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How Co-ops Divide Shares

Other, Real Estate Legality, Real Property

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.”

The amount of shares a shareholder owns can be very significant. Shares reflect the value of you apartment, can be passed on to family members, transferred into a trust (depending on your building’s by-laws) or sold. They determine your voting rights and contribution of maintenance fees, and most importantly give you the right to live in your apartment in conjunction with the proprietary lease.

Co-op shareholders, unlike condo owners, do not own their physical unit. Shareholders own a portion of stock in the corporation, and the corporation owns the building. Shareholders then enter into a proprietary lease with the corporation which gives them the right to reside in their unit and the only ‘thing’ they have ownership over are their shares. Usually co-ops will comprise of hundreds of shares and those shares are allocated at the co-op’s inception and stated in the corporation’s offering plan. Similar to any other corporation, the board must submit the organizational documents (synopsis of the number of shares) with the attorney general.

Why does everyone have a different percentage of shares? Because every apartment is different depending on the lighting, views, the floor, and of course size. Units that are identical will typically have the same share value, unless one unit has extra perks. Two bedroom apartments are normally double the share value as one-bedrooms, and the penthouse will be even more. Shares are allocated based on the square footage of the unit and whether there is a balcony or private roof access. Your co-op board cannot determine the amount of shares randomly for each unit. They are held accountable by the Internal Revenue Service, which requires that shares have a direct and “reasonable relationship” to the value of the unit.

Shareholders are likely to get upset if they have been allocated more shares than someone else who has an identical apartment because this means the shareholder pays greater maintenance fees. If you give up a portion of your shares to reduce your maintenance fees, not only do you lose voting power but your proprietary lease and/or by-laws may require shareholder consent, which in reality is unlikely to happen. However, shareholders can increase their share value by purchasing a neighboring apartment. Occasionally co-op boards will increase the amount of overall shares (which has to be done by amending the by-laws) if the building expands by either taking over a neighboring building or creating residential units in what was previously commercial space.

Is there a benefit to having more shares? For shareholders who own two units or a larger unit there are financial benefits as the property will be worth more. The shareholder will also have greater voting power, which could be beneficial during shareholder meetings. Unlike buying shares in a public company, more shares in your co-op means paying higher amounts for the building’s operating costs and does not always make a significant difference.

 

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