How Did the Co-op Come into Existence in the First Place?
Before discussing the operational nuts and bolts of a New York cooperative corporation (usually called a “co-op”), the question has to get asked, where did the cooperative come from in the first place? Although there are buildings in Manhattan that were constructed as co-ops from the get go, most co-ops came into existence by a developer or “sponsor” converting the operational structure of the building from a rental property to cooperative entity, that is a corporation, formed under the New York Business Corporation Law. That intended conversion required the sponsor to file an “Offering Plan” with the New York State Attorney General’s office describing the salient details and terms of the offering, which at least, theoretically, disclosed all the relevant facts about the conversion. At some point after the sponsor sells a sufficient number of apartments to “declare the Plan effective”, the sponsor will transfer (sell) the property to a coopertive corporation, which the sponsor has formed by filing a Certificate of Incorporation with the New York Department of State, in anticipation of declaring the Plan effective. In fact, what is being sold to each purchaser are the shares allocated to a particular apartment, as the purchase of a co-op is actually the purchase of shares in the cooperative corporation, not the purchase of apartment itself (which is the case with a condo). Once the sponsor transfers ownership of the property to the co-op, the co-op will take ownership of the property and will commence operating the building.
Once the co-op comes into existence, it is then free to conduct its business as a separate legal entity. Similarly, that co-op, as provided in the Business Corporation Law, will be governed by its Board of Directors, who are elected by the shareholders. That being said, when a co-op is first converted to cooperative ownership, the sponsor will “control” the Board of Directors, until a sufficient number of apartments are sold. Once that happens, the sponsor gives up control of the Board and the shareholders will then take over management of the building. As the current co-op housing stock is aging and since very few new co-op plans are filed with the Attorney General’s office, most co-ops are no longer controlled by a sponsor, even though a number of co-ops still have apartments owned by a sponsor or by a transferee of a sponsor (usually called a “holder of unsold shares”). For my purposes, I will assume that the co-op is no longer controlled by the sponsor.
When the corporation is formed, the initial Board of Directors (comprised of the sponsor and the sponsor’s designees) will adopt "by-laws" which are the rules of governance by which the corporation figures out how to elect officers and directors and issue stock among other things. The by-laws are the foundation upon which the corporation stands and serves as the framework for all major actions by the corporation. Once the cooperative takes control from the Sponsor, the by-laws are often amended or even restated in their entirety to better serve the needs of the co-op and its shareholders.
The Board of Directors
Although the by-laws establish the operational structure for the corporation, the Board of Directors (whose number is designated in the by-laws) is the body charged with making the day-to-day decisions for the management of the corporation. Once the sponsor loses or gives up control of the Board, the persons who are thereafter elected by the shareholders to govern the co-op have great power over you and over the operation of the co-op. It is New York lore, that some buildings have "difficult boards" and some buildings have less difficult or "easy" boards. A difficult board means it's chock full of bean counters, people who got picked on in junior high or people who just take the process of managing their building just a little too seriously. An easy Board might not take matters seriously enough. There are also buildings that have a reputation of having a "great" Board. Those are the buildings that have an attentive Board, where the Board members actually serve the best interests of their shareholders, that is, you.
Officers are appointed by the Board to carry out the decisions of the Board. For example, if the Board voted to open a bank account, the officers of the corporation (e.g., the president or a vice president) would be the parties who actually went about the business of opening the account at the bank. Directors and officers are not always the same parties. With institutional corporations such as IBM or General Motors that have hundreds of officers, few of them other than the president or chairman are on the Board. With co-ops, however, the directors and officers are often the same people. You'll often hear someone refer to the "President of the Board" of a particular co-op. That generally refers to someone who is the president of the co-op, but is also on the Board. That individual is usually viewed as the co-op's leader during his or her term in office, but again, all decisions would be made by the Board as a group, not by one individual. In some buildings, you will find that the same person has been president for years or the same people have been on the Board for years. In those situations, a small group of people will be in control of the building, and an individual shareholder has very little chance of shifting building policy. In most co-ops (and condos) the day-to-day management of the building is handled by the "Managing Agent", so the officers don't really do much more than the Board does. Boards often have committees, however, and Board members and officers do get involved in many issues such as approval of prospective purchasers and sublessees; lobby and hallway renovations; interviewing architects, engineers, accountants, lawyers and other professionals to represent the building; oversee construction and building-wide repairs; handle financial matters; attend to building-wide landscaping matters; and resolve disputes among shareholders.
