ form of joint own ership. In a

housing coo perative. pt<'PIe join to form a nonp rofit

cooperative corporation that owns the buildings in

which they live. Purchasing a share in the cooperative

enti tles each member to lease and occupy a dwelling

u nit from the cooperative and to participate in its gov -

ernance and operati on .

KEY: TheUser..()wner Nature of COOperatives

The cooperative fonn of business p rovides serviet's to the people who own and use it. By comparison. investor-owned compan ies exist to provide a

return on the investment of stockholders. The userowner eepect o f cooperation has important implications for the way coope ratives are operated and govemed.

KEY: Operallon 01 COSI

Cooperati ves exist to provide se rvices to userown ers, rat her than returns to investors and operate

on an "at-cost" or "not-for-profit" basis. Because there is

no profit line in the cooperative budget. costs are often

lower th an in nonccoperett ve businesses. It i.s important to understand , however, that the fees cooperatives

charge members are o ften competitive with noncooperatives. This ensures that the cooperative has enou gh

capital available to mee t its obligations. AI th e end of

the year (or other pe riod), fees that exceed expenses

are returned to members as patronage refunds. This is

the way coopera tives opera te "at-cost,"

KEY: Democratic Control

Cooperatives ere controlled by the people who

own and use them-e-the residents in a hou sing cooperative. Members elect a board o f directors from among

themselves. Each member has one vote in deciding the

affairs of the cooperative.
KEY: Cooperall. e Structure

Structure refe rs to the way members' equity o r

ownership interes t in the property builds. Two main

types of housing coo peratives are markd-rlltt.' cooperatives and li jted l ity cooperati ves,

In a market-rate coo perati ve. members benefit

from any apprecia uon in the value of the property and

are allowed to sell their shares for whatever the market

will pay. People who consider homeo wnership an

inves tment will usually choose this type of coope ra -

tive.

Limited-equitv cooperatives limit the price a t

membership and control resale valu es to keep the

housing affordable for low- and moderate- income residents. Formul as fer setting resale pri ces va ry. In some

coope ra tives. the resale price is based on th e initial

sha re price plus a sma ll amount; say 1 percent per

yea r, for appreciat ion. In coo pe ratives geared toward

very low- income residents. members may receive only

their o riginal share price when they mov e ou t.

KEY: Cooperall. es and Other Types 01

Homeownershlp

Housing cooperati ves are different from condominiums in that resid ents do not own o r hold title to

their individual d welling units. Instead , residents own

shares of the whole cooperative corporation. The corp oration holds title to the property. Housing cooperatives differ from re ntal housing in that residents' ownership of shares en -itles them to a voice in running the

association.

Housing coo peratives are usuaUy multi-family o r

apartment-type dwellings. However, sing le-family

homes located close together and even trail er parks

can be operated on a cooperative basis. They can consist of just a few urits-or have a large number. Co-op

City in the Bronx, New York, houses more than 60.000

families. Cooperati ve housing can be new constru ctio n

or renovated, exien ng housing.

Planning and Organizing a

Housing Cooperative

Planning and organi zinp; a hc uslng coo pe rative is

a complex task that can take several years to complete .

Throughout the process. organizers-which will

include sponsors, ad visers, and prospective residents-will learn abo ut many facets of finan cing.. constructicn, and man agement of multi-fam ily housing.

The process is ma de even more complex by the coope rati ve nature of the project and the need to make deciz

stone as a group. Therefore. having a sponsor or 1IoCCesS.

to those with experience in d eveloping coo pe ratives

can go a long way toward. simplifying the process and

ensuring success in establishing and ope rating the

coope rative.

KEY: Getting a Sponsor and Other Assistance

Most grou ps wanting to form a ho usin g coo pe rative will need a sponsor or technical assistance adviser

10 help them throughout the planning and development process.The sponsor or adviser might be a prtvate or public commuruty-besed orga nization, a nonprofit developer, a private organization.. or housing

consultant.

How much technical assistance? Coope ratives us ually need more technical assistance during the de velopment stage than during ongoing ope rations. In this

early stage when plans are d eveloped an d fina ncing

arra nged. the experience of the sponsor is of greatest

benefit. As members become more familiar with cooperative housing, the level of technical assistance

required will decrease, especially after the cooperative

is operating and the start-u p problems are worked ou t.

rvhat does the sponsor/adviserdo? The mission of

th e sponsor or technical assistance ad viser is to foster

the education, Independence, and overal l development

of the cooperative being formed . Ideally, the sponsor

shou ld have some back ground in housing or in organizing ho using coopera tives, or ha ve access to such

expertise. The ran ge of se rvices that the sponsor or

adviser may provide in starting a housing cooperati ve

includes:

• Provide informati on on housing op tions.

• Facilitate focus group sessions with potential

members to help define in terests and needs and

determine what people consider affordable.

