Ho, Comrade! Let's Share A House!

Appraisal of Cooperative Interests

Suppose that you and several friends want to buy some land to live on. You can't afford it individually, but if you pool your money, you can get a loan to buy the land and build a cottage for each of you. To do this, however, requires that some entity be legally responsible for the debt. You form a corporation, issue shares based on your contribution to the scheme, and the project moves forward. Friend A is issued 10,000 shares and is entitled to a 1,000 square foot home, Friend B is issued 20,000 shares and is entitled to a 2,000 square foot home, and so on. Each shareholder is allowed to use the land in proportion to the number of shares, and each is assessed a portion of the corporation's loan payment, insurance, and taxes, based on his number of shares. If you need to move away, you can sell your shares and the new shareholder can take over your cottage and its responsibilities. You may be allowed to remodel or redecorate, and maybe even reside and reroof the home, but you may not be able to make the cottage bigger or tear it down or sell it, since you do not have title to it -- the corporation owns it. This type of ownership is a cooperative.

Cooperative ownership is very common in some of the major urban centers of the US, but is rare in NE Ohio. It is also found in places where people have gotten together to put houses on large tracts (usually with lakes) which they could not have afforded to buy individually. There are two cooperatives in southern Summit County : the Luna Lake Club and the Comet Lake Club. If a search of the Auditor's web site for a home in one of these developments is undertaken, a unique set of tax cards results. Luna Lake Club Company, for example, returns two parcels, 27-00137, which is a 14 acre vacant lot, and 27-00563 which is a 121 acre parcel showing 71 homes and a clubhouse. The latter parcel also includes a list of all the house addresses and the householders. Each of the residential cards has an appraised Dwelling Value associated with it, but the tax bill goes to the Luna Lake Club Company.

"Owning" a home at Luna Lake is different from owning a home in fee simple. The householder does not own the land under the home, and while he may pay the prior householder an agreed-upon sum of money to move in, what he actually is buying is shares in the Luna Lake Club Company. To "buy the house" he has to sign a separate agreement with the Club. Those shares entitle him to occupy a specific home, but he will always have to pay fees to the Club for the corporate debt (somebody has to maintain the streets and lake!), insurance, and taxes. Since he does not own either the house he lives in or the land on which it sits, he has no legal liability for either. If someone is killed or injured on the street, that injured person's beneficiaries can sue the Club for damages, and any judgement must be shared via the shareholder annual dues as a debt incurred by the Club.

The householder's shares specify which House Number he is entitled to, but he cannot legally encumber either the house or the land it sits on with a mortgage. He can, however, borrow money against his shares, but there are few lenders willing to take a chance on such propositions, so most sales in Luna Lake are either cash transactions, private loans, or loans made based on appraisals by appraisers who don't understand estates in real estate (or they willfully ignore them).

There are lenders which will loan on a home in a co-op, since that type of ownership is very common in places like New York City. The Fannie Mae Form 2090 was created specifically for valuing a cooperative interest. The Subject block of the form, at the top of Page 1, provides for checking either "Cooperative" or "Other" with respect to Property Rights Appraised. There is no mention of Fee Simple or Leasehold interest.

The Certifications Page of the form begins, "This report form is designed to report an appraisal of the cooperative interest (the cooperative shares or other evidence of an ownership interest in the cooperative corporation and the accompanying occupancy rights) in a cooperative project or the cooperative interest in a planned unit development (PUD). This form is not designed to report an appraisal of a manufactured home or a unit in a condominium project." The bold italics are my emphasis.

The value summary at the bottom of Page 3 of the form states, "Based on a complete visual inspection of the interior and exterior areas of the subject property, defined scope of work, statement of assumptions and limiting conditions, and appraiser’s certification, my (our) opinion of the market value, as defined, of the cooperative interest (the cooperative shares or other evidence of an ownership interest in the cooperative corporation and the accompanying occupancy rights) that is the subject of this report is $______, as of ______, which is the date of inspection and the effective date of this appraisal."

In performing an appraisal of a cooperative interest, the appraiser must investigate and report on such things as the total outstanding indebtedness of the project, the number of shares attributable to the subject, and the percentage of outstanding liens attributable to those shares. He must also use as comparables other homes located in the same or similar cooperatives, and in order to come up with an opinion of the value of the subject's shares, must have access to the price per share of the comparable sales. He must also subtract the pro-rata share of any blanket mortgages from the adjusted sales price in order to arrive at the market value of the cooperative shares.

It is not logically possible to provide an opinion of value based on the market sales of other cooperative dwellings if their price per share is not available, but you would be surprised at how many appraisal reports I have seen where such opinions were rendered. It would not be a pleasant thing to be cross-examined on the stand over a cooperative appraisal which contained in the grid field for "Sales price per share" of the comparables, the comment, "Not Available".