Share and Share Alike Understanding the Intricacies of Co-op Shares

Share and Share Alike

They’re the smallest pieces of the co-op puzzle. The one item without which the whole endeavor could not function. Just like in a Fortune 500 corporation, the shares in a co-op reflect value, and can be highly sought-after prizes—depending, of course, on the exclusivity of the address. But for all the talk of shareholders and shares, what do these items really represent, and how do they function? Even co-op owners themselves are sometimes unsure about exactly what it means to own shares, and how those shares are allocated.

Definition, Please

Very simply put, shares represent portions of stock in a corporation. This distinction is what sets a co-op apart from its real estate cousin, the condo. With a co-op, the resident owns shares in the corporation that owns the building, explains attorney Gail Miranda Schmidt of the firm Milbank Tweed Hadley & McCloy. There is a long-term proprietary lease that gives individuals their rights as a shareholder in the company and as a tenant in the apartment itself.

“In a condo, you actually own the real estate,” Schmidt says. “You own a percentage of the underlying building, and a portion of the common elements. You get title insurance. You’re taxed as an individual. You physically own the box you bought.”

Or, as attorney Diana Lipsig of Pisapia & Lipsig in Manhattan puts it, “In a co-op, it’s a community. In a condo, it’s like everyone has their own little fiefdom.”

While condo owners receive four walls and a roof, co-op shareholders receive actual certificates of stock, although they may only catch a brief glimpse of them at closing. “The bank holds the certificate, and the owner does not see it again until he or she pays off the security agreement,” says attorney Robert Tierman of the Manhattan-based law firm Litwin & Tierman.

“The shares represent your ownership right—otherwise you own nothing,” says Schmidt. “You simply have the right to reside in the building.”

That right is laid out in the proprietary lease. “That lease allows you to live in the building,” says Lipsig. “You need the shares and the lease to live there.”

How Many Shares?

Determining the number of shares attached to each apartment or unit is a decision that gets made early on in the co-op process, either when a co-op is first built or a building is first converted. “When you form a corporation in New York, you can designate a number of authorized shares,” Tierman says. “You can choose whatever number of shares you want.” Most co-ops are comprised of hundreds of shares, rather than thousands, but the numbers vary.

“Co-ops are regular, standard corporations,” Schmidt says. Condos and co-ops both have to file their organizational documents with the attorney general. Those documents will outline the initial number of shares and the initial amount of space offered in the plan.

“The initial number of shares are listed in the offering plan,” Lipsig says. “Just like a corporation has to have an offering plan, so does a co-op.”

Ultimately, it’s not the total number of shares that matters. It’s the relative relationship between all those shares. The issue of determining how many shares each apartment is worth and how those apportionments relate to one another is key.

According to Anthony Sarro of Priority Appraisal Services, Ltd. in Bronxville, the dollar value of a share in a co-op is determined by the complex’s mortgage balance divided by the total number of building shares. That figure is then multiplied by the individual unit shares. “Two identical apartments should have equal assessments, unless an extra items such as a parking space is included.”

“The important thing is that shares for two-bedrooms will be twice as much as for one-bedrooms,” adds Tierman. “The actual number is not important. It’s the relative share numbers that are important.”

If a building is converted or reassessed because of changing floor plans, Sarro says that “the share value, total number of shares, and so forth are most likely determined by the conversion company and/or the financial institution that provided financing for the complex. Proportionally, the number of unit shares would most likely remain the same. This is kind of a gray area for appraisers, because generally speaking, ‘share’ issues are given nominal consideration by appraisers.”

So size does matter when determining share allotments. “Shares are determined by size,” Schmidt says. “By square footage and balconies and penthouses.” Obviously, the larger the apartment, the more shares it will be worth.

Those determinations cannot be made randomly either. Co-ops must comply with an Internal Revenue Service (IRS) requirement that states that there must be a “relative and reasonable relationship” between the shares and their value. That relationship must be established by a licensed real estate broker or appraiser. “You have to prove that the relative values are valid,” Tierman says.