• Help obtain financing through Government, commercial, and commu nity sources.

• Help mediate with go vern men tal agencies.

• Help with incorporation an d other legal documents.

• Assist with feasibili ty stud ies.

• Help develop business plans.

• Develop u p ed ucational programs for members

and the board of d irectors.

ArlOld Too Much Ckr.."dtm:r 0'1thr SpcmsorlAdv iseT.

It is important to avoi d over-dependence on the

sor or housing consu lta nt. Often. inadequ ately prepared groups end up being run by their sponsors or

the experts the y hire. The sponsor must understand
the limits of its own ed v bory role and stress that decisions rome from the members.To this end, the sponsor

or housing consultant should:

• Affirm trust in peop le's abilities to manage their

own affairs and ma ke good d ecisions on solid

Information.

• Provid e an atmosphere tha t eTlro uragt'S d iscussian and works tow ard consens us.

• Listen sensitively to the expressed need s and

desires of the membe rs. and help them to expre

the ir views in a no rvhreatentng environmen t.

• Draw on the skills oj members.

• Provide honest feed back to the group and avoi d

paternalism.

• Be pati ent during tbe development process. It's

time consuming, bu t necessary that the sponsor

be committed to serving for the long ha ul.

• Design any assistance so it becomes obsolete.

This allows the cooperative to mature an d reduce

its dependence on outside assistance.

• Maintain momentum of the project. particularly

during planning and constru ction phases.

• Balance the time between th e pursui t of goals, the

stru cture of the organization, and the needs of

individual members. Members have to feel that

they are part of an e-fort that will yie ld positive

results for them .

KEY: Keep Members Involved

The cooperative should be orga nized by those

wh om it will serve. Members mu st wo rk with the

sponsor as much as possi ble, especially if they plan to

ma nage the cooperative themselves.

Members should also be involved on some level

during the construction p hase. Although building contractors will prefer to d eal with a single contact, usually the sponsor, members can supply inpu t on selection

of ap pliances, furnishing). interior decor. an d land -

scaping. As future residents, members should also be

consulted when significa nt design change-sare

required. These an d other tasks can be delegated to

committees. Committees allow more members to

become involved, help the m d evelop grou p decisionmaking skills, and enhan....-ethe ir knowledge bese.

Provide signs ofprog Sj The yea r or two involved

in planning and building the housin g facility can seem

even longer to members awaiting the ir new homes and

prompt some to pull out \ If the project. To overcome

this feeling of delay, d ear guide lines should be established to keep members informed of progress as the

project moves toward completion.

KEY: Avoid Unrealistic Expectations

A group of people interested in a hou sing cooperetive can meet either at the invitation of the sponsor or

on their own initiative. The sponsor or technical adviser should present an overv iew of available housing

options, includ ing cooperatives. along with the realistic chances for participa ting in any of them.

Prospective residents shoul d be ve rsed in the benefits

and challenges of each option and in the process

req uired to carry ou t the option chosen. Taking the

time to provi de the initial overview can minimize

po tential d isappointments and unrealistic expectations

common during the planning and construction phases.

In add ition. pl anning for contingencies by build ing

flexibility into the p rocess effectively fosters more realistic expectations.

KEY: InsUIl Member Commitment

The suc cess of any type of coope rative depends

on the commitment of its members. Commitment is

the acceptance of a set of responsibilities necessary to

insure that the cooperative meets its objectives. As

owners, it is in the best in terests of members to su pport the cooperative through pa rticipa tion in the decision-making p rocesses, to abide by house rules, and to

provide financial support through timely payment of

carrying charges.

During the cooperative's developmen t pha se.

potential members are usually req uired to ehow their

commi tment by making a down payment or peying a

membership fee.

Managment and Operation

of the Cooperative

Occu pancy of the housing uni t brings the pl anning and developmen t phase to a d ose . A managemen t plan should be in place and d irectors should

have received adequ ate training. particul arly about

coope rative fina nces. buil ding operations. and memo

be r relations.

KEY: Roles and Responsibilitiesof Directors

and Managers

The board of directors ts the d em ocrancelly elected decision-making body of the cooperative assod etion. Boards vary in size bu t most have be tween six

and nine directors. Trad itionally. cooperatives require

th at all directors be membe rs of th e cooperative.

3
Howe ver, some sta tes allow housing cooperative

boards to inclu de ronmember d irectors who represent

the community, a sponsor group, etc.

The board set , the general policies of the cooperative. Unle ss the cooperative is self-managed, the

board is also responsible for hiring and overseeing the

pe rformance of a pecfessional manage r,Tht' manager

carries out the poltoes set by the board and hand les

the d ay-to-day bus-ness activities of the cooperative. rf

the cooperenve is se ll-mana ged, it is the board's

responsibility to hand le day-to-day management functions as explained in the next section.

