You wanted to know if the state could do more to help developers build cooperative housing and individuals buy into this type of housing.

SUMMARY

We cannot say if the state needs to do more to promote cooperative housing. Connecticut has relatively few cooperatives, and there does not appear to be a strong demand for this type of housing. This appears to be true despite the fact that the federal government runs programs to help developers and individuals obtain financing to develop and buy cooperative housing.

The state runs programs providing financial assistance to cooperative housing developers, but none aimed specifically at helping individuals buy into cooperatives. The state also runs a program that finances home mortgages for first-time homebuyers, but it is not certain if it could readily be adapted to help individuals buy into cooperatives given the peculiar nature of cooperative ownership.

Unlike condominium owners, cooperative members do not individually own the units they occupy. Instead, they own shares that entitle them to occupy their units. Mortgages are designed for borrowers who own the

property, which lenders can take if the borrower defaults. Since coop units are owned collectively by the cooperative, lenders must find another way to secure the loan. Some out-of-state banks, for example, accept the shares as collateral for the loans.

The Connecticut Housing Finance Authority (CHFA) identified several barriers preventing it or private lenders from providing loans to people who want to buy into a cooperative (see Attachment 1). After surveying many lenders, CHFA found that none generally make loans for this purpose, a fact that it attributed to the small number of cooperatives in this state. And, because there are so few cooperatives here, only a few Connecticut lawyers are experienced in structuring a closing for cooperative loans. Another barrier CHFA identified is the lack of government and private mortgage insurance.

Before the state expands or modifies its programs, it might identify reasons why there appears to be little demand for cooperative housing and determine whether and how this type of housing could serve the state's affordable housing goals.

DEMAND FOR COOPERATIVE HOUSING

It is not clear, based on conversations with housing experts, if the state needs to do more to promote and support cooperative housing development. We are still waiting to hear from other experts and may revise this memo based on their observations.

Connecticut has fewer than 1,200 cooperative units, Robert Kantor, the director of Fannie Mae's Hartford Partnership Office, estimated. Over the last five years, banks have made fewer than 100 loans to people who want to live in cooperatives, he also estimated.

At this point, we can only speculate as to why there are relatively few cooperatives in Connecticut. People may not know about cooperative housing or, if they do, prefer other types. As discussed below, state and federal government programs assist cooperative housing developers and individuals, but whether and how the state should do more to promote this type of housing depends partly on the answers to these questions.

CURRENT COOPERATIVE ASSISTANCE PROGRAMS

State

Development. The state mostly provides financing for cooperative housing developers. The Department of Economic and Community Development (DECD) can finance limited equity cooperatives under a multi-purpose bond authorization. As discussed below, these types of cooperatives operate under rules that keep the units affordable to low- and moderate-income people when they become available to new members.

The CHFA has found a way to assist sponsors developing limited equity housing projects by using federal tax credits intended for low-income rental housing. It does this by allocating credits to rental housing projects that will covert to cooperative ownership after 15 years, which is the period during which federal law requires the developer to operate the project as rental housing.

Purchase. CHFA sells federal-tax exempt bonds to finance mortgages for first-time homebuyers and loans to developers for developing low-and moderate-income rental housing. States can use the bond proceeds to help individuals buy into cooperatives, the National Cooperative Bank's vice president for cooperative development, Terry Lewis, stated, but most seem to be unaware of this option, he added.

But other factors unrelated to federal law could make it difficult for CHFA to use the bonds for this purpose. These include the lack of government and private mortgage insurance for cooperative loans, few attorneys who know how to close them, and few lenders who willing to originate them.

DECD does not run a program geared specifically to help people obtain cooperative housing. But it could use federal HOME funds for this purpose, DECD housing administrator Mike Santoro stated.

