The Limited Equity Cooperative: An Economic and Social Solution to Affordable Housing Crises

March 26, 2019 by Benjamin Kamelhar

by Niko Papoutsis

Whether marked by rosebushes and a picket fence or penthouse perks and lofty views of Manhattan, equity home ownership has been and continues to be romanticized in our society as a symbol of personal success, security, and the American dream. This was certainly the case in my own family’s history. When my grandparents arrived from Greece in the 1950s as ambitious immigrants, purchasing a single-family home—in its most basic fee simple form—was always at the forefront on their list of priorities. Through hard work, they soon accomplished the task and bought a home in the modest suburbs of Waynesboro, Pennsylvania. The house was theirs. It reinforced notions of self-worth and motivated future successes. It was where they raised, educated, and protected their children. It was a space to cultivate friendships and a constant base from which they civically supported and socially engaged in the community. It was a powerful ally with which they navigated life’s developments.

Equity interests aside, the level of stability of one’s housing provides an essential foundation for economic, social, physical, and mental well-being.[1] Stability, however, is a luxury that a significant portion of the American population does not enjoy. Rapid increases in the cost of living stemming from the gentrified redevelopment of urban spaces have generated rampant displacement among the subset of the population positioned on the lower rungs of the socioeconomic ladder.[2] In the midst of such chaotic housing uncertainty, it seems absurd to suggest that even low-income individuals should continue to strive for equity and the benefits that equity ownership entails when they have such difficulty consistently maintaining a place to call home. Under the traditional equity model of fee simple ownership, this conclusion would be correct. However, there exists an underutilized tool through which low-income members of society can enjoy many of the benefits associated with equity ownership while also retaining affordability and long-run guarantees of ownership: the limited equity cooperative (LEC).

LECs provide a viable economic solution to combat affordable housing crises and, simultaneously, foster a host of non-economic benefits that can work to catalyze the social and economic growth of their low-income residents. Legally, the LEC is a corporate entity; an initial developer—typically a non-profit organization but occasionally a group of the residents themselves— that takes responsibility for establishing the corporation and securing a blanket mortgage to purchase a building in the name of the corporation.[3] Residents then buy equity shares in the cooperative and democratically manage the building through a set of corporate bylaws and an active, democratically-elected board of directors.[4] Equity is “limited” in that each shareholder-resident, if and when she decides to leave the cooperative, is entitled to resell her shares back to the cooperative for the initial price paid—formulaically adjusted for inflation—plus some additional allowances up to a certain amount listed in the bylaws for improvements made to the unit during occupancy.[5] Depending on the specific cooperative and its unique set of bylaws, residents might also be entitled to a very small percentage of the actual equity appreciation of the unit at resale. In either scenario, “the owner does not get the economic benefit of appreciation but only a simulacrum.”[6] Nonetheless, limited equity provides cooperative members with a number of equity-based housing rights without the heightened risks and prohibitively expensive costs associated with full equity ownership. More importantly, this hard limit on equity appreciation is absolutely essential for maintaining the affordability of the units for future generations of residents.

Economic viability of the cooperative is bolstered by the nature of financing the project through a blanket mortgage. Financial liability is diffused among all of the cooperative’s members, thus minimizing the overall risk of default and securing financing for individuals who could not do so otherwise due to income and credit deficiencies.[7] If, for instance, two members of a twenty-person cooperative were both out of work for the same two-month period, the remaining eighteen residents could absorb that financial burden and continue making timely payments to the lender. The LEC’s ongoing economic feasibility depends on the ability of its residents to pay monthly fees called carrying charges. Carrying charges cover the blanket mortgage, maintenance expenses, and property taxes, and any excess funds become reserves that the cooperative will use for renovations or unexpected expenses.[8] Like the initial share price, carrying charges are also comparatively far more affordable than renting or purchasing in fee simple. In 2011, average monthly rent in Washington, D.C. was $1,461 while average carrying costs in the District’s limited equity cooperatives was only $759.[9] This drastic decrease in housing costs could potentially enable residents to pursue a degree, invest more in their children’s development, or simply build savings for retirement.

The non-economic advantages of the LEC are myriad and stem from three overarching characteristics inherent in the model: stability, autonomy, and engagement. Residents—many of whom have experienced the financial and emotional stresses of displacement in the past—find reprieve in the permanence of their dwellings. All shareholders are granted the exclusive right to occupy a particular dwelling unit in perpetuity, subject to the cooperative’s bylaws and occupancy agreements. Moreover, residents are able to convey their equity shares to their heirs just like in a fee simple scenario. LECs not only provide stable living for their residents, but they also endow the benefit of individual decision-making and collective governance that mirror the freedoms of full equity ownership. Rather than living at the mercy of egregious landlords, cooperative members enjoy individual control over their units and democratic control over the building.[12] For example, residents can customize their units according to their liking, meet to plan social events or discuss the safety of the community, and work quickly to address broken appliances or leaky pipes through the board of directors.[13] This dual autonomy has serious potential to increase each resident’s self-esteem, personal investment, and participation in the greater community. The cooperative model creates a natural incentive to take greater pride in one’s self as well as the collective, whereby each member feels of the community and not merely in the community.

In summary, the LEC provides compelling justifications, economic and otherwise, for its use as a tool to create new affordable housing stock in cities with a desperate need for it. The model is unique in that it provides some benefits of equity ownership—nominal appreciation, ample resident freedom, and stability—while maintaining affordability for low-income individuals by divvying-up financial risk and formulaically restricting resale values. Not surprisingly, more widespread use of the LEC seems to be hindered by prohibitively expensive development costs; real estate prices in areas where gentrification is prominent and affordable housing is scarce are exorbitant, making it difficult to find sufficient numbers of  investors willing to purchase, renovate, or build a multi-unit building for LEC use.[14]

 

 

[1] J. Peter Byrne & Michael Diamond, Affordable Housing, Land Tenure, and Urban

Policy: The Matrix Revealed, 34 Fordham Urb. L. J. 527, 528 (2007).

 

[2] Katherine Hannah, Carrying Out the Promise: How Shared Equity Models Can Save Affordable Housing, 23 Geo. J. on Poverty L. & Pol’y 521, 521-22 (2016).

 

[3] Julie D. Lawton, Limited Equity Cooperatives: The Non-Economic Value of Homeownership, 43 Wash. U. J. L. & Pol’y 187, 204 (2014).

 

[4] Hannah, supra note 2, at 540.

 

[5] Duncan Kennedy, The Limited Equity Coop as a Vehicle for Affordable Housing in a Race and Class Divided Society, 46 How. L. J 85, 87 (2002).

 

[6] Byrne and Diamond, supra note 1, at 548.

 

[7] Lawton, supra note 3, at 204.

 

[8] Kennedy, supra note 5, at 97.

 

[9] Amanda Huron, Creating a Commons in the Capital: The Emergence of Limited-Equity Housing Cooperatives in Washington, D.C., 26 Washington History 57 (2014).

 

[10] northcountry cooperative foundation, Cooperative Housing Toolbox: A Practical Guide for Cooperative Success 6-8 (2003). https://www.cccd.coop/sites/default/files/resources/HousingToolbox.pdf

 

[11] Amanda Huron, Carving Out the Commons: Tenant Organizing and Housing Cooperatives in Washington, D.C. 103-04 (2018).

 

[12] Kennedy, supra note 5, at 91-92.

 

[13] Huron, supra note 11, at 100.

 

[14] Hannah, supra note 2, at 537-38.