Directors and managers must understand their

differing responsrb lilies. Oearly written policies. procedures. and job dcscrtp nons can help avoid confusion

and contlict over the di vision of responsibility.

While the boa rd of directors assumes most

responsibilities as a group, each d irecto r should know

what is requi red in contnb uting to boa rd decisionmaking, This ind u es:

• promoting tht· association's purpose and programs both in the cooperative and in the comma -

nity,.

• attendi ng the rssociation's meetings and events..

• pa rticipatin g actively in meetings and decisionmak ing..

• aski ng questic ns,

• keeping well-informed about what the orgeniaation does and 1 0 W, and.

• helping develop reso urces {i.e., increase membersh ip or fina nc ial resou rces).

Directors should take these individ ual responstbilities seriously. Tb,s helps avoid too large a workload

falling on a few direc tors. Directors who fail to be diligen t m their d uties 'et down the cooperative and the

membe rship whose Interests they were elected to represent.

KEY: Roles and Responsibilities In Sell·

Managed Housing

Smaller cooperatives with limited resources may

ope rate without a h.red manager. In small cooperative s of less than 20 units, for instance, complete selfmanagement by the association membership may be

feasible because of tne small size of the build ing to be

maintained and its simple r finances.

In self-managed housing, the board of d irecto rs and

various co mmittees assume responsibility for day-to--

day management ta sks such as bookkeeping and

building ma intenance. while the board may delegate

4

some tasks to committees, it maintains ultimate

responsibility. The board monitors the performance of

these functions by requiring tha t periodic reports from

committees assigned to carry ou t those functions.

In a self-ma naged cooperative, the re should be a clear

rotation or other system for assigning tasks so the

work is evenly divided among members. It is also

impo rtant tha t com mittee members receive some form

of recognition or cred it for carrying out their assigned

tasks. This helps instill a sense of accomplishment and

ap preciation. and provides an incentive for mem bers

to rem ain active and interested . Often, simply thanking committee members th rough the newsletter is

am ple recognition.

1n some cas-es, it may be appropriate to pro vide

finan cial incen tives or penalties fa ensure that members shoulde r their share of respo nsibility.Some cooperatives issue credits tha t red uce the mem bers' monthly payments. Others add penalty payments for

members who fail 10 pe rfo rm the ir assigned tasks. A

stay-at-home member may be assigned bookkeeping

tasks for which the cooperative will pay a small fee tu

su pplement a limited income. It shou ld be remembered, ho wever. that th e purpose of self-management

is to conserve finan cial resources. FinanCIal incentives

should be de termined accordi ngly.

Protnde sufficient education and training. Self-manage ment requires sufficient training and preparation.

Members should receive adequate instruction on bookkeeping and cooperative finance and become familiar

with the maintenance needs of buil dings and equipment, as well as basic grounds keeping requirements.

In ad d ition, members sho uld have a thorough understanding of their own roles and respons ibilities as well

as those of the board of directors.

whether a professional com pany is used or residents take on management tasks. responsibilities

shou ld be clearly outlined in the coope rative's operating policies. An annual contract between the board of

d irectors and the professional management company

should specify the manager's duties.

KEY: Operating Policies and Pracllces

While many issues surface in managing coopt'fatlve hou sing. some issues may be recu rring. To save

time and promote consistency, dear poli cies should be

developed on how to deal wi th the se matters. While

some of these rules may be includ ed in the bylaws,

usu ally th ey will appear as policies in the house policy

ma nual.

The purpose of house rules and policies is not to

put unnecessary burdens on individual members.
Rules and po licies create expecta tions of how the cooperative will consistentl y dea l with individual members

in certain situ ations. They replace arbitrary treatment

with due process. House poli cies need not be excessive

or inflexible. Because rrembcre set the rules for themselves, they are not like ly to impose unnecessary hard -

shtps or req uirements. bu t come to u nderstan d why

some policies are needed . House policies are enforced

consistently an d fairly.

What house policies cot'tr. Although the coopera·

live may decide wh at issues to include in its house

policies, several Import .mt areas should be covered

either in the bylaws or house policies. This includes

the responsibilities of the board of directors, its offtcers. and certain committees. Other topics include new

member selection, occu pancy restrictions, maintenance

req uirements, late payment of fees, resale of units,

supervision of children. garbage and trash disposal,

use of common areas and laundry facilities, parking,

insurance, and gro und,", fur eviction.

KEY: Maintenance Policies and Plans

Coo perative members want bu ildings, gro und s.

and equipment kep t in zocd repai r and maintained

attractively. Physical maintenance is important to

members' sense of well-being an d comfort and critical

to the fina ncial stability of the cooperative, The association's building and grounds are its primary assets.

Members' investments 10 these assets must be protected through a systemati c ap proach to repairs and fl"b'U ·

lar preventive ma inten an ce.