Federal

The federal government also provides financial assistance for developers who build cooperatives and individuals who buy into these federally assisted projects. The U. S. Department of Housing and Urban Development (HUD) insures loans banks make to cooperative housing developers under the Sections 213 and 221 programs. And, under its Section 203(n) program, it insures loans banks make to individuals to obtain units in these federally insured projects. Housing authorities and welfare agencies can use Section 8 rent subsidies and Temporary Assistance for Needy Families funds, respectively, to help people obtain cooperative housing, Douglas M. Kleine, executive director of the National Association of Housing Cooperatives, stated.

COOP ISSUES

Most state housing policies and programs aim to increase homeownership or make rental housing more affordable to low- and moderate-income people. Crafting a state policy to promote cooperative housing should recognize the fact that this type of housing involves a form of ownership that falls somewhere in between owning a condominium and renting an apartment. For this reason, cooperative ownership may require a different approach.

What is Different About Cooperatives?

Members of a cooperative do not own the units they occupy. Instead, they own shares in an organization that collectively owns all the units. A cooperative developer initially owns the project and then sells shares to people, who in turn receive a lease from the cooperative entitling them to occupy a unit, subject to cooperative's rules. Besides purchasing the shares, the members pay a monthly fee, which covers property maintenance costs and a pro rata share of the mortgage the developer obtained to develop the cooperative.

Are Coops More Affordable than Other Types of Housing?

The answer depends on the type of coop. Market rate coops operate under rules that allow shareholders to sell their shares for what the market will bear. As with single-family homes and condominiums, location, condition, amenities, and other factors affect share prices. Shares for market rate units in Connecticut range from $ 30,000 to $ 40,000, Betsy Crum, executive director of Co-op Initiatives, Inc. , speculated. The National Co-op Bank in New York offers minimum $ 25,000 loans for this purpose.

Shares in a limited equity cooperatives cost less, since their rules explicitly limit the extent to which a member can profit when he sells his share. For this reason, limited equity cooperatives are generally regarded as a source of permanent housing for low- and moderate-income people. Buying a share in a state-funded limited equity cooperative costs between $ 500 and $ 1,000. These cooperatives allow buyers to cover some of the cost by contributing their sweat equity.

While low- and moderate-income people may be able to afford shares in a limited equity cooperative, they may not have enough income to cover the cooperative's monthly fees. We have no data on the extent to which cooperatives reject applicants because they have insufficient income. The turnover in DECD-funded limited equity cooperatives is low, Santoro stated. This fact makes it difficult to determine if the monthly fees are unaffordable to low- and moderate-income people.

Unlike tenants in an apartment building, the members of a cooperative are expected to help manage it. But, unlike condominium owners, the shareholders do not have final say as to whom they can sell their shares; the cooperative's board of directors must approve each sale.

Does Cooperative Ownership Discourage Private Financing?

Not necessarily. The fact that cooperatives are common in big cities suggests that lenders have designed products for developers and shareholders. As stated above, the federal government provides mortgage insurance for developers and the people who buy into their projects.

But lenders in areas where there are few cooperatives may not have had the opportunity to access this insurance and develop expertise in lending money to developers or individuals. Unlike mortgages, which are secured by the property, loans to buy shares in a cooperative (i. e. , share loans) are backed by the shares. For this reason, banks may charge higher interest rates than they normally charges for mortgages.

Should the State Promote Cooperative Housing?

The answer depends on a couple of factors, including the demand for this type of housing. There does not appear to be a strong demand for market rate or limited equity cooperatives in Connecticut. The state could research why cooperatives are popular in certain parts of the country and determine if those conditions are present in Connecticut.

Most state programs target low- and moderate-income people. For this reason, the state might compare the costs and benefits of limited equity cooperatives with other forms of state-funded housing. Clearly, these cooperatives are generally affordable to low- and moderate-income people and give them some of the tax advantages enjoyed by conventional homeowners. Since many cooperatives expect their members to help manage and maintain property, the state may have to provide training and technical assistance as well as financing.

Attachment 1: March 19, 2002 CHFA memo regarding Coop Lending by Louis L. Bolella, jr. , Manager, Residential Mortgage Underwriting

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