And it’s important that the values are fair when it comes to comparisons of property. These determinations should be made carefully—if two virtually identical apartments in the same building are given unequal share allotments, it causes understandable upset. Primarily, it’s a disservice to the person who gets more shares, because more shares means paying a bigger percentage of maintenance and other shared costs when in fact there apartment has no greater value than the one down the hall.

More Shares, More Power?

Sometimes shareholders will increase their holdings in the co-op by purchasing additional space. If a neighbor’s apartment goes up for sale, a resident might decide to snap it up and add that den and second bathroom they always envisioned. If that happens, “The shares would be combined, and they would receive a new certificate reflecting the new number of shares,” Lipsig says.

But is there value in having more shares than your neighbor? Yes and no. “In some ways, it’s anomalous,” Tierman says. “If it was Microsoft, you’d want more shares. But in a co-op, more shares means you end up paying a higher share of the building’s operating costs.”

On the plus side, an apartment with a higher share value could pay off financially down the road, at least in theory. “People sort of value apartments based on the relative number of shares,” Tierman says. “A real estate broker could say this apartment has an extra 50 shares because someone at some time thought it was of more value. So, in terms of selling the apartment, it may be beneficial later.”

In smaller co-op complexes, the benefit of extra shares may come in the form of power, according to Lipsig. “It could have some significance in relative voting power—in terms of things like electing board members. Your voting power is relative to the number of shares you own.”

Adding More Shares

Although most co-ops maintain their size for years, sometimes the opportunity arises to expand the business, so to speak. The board can make an amendment to the bylaws to increase the number of shares in the co-op. This can happen if—to cite a relatively common example—a unit previously used for commercial purposes is converted for residential use. Shares must also be—increased if the decision is made to purchase the building next door, Lipsig says. “Then the board would increase the number of shares available in the building.”

According to Tierman, sometimes those additional shares are already built into the co-op plan. When a co-op is first put together, the developer often will authorize a higher number of shares than they have to for the number of apartments available. This is so that if they decide to convert a common area in the building into a purchasable unit, those pre-authorized shares will already exist.

You Can’t Take it With You

While shares can certainly be bought and sold, the question of what happens to them after the death of a shareholder can get a bit tricky. If the owner of the shares passes away, his or her spouse can receive the value of those shares through a will or joint tenant ownership without any difficulty, according to the proprietary lease. There would be no need for board approval on the transfer.

If, however, a shareholder passes away and leaves his or her shares to an offspring, a more distant relative, or a non-family member, the board needs to issue its approval for the transfer, just as if the individual were selling the apartment to a complete outsider. If the inheritor cannot get board approval, then the estate would be forced to sell the unit and its shares to a third party approved by the board. That’s the worst-case scenario, Tierman says. It’s important to note that according to law, consent of the board cannot be “unreasonably withheld.”

For such thin, slight pieces of paper, shares hold an enormous amount of power for residents, board members, brokers, managers and anyone else involved in the co-op business. Shares can be sold and passed down. They can go up in price, matching the rising prestige of an elite address, or hold steady, measuring the long-term solidity of a well-established co-op community. Most important of all, these pieces of paper represent a destination, the metaphorical key to a place called home. n

Liz Lent is a freelance writer and a frequent contributor to The Cooperator.

Related Articles

Statuette of Themis - the goddess of justice on lawyer's desk. Lawyer is stamping the document. Law office concept.

Q&A: Posthumous Stock Change

Q&A: Posthumous Stock Change

flooding in luxurious interior. 3d creative concept

Flood Provisions Must Be Incorporated Into Leases - Including Proprietary Ones

New Law Applies to Co-ops

New York US state law, code, legal system and justice concept with a 3d render of a gavel on the New Yorker flag on background.