Two things contnbute to a cooperative's su ccess

in maintaining the physica l condition of its facilities:

(a) a long-term maintenanceplan th at budgets for

rep lacement of major it..ms. and (b) a regular ma intenance program to ensu re th at both regular and emergency maintenance are 'm ndled efficien tly and quickly,

Long-term meimcnnnce planning. A sound maintenance policy requires lc ng-term planning to decide

how an d when to replace heating. water, and electrical

sys tems when they wesr out. One suggestion is 10 use

a 5-year plan to torecas- what capital improvements

will be req uired in the fu ture . A comprehensive preventive maintenance <I t'd staged replacement plan is

essential (or a well-run coo perative.

Major replacements are best paid from reserve

funds that have been accumulated over a period of

years for that expfi>Ss p ..Irpose (see page 7). In some

cases, however, the coo perative may require outside

financing to cover ma jo r replacements or" in extreme

(and un popular) cases, 'nay have to collect an a5SeSS'­

ment" from members tc pay for the repair.

Rtgularly iichedultJ ml1mtt'uauce programs. The best

ma intenance p rograms provide for quick and effective

response to p roblem s as they arise and for regular pre·

venttve maintenance to minimize unanticipated

repairs.

The boa rd must assume ultimate responsibility

for the maintenance of the coo pe rative's p hysical facilities. In large cooperatives, the on-site manager oversees daily main tenance. For smaller coo pe ratives without a manager, the board can delegate some

responsibility in th is area to a committee tha t investiKates potential p roblems and suggests a co urse of

action.

No matter how responsablhties an d d uties are

d ivided, a p riority system should be put in place to

ensure th at emergency repairs are handled first, followed by those things da maging to the bu ilding.

Lowest priority is given to cosmetic repairs su ch as

painting and pa tching. A good tool to avoid a sudden

backlog of needed repairs is to su rvey the members

regularly on possible future repair needs in thei r unit9.

KEY: Fee Collectlon PoIlci••

Individual mo nthly carrymg charges or fees are

usually based on a member's equity or financial interest or on the size of unit occupied . The collectio ns policy should specify the schedule for payment, pena lties

for late paymen t, and procedures for collecti ng delinquent fees or initiating legal action . Occupancy by

individua l members is pro tected by a proprietary

lease. But, members are consi dered in violation of the

lease if the y fail to make payments. The lease should

include the legal remedies ava ilable to the cooperettve

to pursue payment and to evict the nonpaying member.

The most commo n collectio ns problem occu rs

wh en members have temporary financial d ifficulties

an d fall behind on payment of carrying charges. The

coo pe rative should have a procedure for assessing

interest or late charges in such situations and a

timetable to beg in legal action.

Some housing coo pera tives cu t down on delia -

quency rates for monthly assessments by assessing relatively hig h penalty charges. However, in a coo perelive with low -income residents, the collection policy

requires some flexibility to cover exten uating circumstances, How mu ch flexibility to allow, however, is a

tough balancing act because one must also consider

those members who make timely monthly payments.

5
KEY: Resale Policies

A housing cooperative has three basic objectives

in setting restriction s on resale: (1) ensure the continued financial stabilily of the cooperative by controlling

turnover; (2) ensu re that all debts are settled by th e

departing member; and (3) ensure that the new member moving in will be a positive addition to the cooperanve membership. limited-equity cooperatives have

an additional objective of ensuring future affordabilityo

Some cooperatives have an unrestricted rrsalepollcy tha t allows members to sell membership Interest

privately. The cooperative board of directors reta ins

only the right of approval or disapproval of the

prospective buyer. These "market rate" cooperatives

are most common In New York City and other urban

area s.

Cooperatives often retain a right offirst refusal.

Themember ma y privately, but the cooperative

retains the right to pur chase the membership at a

sched uled price, d etermined either by market value or

formula. U the cooperedve repurchases. it can select a

buyer. nus method is most common among limited -

equity and subsi dized coo pera tives.

Other coopcr edves have an automah'c rtpur, hast

policy. The coope r stlve automatically repurchases the

membership Inte rest from the d eparting member and

cond ucts its own search for a buyer. Man y subsidized

cooperatives use this approach. Although some cooperatives legally have only the right of first refusal, in

practice they exero se thai right with every sale.

Cooperatives may face financial jeopardy if member turnover is high , particularly during the first 2 or 3

years, when reserv es are still low. Consequently, some

coo peratives have prohibited resa les during the early

years, except in Col"l"S of death, mandatory job relocetion, or extreme personal financial hardship. Still other

coo pera tives have res ale rules that severely penalize

the ea rly seller, mu ch like a bank penalizes early withdrawal from lugh-vield accounts.

Cooperative Finances

The owner-u ser and owne r-controlled aspects of

cooperatives ha ve -pedel implicati ons for cooperett ve

financing thilt mll'" be understood if the- cooperative is

to be operated in the best Interest of members.