The Proprietary Lease
The by-laws may be the foundation upon which the co-op operates, but the proprietary lease is the mother of all co-op documents. This document is a "lease" executed between the co-op and a shareholder with respect to the particular apartment that the shareholder will inhabit. This document governs all aspects of the relationship between co-op and its shareholders. As I discuss in "The Great Co-op Secret", the relationship between the co-op and the shareholder is that of landlord and tenant. Why is the proprietary lease so important? There are a myriad of issues that the proprietary lease governs, Some examples: a shareholder's right to sublet his or her apartment or assign (that is, sell) the shares; a shareholder's right to mortgage; who may lawfully occupy the apartment; what constitutes a default by a shareholder under the proprietary lease; the co-op's right to terminate the lease; who is responsible for maintenance and repair of a unit; the right to impose monthly maintenance charges; and numerous other issues that impact your ownership of your apartment. Older proprietary leases, let's say more than 25 years old, can be inadequately drafted, so that many unanticipated issues that now confront a co-op are not addressed in the lease. More recently drafted leases attempt to resolve some of the trouble spots, but it is difficult to solve all human interactions in a document. The best example of this problem relates to the individual owner's obligation to make repairs. The general rule used to be that everything from the walls into the infrastructure of the building was the co-op's problem, and everything from the walls into the owner's apartment was the responsibility of the apartment owner. This general rule can be difficult to apply: Let's say that a pipe bursts inside a wall. Generally, it's the co-op's responsibility to open the wall, fix the pipe and close the wall. Most co-ops will not take responsibility for repairing or replacing the wall covering or for repainting. The co-op will only return the wall to a "paintable" surface. If you have expensive wallpaper on that wall, it could get costly to replace or match something that's five years old. According to most proprietary leases, or the interpretation of same, that's not the co-op's problem. Another repair that causes great misery is a defective "shower pan". Each shower has a rubber membrane underneath the tile floor of the shower that insures that the water goes down the drain and not into your neighbor’s below. Sometimes these pans are defective or outlive their useful life. That requires the shower floor to be opened up and the shower pan replaced. I've seen a co-op argue that replacement of the shower pan is the shareholder's responsibility. Many times the co-op will tell the shareholder to look to the prior owner for the faulty construction or system failure, but in almost all cases, the prior owner’s responsibility ended with the closing.
Rules and Regulations
Every cooperative corporation also adopts rules and regulations to address general rules of behavior and life-style issues. The rules are usually found at the end of the proprietary lease. Rules usually dictate how late musical instruments can be played, where to store baby carriages, garbage disposal, deliveries and similar issues. The rules can also address the owner's right to have a pet, using an apartment as a home office, how long a guest may stay in your apartment if you're not there, furnishing the hallways, and landscaping of terraces. The rules can greatly impact on an apartment owner's daily existence and must be reviewed as a part of a purchaser's due diligence process.
Proprietary leases provide that a shareholder cannot assign or sublet his or her interest in an apartment without "Board approval". This restriction on an owner’s ability to sell or lease an apartment is the primary aspect of co-op governance. The Board of Directors, pursuant to the provisions of the proprietary lease, has the right to vote on the proposed sale or sublease of a shareholder's apartment. To get technical, a shareholder would be requesting the right to sublet the occupancy of the apartment or the right to sell the shares allocated to the apartment which have an appurtenant right to use a particular apartment. So, if you have a "tough" Board, that can make the process of subletting or selling equivalent to the inquisition. Accordingly, the transferability of your apartment is reduced. Further, Boards can limit or eliminate entirely a shareholder's right to sublet depending upon the language of the proprietary lease. As a result, short-term co-op ownership may be very difficult or impossible in such co-ops. Unlike a condo, where the condo's right of first refusal to purchase the unit offered by the selling unit owner is rarely exercised by the condo's Board of Managers, co-op Board's often turn down a potential purchaser or proposed sublease to the dismay of the selling or leasing shareholder. As the owner of a co-op, there's not much you can do about it except make sure you're represented on the Board by reasonable people. In order to mitigate the problem, there are co-ops that govern themselves like condos. Sometimes these hybrids are called "condops", that is, a co-op that rules itself like a condo. Everyone wants financially sound, reasonable people living in their building. There's no denying, however, that some Board members take the process to an absurd level and make the process more difficult for all involved. In one recent situation I was involved in, it took the Board two months to consider the purchaser's application. It was the summer and no one could be bothered to meet in August. In Manhattan, you pay extra for that kind of treatment.
Residential Reality: Understand the Corporate Personality of Your Co-op
So you now know that you wear two hats when you buy a co-op. You are a shareholder, that is, an owner of shares in the cooperative corporation, with the right to cast your votes to elect directors who manage the co-op. You're also a tenant, pursuant to the terms of the proprietary lease, with the co-op as landlord. Co-ops have personalities, just like the people who live in them. It is in your best interest to investigate that corporate personality to make sure that it jibes with your own outlook and way of life. Moving into a strict building with lots of rules, can be a real burden if you're not used to it. Similarly, if you like organization, a loose building with a Board that never meets, can be just as maddening. As always, the more due diligence done before you sign that contract, the happier you'll be when the movers show up.
For more on the basics of cooperative owernship, see "If You're Buying a Co-op".