What is a proprietary lease?

Property management 101
Calendar Icon - GoRead Webflow Template
September 29, 2021
Clock Icon - GoRead Webflow Template
min read
What is a proprietary lease?

Some buildings just beg you to imagine what it might be like to live there. That one’s historical, even famous, with gorgeous turn-of-the-century architecture. This one’s new and fresh and so centrally located it’d revolutionize everything from your commute to grabbing dinner. Who owns these buildings, and who gets to live there? Are they condos, or are they co-ops? What’s the difference, anyway?

Some buildings just beg you to imagine what it might be like to live there. That one’s historical, even famous, with gorgeous turn-of-the-century architecture. This one’s new and fresh and so centrally located it’d revolutionize everything from your commute to grabbing dinner. Who owns these buildings, and who gets to live there? Are they condos, or are they co-ops? What’s the difference, anyway?

If you’re thinking of moving or buying for the first time, odds are you’re considering condos and housing cooperatives, or co-ops. On the surface, they seem very similar. Both are multi-unit structures, and both typically have a governing board in charge of managing the property as a whole as well as the community that lives there. Although living in a co-op and a condo are pretty similar experiences with many comparable pros and cons, what you’re buying into with each is significantly different.

When you buy a condo, you get a deed to the property. The “who” who owns that property is you, at least in part. But when you buy shares in a co-op, you don’t become the owner of real property. Instead, your money buys you a stake in the corporation that owns the property, and that stake typically comes with an occupancy agreement or proprietary lease. Yeah, kind of confusing.

Wondering if you should buy a co-op, the difference between a condo and a co-op, exactly what a proprietary lease is, and how owning in a co-op works? As experts in all things condos and co-ops – and in making sure people love the place they’re living in – we’ve got you covered.

Photo by charles parker from pexels

How a Co-Op Works

Generally speaking, the more money you have, the more options you’ve got. But a co-op allows you to pay less to live in otherwise expensive areas. This makes them a popular choice for many looking to live that big-city life without an infinite budget. And then there’s curb appeal. Co-ops are also more likely to be located in atmospheric, historical buildings such as The Dakota and The Beresford. Having a stake in a place like that and getting to call it home has a real appeal, even if you don’t technically own a piece of it.

What you do own is the exclusive right to live in that place. And the more expensive a living unit is, the more shares you need to own in order to live there. Owning shares gets you a proprietary lease, which is a form of a residential lease. That means landlord-tenant law will govern the relationship between shareholders like yourself and the co-op.

This lease agreement lays out the details of the relationship between you and the corporation, outlining the privileges and rights associated with your residential unit, including:

  • Your right to mortgage
  • Whether pets are allowed in the unit
  • What contractors you’re allowed to use for renovations
  • Who’s responsible for fixing issues in the dwelling or building
  • Rules regulating the sale of co-op shares
  • What a default by a shareholder looks like
  • Who is responsible for repairs and maintenance
  • When the co-op has the right to terminate the lease
  • Who may occupy the unit, including who has the right to lease out the unit

Each housing cooperative has a set of board members, and they work together in the community’s best interest to outline these privileges and limitations.

Purchasing Shares in a Co-Op

Co-ops come in all shapes and sizes, and they also come in three main different types. Before you purchase one, find out what type of co-op it is. This will help you understand the market value of your investment. The three types include:

  1. Leasing Co-op. The corporation doesn’t build equity, and it leases the building rather than owning it.
  2. Market Rate Co-op. Members can buy and sell shares at the going market rate.
  3. Limited Equity Co-op. The board sets limitations on the rate at which shares are bought and sold.

After you decide which type fits you best, it’s time to buy shares. To buy shares in a co-op, you can take out a share loan through a credit union. Share loans work like mortgages, but you are responsible for paying a pro-rata share of the common or maintenance costs of maintaining and running the building as well as the loan payments made to the lender.

These common or maintenance costs are typically paid to the corporation every month and are billed on an at-cost basis. They may or may not include real estate taxes and the property’s mortgage.

And we’re sorry to say that, just like nearly anywhere you live, you’ll also have to pay monthly utility bills and insurance costs.

Co-Op Mortgages

If you need to take out a mortgage on a co-op, that can be tricky. Most lenders won’t lend you a mortgage since they can’t physically obtain a mortgage for a property you don’t own. In contrast to a typical mortgage involving real property where the property itself is collateral for the loan, with a co-op mortgage, the collateral is the proprietary lease and the shares in the co-op corporation. That’s a little harder to quantify than physical property.

Fortunately, many large co-ops work with approved lenders from whom you can take out mortgages. If your co-op doesn’t have approved lenders and you can’t locate traditional lenders, you may have to find private lenders to take out a mortgage.