KEY: Cooperatlva Capitalization

Cooperative : apitalization includes financing

provided by outside sou rces such as banks, government loan programs, and other grants and assistance,

6

as well as the internal sou rces of funds from membership fees or stock purchases and monthly carrying

charges each member pays to occupy his or her home.

whatever the source, a cooperative's financia l wellbeing will only con tinue if a budget ing program is in

place that accounts for p robable revenues and expenses that will occu r during the coopera tive 's fiscal year.

fi nding outside funds, Housing cooperatives are

usually financed by a blanket mortgage on the entire

property, based on the value of the buildings. etc.

Sources of this external financing come from banks.

savings and loans, and Government programs at the

State and Federal level, Other potential sources

include foundation grants and rental subsidy p~

grams, A lack of funds from commercial banks has

been an obstacle for housing cooperati ves. Banks,

especially those ou tside areas where cooperettve housing is common, are often reluctant to finan ce cooperafive housing because they are not familiar with the

cooperative form of bu siness or the blanket mortgages

typically used to finance cooperatives, The sponsor

helping the cooperative often plays an important role

as an ad vocate and facilita tor in applying for flnancing.

Private foundations with gra nt programs and

community development agencies with seed money or

revolving fund programs can be sources of working

capital to rover pre-development costs while awaiting

Government or bank financing, In ad dition,. local

Spol15OfS can be encouraged to donate in-kind services.

Applyingfor 1000llS ilnd gw tts. There are several

things the prospective cooperative sh ould do to prepare its case for loan or grant approval. The basis o f

any proposal must include a solid business plan that

includes accurate p rojections of income and expenses

over the first several years, The busi ness plan also

includes a detailed explanation of the cooperative systern of management. Coo pe rative management has

two components: physical management of the building

and property, wh ich are the assets that secure the loan;

and fiscal management, wh ich includes a sound policy

of revenue collections, accounts management, and fiscal overview.

KEY: Internal Cooperative Finances

Internal finandng refers to member charges to

cover the coope rative's operating expenses once it is

operational. Member purchases of ownership shares

are the cooperative's initial so urce of intern al funds. In

market-rate cooperatives o r limited-equity cooperatives geared more toward moderate-income household s. residents mAy purchase their sh ares outright or
obtain share loans from outside lenders to obtain their

shares. In Iimtted-equ .eycooperatives geared more

toward a low-income aud ience, share prices are set at

an extremely low level to bring them wi thin rea ch of

prospective residents.

However, thr primary source of internal financing

is th e monthly carrying or occupancy charge paid by

each member. This monthly fee cove rs the cooperative 's operating costs, including mortgage payments,

taxes, maintenance, utilities, and insura nce as well as

contributions to the revme fund . This fun d is saved for

YOiriOUS contingencies such as an unexpected building

repa irs or a default by a member.

When occupanC) cha rges exceed expenses, these

savings are either retu rned to members as patronage

refunds or kept in th e cooperative as a source of capital, or both. Boards. members, and managers should

become familiar with the tax implications of this

aspect of cooperative finance.

KEY, Cooperative Budgeting

A bud get is a plan for the cooperative's expected

resources and expenduurcs over a given period.

Operating budgets are usually developed for a t -yeer

period, whi le capi tal budgets are more long-range.

Operating budgets Involve expenses normally

related to the dey-to-day operation of the cooperative.

Expenses typically tnc.uded in a housing cooperative's

operating budget are : repayment of debt, real estate

taxes, insurance. utilit.es, administra tive costs, manegement fees, il.' maintenance and repairs, security, and opereung rese rve funds set aside for emergencies such as higher fuel bills because of a very cold

winter.

Capital budgets deal with major expenditures

expected in the future" such as major replacements (for

example, roof or elev a -or) or for additions to the property (a new build ing. playground, etc.).

A housing coope rative's budget is developed by

its treasurer, the finance committee, the board and

manager, and sometin- es the entire membership.

Approval of a ccoperedve's annual budget usually

rests wi th the board 0 1 d irectors, although in some

cooperatives. members may approve the budget based

on a recommendation trom the board.

KEY, Fee Adjustment Policies

Developing BOunJ fee adjustment policies

involves realistic bud geting and a balance between

keeping members happy and ensuring the financial

soundness of the coope rative. No one likes a cost

increase and it is not uncommon for a board to

appease members by keeping month ly fees artificially

low. This is a dangerous precedent and sets the stage

Ior a much larger fee increase once it becomes apparent tha t the cooperative is underfinanced. To avoid

large fee increases, some cooperatives raise fees by a

small amount, 1 to 3 pe rcent each year. Others place a

cap on the amount fees may be raised each year.

Financial auditors ofte n recommend a minim um annual increase in fees to keep pace with inflation.

