Limited Equity Cooperative

What Is a Limited Equity Cooperative?

A limited equity cooperative (LEC) is a form of homeownership in which residents do not own their apartments directly. A cooperative corporation owns or leases the property. Each household buys a share or membership, and that share carries the right to occupy a unit. The co-op is “limited equity” because its bylaws cap the price at which members can sell their shares. That cap keeps the homes affordable for whoever buys in next.

LECs are one of the main forms of shared equity homeownership, along with community land trusts and deed-restricted homes.

How It Works

• Buying in. A new member pays a share price, usually well below the cost of a comparable market-rate condo. The member then pays a monthly carrying charge that covers the co-op’s mortgage, property taxes, maintenance and reserves.
• Governance. Members elect a board of directors and vote on budgets and house rules.
• Resale. When a member leaves, the co-op or the incoming member pays no more than a transfer value set by a formula in the bylaws. Any appreciation above that amount stays with the cooperative.

State and federal law give these formulas their shape. California’s Civil Code, for example, caps transfer value at the first occupant’s share price plus board-approved improvements and an inflation or interest allowance. Any annual increase is limited to 10% of the original price. Federal tax law uses a similar test. Under 26 U.S.C. § 143(k)(9), a share may not sell for more than the first buyer’s price with a cost-of-living adjustment, plus payments for improvements and the member’s share of principal paid down on the co-op’s debt. For tax-exempt bond purposes, a co-op that meets the test and elects this treatment counts as residential rental property rather than owner-occupied housing.

Example

Suppose a member paid $15,000 for a share in a co-op whose bylaws allow 2% simple annual growth. After 10 years, the transfer value would be $18,000, plus any approved improvements. That is the price the next member pays, even if similar market-rate units nearby had doubled in value.

Criticisms and Limitations

• Less wealth building. Members give up most market appreciation. That trade-off is the whole point of the model, but it means an LEC builds less equity than a conventional purchase.
• Governance demands. The model relies on volunteer boards to set budgets, keep reserves and enforce resale rules.
• Loss over time. In a 2018 Shelterforce review, researcher Emily Thaden reported that the Urban Homesteading Assistance Board (UHAB) had accounted for about 300,000 co-op units built under limited equity rules and found that only 166,608 were still shared equity co-ops. Most of the losses came when restrictions tied to federal programs expired, or when a co-op could not get financing to preserve the property.
• Concentrated footprint. Close to 100,000 of the remaining units were in New York City. California, Connecticut, Massachusetts, Minnesota and Washington, D.C., each had thousands.

For more on how LECs compare with other models, see Community Land Trusts and Shared Equity.