Note that many mortgages for co-ops may require large down payments that can range from 25% to 50%. Additionally, you may not get the best mortgage rates.

Leasing Requirements and Responsibilities of a Co-Op

No one likes a living situation where they’re drowning in fees, but co-ops work to keep things running smoothly for all. Yes, the co-op board sets community rules and property regulations, and you’ll be responsible for paying for your fair share. But this isn’t some evil conglomeration here to make your life harder. In fact, the co-op works to serve its shareholders, and it has a few obligations to you, too. Typically, you pay a monthly fee in exchange for some utilities, upkeep of common areas, and maintenance.

When you’re living in a multi-unit structure, you’re automatically part of a community. Though not all buildings feel that way, the good ones should. The board makes broad decisions about the property, and they’re also the ones who’ll decide whether you can buy in. Part of their job is building a strong community full of good neighbors and people you won’t feel weird about sharing the elevator with.

Compared to condos, co-op boards can be quite picky about whom they allow to purchase living units. If you want to purchase co-op shares, you’ll likely have to appear before the board. They’ll consider:

  • Your character
  • Your age, since some co-ops are only for people aged 65 or older
  • Your profession, since some co-ops are looking for specific kinds of residents, such as artists, writers, or similar
  • Whether you intend to occupy the dwelling unit for a specific period of time
  • Whether you have the minimum gross income and financial status to qualify
  • Your resident status, since some co-ops may only accept citizens

The board may also request your net worth, debt, tax returns, income, a background check, and character and employment references.

It’s a lot, we know. But on the plus side, the process helps ensure you’re moving into a community you actually want to be a part of! In contrast, condos don’t have interviews and only have the right of first refusal. This means they either have to approve your application to buy the unit, or the condo has to buy it themselves. And that makes it much easier to buy a condo than it is to take out a proprietary lease for a co-op.

Leasing Out a Co-Op and Adding Others to a Proprietary Lease

Leasing out a co-op and adding others to your proprietary lease may be less straightforward than it would be in a condo. The odds of getting a random six-month subletter while you take a half-year sabbatical upstate? Not great.

Because each co-op board sets up its own rules, whether you’re allowed to lease out your co-op residence will depend on where you own shares. If your co-op does allow you to lease out your unit, they’ll likely have firm rules about when you can lease it, to whom, and for how long.

For example, your proprietary lease agreement may require you to have lived in the unit for a specific amount of time (such as two years) before you can rent it out. This is even more likely in co-ops that assess your intent to live there as part of your application.

Even if you’ve met the minimum residency requirement to begin leasing, the co-op may still limit how often and for how long you can sublet. For instance, you may only be able to rent out your unit for three years out of every five years. Other housing cooperatives may allow you to extend your sublease term on a month-to-month basis.

Any potential renters will have to go through board approval in a process similar to the one buyers have to complete. Once your tenant is approved, you may have to pay fees to the housing cooperative, the managing agency, or both for subletting your unit.

Similarly, if you’re interested in adding someone to a proprietary lease or want to transfer your property to someone else, you’ll need your co-op board’s permission.

Check your proprietary lease contract for guidance. There should be a clause about getting board approval before assigning your lease and the corresponding stock to another person. However, there are some exceptions, such as transferring to a spouse or child.

Investing in a Co-Op or a Condo

In the end, the answer to the question “Is a condo or co-op better” really depends on what you’re looking for.

A co-op is generally a safe investment, but be sure to conduct background searches on the housing cooperative to make sure it’s well-managed, as you would with a condo, too. Since buying a co-op means buying market shares, just as with any stock investment, you don’t want to get involved in a company that may go bankrupt soon. If the company fails, you’ll lose your investment and your place to live – the opposite of a win-win.

Before deciding to get a proprietary lease, consider the limitations that come with buying a co-op. For instance, co-ops have lower liquidity than condos. The approval process for getting a condo is much less demanding, which makes getting condos on the market much easier. As a result, condos can be sold for a lot more. You might be able to buy in for less, but you might be leaving money on the table when it comes time to sell out.

Still, co-ops can be the right choice for some people. If you’re looking to live in a picturesque part of town or want to downsize, a co-op might be for you. Co-ops also let you put down roots more easily since co-op members won’t be asked to leave unless they go against the co-op’s rules. Just make sure to consider the following before deciding whether to buy a co-op:

  • Pet policy
  • Amenities
  • Costs
  • Ability to sublet or rent out your unit
  • Location
  • Ability to get a mortgage

Daisy knows co-ops and condos in and out.  As a property management company that strongly believes that every building is a unique ecosystem, we want to help board members and residents have exceptional living experiences in their buildings. If you’re interested in learning more about what we have to offer, check out our website.

Subscribe to get the latest resources on property management straight to your inbox!