KEY: Reserve Funds

Once the cooperative is full y occupied and opera -

tional. it mu st begin accumulating sufftrient reserves

to take care of contingencies. Unexpected breakdown

of equipment, uninsured prope rty losses, a sudden

increase in the property tax bill-all lead to expenses

tor which cas h reserves are nee ded. Sound financia l

planning calls for adequate financial reserves to be

built up year by year, so that ail> a bu ilding's plumbing..

roof" or othe r systems wear out, the cooperative can

afford to replace them.

One attribute of a welt-managed cooperative Ie

the willingness to maintain a high enough level of

monthly fees so that a sufficient amount can be allocated.for reserve funds. Reserves are bu ilt u p through

planned con tributions based on the operating bu dget

A good. rule of thumb is to establish a policy tha t provides for a percentage of th e monthly carrying charge

to be ap plied to the reserve account. Local property

management specialists, aud itors, or the cooperative's

lender can provide useful information on the appro priate level of rese rves.

Some cooperatives may resort to cutting operating costs by red ucing or eliminating regular contributions to reserve accounts.The Simple answer to this is

"don't." If money is so tight th at a cooperative cannot

afford opera ting reserves and rep lacement reserves,

then it wUl certainly not be able to affor d those unpred ictable and e xtraord inary exppnses that a re bound to

happen a few years down the road. The effort expended by members in establishing the coope rative should

not go to wa ste because one failed boiler, one leaking

roof, or a similar emergency forces the cooperative into

default or forces members to pay expensive "assessments" to cover the costs of repairs.

7
Cooperative Membership

KEY: Keep Cooperative Members

Involved and Informed

The Involvem ent of members does not end with

the development process. Members have both a. right

and a responsibility to be informed about and

involved in the operation of their coope rative.

Solicit input. Although d irectors ha ve the euthortty to make many decisions on behalf of the members

who elected th em. they should not act au tonomously

Directors should w .nk with members in developing a

consensus or vision on how the cooperative is 10 be

run. This contributes to the education and general

awareness of all members as to how the cooperative is

operated . Directors might solici t input from members

when developing budgets; wh en assessing the condition and maintenance needs of build ing and grounds;

and when ol dtin participation in committee essignments. By add ressing these questions, the cooperative

is spurred to develop dearer goals and objectives.

which mayor may oot be formalized in the bylaws or

house policies. This d ialogue between mernbr..rs and

the board should be repea ted occasionally so tha t th e

cooperative can evolve and continue to be responsive

as the needs of its members change.

Communicate. It is important that cooperative

boards maintain a two-way channel of communications with members. A cooperative's bylaws usually

obligate the board of directors to mee t regularly (usually monthly); to notify all members well before the

meetings; and to conduct an open me-eting at whi ch

cooperative members can attend and be heard. Tlme

should be allotted a t me-etings for member concerns.

The bylaws ehouId also require that minutes be kept

and distributed to all members.

In add ition, many cooperati ves have a monthly

newsletter that keeps members informed of what is

happening in their comm uni ty. A newsletter is a good

vehicle for d istribu>ing board meeting minutes and

announcing elections. volunteer opportunities and

social even ts. and oifering friendly reminders about

following house ru k~

Use Commntres. Cooperative boards of d irectors

are often assisted In the association's operation by

committees. Comm ittees are made up of cooperative

members and may lr may not include a board mernber.

Cooperatives Ttay have to overcome initial apathy to get members involved in committee work. As

with the board of d.rectors, there is a danger of much

,

of the workload fallin g on .,1 few individ uals. However,

all members should be encouraged to get Involved.

because committees are a good way to get members

active and interested in the operation of the cooperative. Comm ittees encourage members to interact. This

provid es a framework for interd ependence and mutual

su pport, and a wa y to poo l the resources of members.

Further, committee work provides members th e opportunity to work together to achieve solutions directly

affecting their living sit ua tions. It also can be personally rewarding and a good training ground for future

directors.

Self-managed cooperatives are likely to rely more

heavily on committees. These committees usuaUy have

responsibility for some or alt of the following functions

or tasks: member communicat ions, maintenance and

groundskeeping, finance, and social activities.

Committees in cooperatives having professiona l ma nagement might be res ponsible for developing rules

and regulations or for evaluating certain projects such

as the need for pl ayground equipment or add itional

parking spaces.

Selection for committee assignments can be based

on random allocation, rotation, or job-specific reason...,

The last method is probably the best option because

members are more likely to voluntee r for jobs in wh ich

they have a talent or Special interest-for example, carpentry or landscaping.

KEY: Member Education Is Critical

Another prerequisite for a success ful coope rative

is tha t members and directors receive adequate trainlog. The process of developing and ope rating a cooperative can be complex and in and of itself educates

members. Finance (annual audits, monthly financia l

statements, finance me chanisms for housing); manage·

ment (parliamentary procedure. personnel matters);

and the philosophies of cooperation are bu t a few

area s in which members should have some knowledge. Training programs must also make members

aware of their rights. responsibiliti es. and obligations

within the cooperative organization as expressed in

the articles, bylaw s, and house policies.

