COOPERATIVE
An association or corporation established for the purpose of providing services on a nonprofit basis to its shareholders or members who own and control it.
The nature and functions of cooperatives differ considerably—such as purchasing cooperatives, consumer cooperatives, and marketing cooperatives.
In the context of agriculture, a farmers’ cooperative refers to an organization of farmers residing in the same locale that is established for their mutual benefit in regard to the cultivation and harvest of their products, the purchase of
farm equipment and supplies at the lowest possible
cost, and the sale of their products at the
maximum possible price.
The term cooperative also signifies the ownership
of an apartment building by a nonprofit
corporation that holds title to it and the property
upon which it is situated. Stock in the corporation
is allotted among the apartment units
on the basis of their relative value or size. The
right of occupancy to a particular apartment is
granted to each cooperative member, who purchases
the shares assigned to the desired unit.
The member subsequently receives a long-term
proprietary lease to that unit. The rent payable
pursuant to the lease is that member’s proportionate
share of the expenses the corporation
incurs in operating the cooperative—such as
insurance, taxes, maintenance, management,
and debt service. The cooperative concept
evolved in New York City during the early 1900s
as a mode of accommodating the public’s desire
for home ownership; it subsequently expanded
to other large urban centers.
In order to finance the purchase or construction
of the cooperative building, the cooperative
places a blanket mortgage on the
property, which is pledged to support the given
debt. Lenders usually are hesitant to accept an
individual member’s stock and proprietary lease
as security for a long-term loan. The members’
lien (a claim on property to satisfy a debt) on the
lease would be subordinate to the blanket mortgage
on the property. The purchaser of a cooperative
apartment usually must have sufficient
cash available to pay for the stock allotted to the
unit he or she wishes to obtain. The initial price
of the stock generally does not exceed the
amount required for a down payment on a single-
family residence. As cooperative members
accumulate EQUITY (the value of property
exceeding the total debts on it) in their stock,
subsequent purchasers must either have a substantial
amount of cash available or locate a
seller who is willing to recoup the equity in
installments over several years.
Cooperative members are also financially
dependent on each other. The existence of a single
blanket mortgage paid by rent receipts
means that if several members default in their
rent payments, the corporation might not have
sufficient funds to pay a mortgage loan installment.
Foreclosure will ensue in regard to the
entire membership unless it acts to satisfy the
default. Although special reserves and assessments
are generally employed to cover such a
contingency, the available funds might be inadequate
to prevent default.