The Continuing Effect of HSTPA on Co-op & Condo Owners

The Law of Unintended Consequences

Flooded vintage interior. 3d concept

New Flood Provisions Must Be Incorporated into Proprietary Leases

Yes, the Law Applies to Co-ops

Q&A: Stock Certificate Problem

Q&A: Stock Certificate Problem

Q&A: Stock Certificate Problem

Q&A: Bilked by Bulk Billing

Q&A: Bilked by Bulk Billing

Q&A: Bilked by Bulk Billing

 

10 Comments

  • Excellent infrmation to better undersatand co-op shares. Most co-op buyers are not well informed on this matter.
  • I recently moved into 5 unit building and I am paying 5 percent of the maintenance since I own 5 percent of the shares. One of the other tenants, who owns a larger portion of the shares (being in the penthouse unit) would like each apartment to pay equal shares of the maintenance (no longer based on number of shares). In the bylaws, it indicates that maintenance is based on shares. I am a bit worried. Can he out-vote me and change the bylaws or possibly allocate more shares to my unit in order to increase my proportion of the maintenance?
  • If myself and fiancee share the coop, and we are not getting along, and I want out and he doesn't. What happens. It is in both our names. Do we have to sell and vacate. Truth be told he no longer want to be with me. I want to sell because if I can't have it. I don't want him to have it.
  • Can a Super who maintains the building and lives in it, buy his own unit?
  • A shareholder dies and leaves the share to a daughter or administrator however the mortgage is not paid for 2 years can the bank auction off the coop to a third party without the authorization of the coop management and it's board.
  • If your name is on the proprietary lease but not listed on the shares are you consisdered an owner? Are you entitled to sell the property, This is a shared apartment and we are in the process of selling and split up
  • How do you sell a 50 unit cooperative apartment complex(garden style units)? Do you have to dissolve the coop and convert it to a different entity before the entire property can be sold?
  • My mother lives in a Michigan cooperative. About three years ago she signed a document with the cooperative (and notarized) stating, "Upon my death, the membership share shall be sold and the net proceeds of each sale shall be conveyed to the above named person or persons. (She named two of my siblings, who also reside in the co-op.) In the event of a conflict between this or any other document, including but not limited to a trust or a will, the provisions of this document shall be enforced and shall supersede any such conflicting document." She has recently been placed in a nursing home by the above referenced sibling. I am now her legal guardian. I want to liquidate my mom's shares by selling her unit, and deposit the cash in her savings account. I was told by the co-op that the equity will be disposed to the siblings named". Since my mother is still alive and will be for quite some time, and has no money to pay the "carrying charges" because she is in a nursing home and will be receiving Michigan Medicaid, what will the co-op do with her shares upon sale, since she is still alive? How and what do I say to the cooperative as my opening statement? Will they hold the shares until my mother's death after the sale?, even though she no longer lives there? I'm baffled.
  • We are shareholders in a Co-op of 120 units, roughly 80 shareholders 40 renters. We have one share each. The land value has increased four fold since the Co-op was formed. Should we increase the share value to reflect the value of the Co-op, or, can we just double or treble the number of shares?
  • In our (pre-Martin 21 Act) walk-up COOP of 1918 the number of shares for each apartment were distributed not in accordance to the footage, location, floor of walk-up and etc. Each of 10 one-bedroom apartment has 24 shares and all 5 two-bedrooms has 38 shares. Instead of correct shares distribution, our maintenance fee reflected all those conditions. For 104 years our building operated that way with maintenance increases being prorated accordingly to current maintenance of each apartment. Now, the shareholders of lower floors of walk-up want to change structure of maintenance calculation, they want each of three lines of our building to average their maintenance. Therefore, they want to decrease the maintenance of the most valuable first and second floor apartments of our walk-up building on expense of increasing the maintenance of apartments of fourth and fifth floors. All arguments about unfairnesses of that change were dismissed, people voted in majority. Can you help us please?