Cooperative sponsors should take the lead in

arranging suitable education and training for cooperative members. During the development or conversion

process, prospective members can learn about building

systems or key clements of the operating budget as the

sponsor puts the loan package together. as well as

about the cooperati ve's legal structu re as the bylaws

are drafted .
•

Aft er the development phase, residen ts (especially

board and committee members)sh ould continue 10

receive training. Futu re board members should be

schooled in the scope ..,f their d u ties in managing the

cooperative, delegati o" IIIau thority, and the types of

decisions that will be required in regarding bu ilding

management and maintenance, fina ncial oversight.

and membership ma tters. Education and training

should continue as an .mgotng process even after the

members move into the coo perative. Formal instruction may be coupled v. ith inform ation provided

through the coo perative newsletter.

Ongoing training mus t be built into the cooperative's operating budget and can be obtained through

the cooperative 's pe rn cr patton in local, regional, or

national cooperative housing association meetings and

seminars, as well as trom other sources.

Mrmw oritntafIO'I. Some cooperatives have a prepu rchase orientation meeting for prospective members. The particular aspects of cooperatives (both positive and negative) are reviewed &0 th o1t prospective

members will have an understend tng of both the

responsibilities dod ad van tages that come with living

in a coope rative.

For the existing cooperat ive that has to orient

only a few new membe rs at a time. it makes sense to

wo rk the orientation In to the coopera tive's regularly

sched uled business en .Isocial events. One California

cooperative reported that it has regular potluck dinners for its 25 members on the first Sunday of ea ch

month, after which the membership meeting is held .

When there a re new members, they begin an orientation session in the afte rnoon. and then they are forma lly introduced to the membership at the potluck dinner.

Member handbook. Prepare a manual that includes

the articles. bylaws. and house policies for easy access

and reference by members. Another handout should

be prepared that summarizes the key byla ws. rules

and other policies in a '[UestionJ answer format.

Newsletter. Contir uing education can also be

accomplished indirectl y through appropriate arti cles

in the cooperative's newsletter, A newsletter is also a

good place to note recent actions by the board, the

quarterly summary o f -inancial condition. schedule of

committee meetings ar-d assignments, and other he lpful informa tion on such things as preventive maintenance.

Newslett ers arc o rten the primary me ans of communicating with meml-eers. It is a W dY to keep the assodation's mission. visio n, and va lues out front. For

coo peratives too sm all to have a ",gular news letter.

ed ucational m... terial end newsletters can be obtained

from na tional or regional housing coo pera tive crganiza tiuns.

blferact witll other housing C'OiII1rratit'es. Make contacts with other hou sing cooperatives in the area to

excha nge information on mutual interests and problems. Consider forming a local cooperative council.

Also consider joining regi onal or na tional trade associations representing housing coope ratives to take

ad vantage of the va rious educational resources they

offer.

Trainers toithin the cooperative. In one large cooperative. the management staff doubles 8 S cooperative

trainers. using all public meetings as a forum for providing instruction on cooperatives. In a small cooperative. the board could delegate a similar role to the education committee to plan events th'd include both

training and social activities.

Survey membtrs, Members may take the initiative

to let the board know what they think about the cooperative. However, a survey can mo re effectively enlist

opinions from aU members. Surveys should be done in

such a wa y to encourage feedback about member

needs and interests . It can also be a way to learn what

aspects of the cooperative the members do not fully

understand and. therefore, need further education on,

Social. Provide opportunities for members to

interact in a relaxed atmosphere by scheduling sodal

activities such as picnics. barbecue. or holiday parties.

Bringing members together tor social events helps CTt'-

ate a strong sense of community. From this face-to-face

communication. board members can learn what memhers expect of the cooperative, and members can get to

know their elected representatives.

Conclus ion

Housing cooperatives offer a viable alternative to

some of the housing problems faced by rural residents.

including low-Income families, Though they require a

significant commitment from members. cooperatives

are one solution to the need for afford able housing and

a livin g en vironment tailored to meet members' needs

and interests,

These key p ractices and philosophies can facilitare the successful planning. development. and operation of a housing cooperat ive, but only if accompanied

by a high level of member commitment and a willin gne ss to be Flexible , A key facto r in helping members

understand th is is early ed ucation. Once members better appreciate the process and what results it can

•
achieve. they will finJ that the commitments associated with living in coo perative housing can actually be a.

source of self-satisfaction and rewa rd.

\0
Other Sources of Information About Cooperative Housing

National Association ot Housing Cooperatives

1707 H Street, NW Suite 201

VVastungton, EX: 20006

202/ 737-0797

www.eecphoustng.org

National Coopera tive Bank

1ns Eye Street NW, Suite 600

Washington. DC 20006

202/336-7700 800/ 955·% 12

wwwncb.coop

National Cooperative Bu siness Association

1401 New York Avenue r... W. Suite 1100

Washington, DC 20005

202/ 638-6222

www.ncba.org

NCB Development Ccrporetton

1401 Eye Street. NW Sui te 700

Washington, DC 20005

202/336-7700 800/955-9<22

www.ncbdc.coo p

NC8 Savings Ban k

139 South High Street

Hillsboro, OH 45133

513/393-4246

Senior Cooperative Development Network

NCB Development Ccrpceanon

15 Sou th 5th Street, ' 720

Minneapolis, MN 55402

612/ 33B-2m

wwweenlcrcccpnet.crg

U.S. Departme nt of Agriculture

Rural Developme nt

Coope ratives Program

1400 Independence Avenue SW

Washington. DC 20250

202/nO-7558

www.rurdev.usda.gov/rbs/coop!l

u.s. Department of Agriculture

Rural Deve lopment

Housing Programs

1400 Independence Avenue, SW

Washington, DC 20250

202/no-4323

www.rurdev.usda.gov/rh s

u.s.Department of Housing and Urban Development

451 7th Street, SW

Wash ington, DC 20410

Telephone; (202) 70S· Il 12

http://www.hud.gov/officeslhsglrnfhlprogdesclcoop2

13.cfm

Uni versity of Wisconsin Center for Coopera tives

427 Lorch St.

Madison, WI 53706

www.wisc.ed wuwcc

II
References

National Coopeeett ve Business Association. CoopcrJlt;w

Housing: A CKrc lo,' m~n Primer, Washington. D.C

U.S. Department of Agriculture, Agricultural

Cooperative Serv ice. How to Start II Cooperative.

Cooperative Inft rma tio n Report 7. revised

September 1993

u.s.Department of Agriculture. Farmers Home

Administration. A Guidt to CooptTQtivt Housing,

Program Aid I\'Lmber 1m . September 1992

Eden, Ernie. HOllsi,; CooptrativtS. How Lorlll Officiols

u n Hdp. Natior al Association ofHousing

Cooperatives

Coughlan Jr.. William and Monte Franke. (",oing Co-op:

1M Complrlt Gultlt to Buying and Owning Yonr Ott'7f

Aparfmtnt. Beacon Press. Boston. MA. 1983

12
u.s. Depart men t ofAgriculture

Rural Bustnees-Coopeeattve Service

Stop 3250

w aatungtcn, D.C. l 025O-325 0

Rural Bustness- ; uoperati ve Service (RBS} provides research,

management. anJ educational assistance to eocperauves to

strengthen the e.oacrnic positinn of Iarmers and other rural

Tt"l'identa. It wnf U directly with cooperative leaders and

Federal do d Stdl e "'Jo:cncil;."s to improve organization.

leadership . and t peration ofCOOpt'nl.li\'t'!l and to givp guidam't'

to further dev eloornent.

The cooperative -egmem of RBS IlJ helps farmers and othe r

rural res tdee te d evelop ccopeeauves to obtain supplies and

services at IOW('f ('()lII and to get better- prices for products they

se ll: 12l advises rura l restdems on developing existing

resoueees ro 'l eeoperauve action to en ha nce rural living:

(3 ) helps coopere av ee imp rove services a nd operating

effic ieney: 14) illl .Im " membe rs, directors, employees, a nd the

public on how coorerenvca work and benefit their members

a nd t heir comrm mties: and (5 1encourages inte rnati onal

cooperative prog-ems. RBS also pub lishes research and

educuuon al mats- r.als a nd Issues Rural Cooperatioes magaz ine.

The U.S . Depart men t of Agril.'ultun.' {USDA) prohibits

dtscri mtnauon it, all t~ progra ms and ac tivities on the basis uf

t-aee, color, na uo oul origin , gender, rehgi cn , age, disability ,

political bdi l' o-xual orientat ion, and ma rital or fa mily

stat us. (Nut all j rohi bited bases apply to all programs.I

Persons with di;' l lo ilitic8 who requi re a lte rnative mean ... for

commurncetron , f program information Ibraille, larg e print .

audiotape, etc .t e.hculd contact USDA's TARGET Center at

(202) 7'lo-2600 -olce and TDDI.

To file a complar'11of discrimi nation, write USDA. Director,

OffiCt' of Civil Rl,zhts, Room 326-W, Whitten Building, 14t h and

Indepe ndence t\ -e-nue, SW, Wash ington. D.C. 20'250-94 10 or

ca ll (202 ) 720-fi~~ (\-oice nf 'rno). USDA is an f'Qllitl

opportunity pro"idt.r and employer.