How Limited Equity Co-ops Can Sustain Affordable Homeownership

In the United States, owning a home has long symbolized stability, opportunity, and progress toward prosperity. However, for far too many low- and moderate-income families, this goal has proved elusive—resulting in diminished economic wellbeing.

One tool that is available to nonprofit housing developers to address this situation is the limited equity cooperative (LEC). LECs are still underutilized, but appropriately stewarded both pre- and post-formation, they offer a proven pathway to create long-term, affordable homeownership for people of modest means.

Barriers to Affordable Homeownership

Systemic barriers have long hindered homeownership for many. Policies such as redlining, as highlighted in Richard Rothstein’s The Color of Law, created entrenched housing inequities. These discriminatory practices denied Black Americans and other marginalized groups the ability to buy homes in neighborhoods of their choosing.

Additionally, millions of Americans reside in manufactured housing communities, often called “mobile home parks,” which do provide affordable housing. Unfortunately, this arrangement, in which most commonly the park owner owns the land while residents own their allegedly “mobile” homes, rarely is an effective means for building family wealth. In fact, it costs thousands of dollars to move these units, so many renters are stuck with regular rent increases as determined by the park owner.

Properly designed, LECs prioritize perpetual affordability and resident participation in decision-making, thereby lowering barriers to affordable homeownership.

How Housing Co-ops Came to Be

Housing co-ops in the United States emerged in the late 19th and early 20th centuries. They were initially marketed to wealthier urbanites, who wanted the advantages of individual homeownership without all the responsibilities it entailed. They also wanted the right to exclude unwanted members, a provision that facilitated racial discrimination despite the co-op principle of open membership. As recently as the 1990s, authors of a Fordham Urban Law Journal article on New York City housing co-ops found that “the underrepresentation of minority groups in cooperative units is apparent even when controlling for income levels across racial lines.”

Housing co-ops in the United States emerged in the late 19th and early 20th centuries.

The development of housing cooperatives that served New York City’s middle-income families was greatly aided by the passage of the New York State Limited Dividend Housing Companies Act of 1926. The act provided co-op corporations with tax exemptions and extended to them the right of eminent domain to acquire sites for housing development.

After World War II, trade union investment in housing co-ops for low- and moderate-income families in New York City accelerated. In 1951, the groups came together to create the United Housing Foundation. Ultimately, UHF played a key role in creating over 100,000 units of co-op housing, including, over 15,000 apartment units contained in Co-op City in the Bronx.

The Launch of Limited Equity Cooperatives

The LEC is a tool developed to extend access to homeownership to low- and moderate-income buyers. In an LEC, residents collectively own and govern their housing—such as an apartment building—but there are restrictions in place to limit the resale price of their ownership interest (share) to a modest appreciation rate. This mechanism permits the seller to collect a modest increase in value while ensuring affordability to future buyers. By contrast, in market-rate co-ops, the sale price is uncapped.

Operationally, in an LEC, a large majority of the capital remains in the co-op corporation, while co-op member-owners retain a minority of capital themselves. By keeping most equity in the co-op corporation, long-term affordability is maintained.

LECs emerged in New York City during the mid-20th century as community activists and housing advocates sought to combat displacement and offer residents a pathway to ownership in a city facing skyrocketing rents. The movement gained momentum with the support of government programs like Mitchell-Lama, which aimed to provide affordable housing through a public-private partnership. Under this framework, LECs enable residents to purchase shares in a cooperative, thereby gaining collective ownership of their apartment buildings. They also ensure long-term affordability by limiting the resale value of shares, preventing speculative increases in housing costs.

Today, LECs remain an important model for providing affordable, sustainable housing while fostering a sense of collective ownership and community engagement. And they serve an increasingly diverse population. According to a 2021 estimate, at present roughly two-in-three LEC co-op owner-residents in New York City are Black or Latinx.

Opportunities and Challenges

LECs offer significant opportunities for community development practitioners and more importantly for low- and moderate-income households seeking to own a home. First, LECs make homeownership accessible to low- and moderate-income buyers who may not qualify for a conventional mortgage. Because of collective ownership, the LEC can obtain the necessary mortgage, which means that LEC members, and specifically “unbankable” ones, need not qualify for individual mortgages.

[Limited equity co-ops] ensure long-term affordability by limiting the resale value of shares, preventing speculative increases in housing costs.

Second, LECs are effective for creating permanently affordable housing, so long as nonprofits provide ongoing technical and other support.

While LECs offer significant opportunities, nonprofit housing developers must navigate several significant challenges. First, acquisition costs in high-demand areas can be expensive. Partnerships with state and local governments, foundations, and impact investors are essential to overcome this barrier.

Second, education for LEC members is crucial. Prospective buyers and residents must fully understand how LECs work, and ongoing technical assistance support for residents is essentially to ensuring long-term success of managing, what are, after all, multimillion-dollar operations.

Third, supportive legislative and regulatory policies are essential for scaling and advancing the growth of LECs. In New York City, such a framework is in place. In many other cities, LECs would be more common if there were supportive policies—such as zoning reforms for placement of projects; tax incentives and bond issuances to help fund affordable housing development; and tenant rights such as a right of first refusal to purchase their building or housing community when the landlord posts it for sale.

How Technical Assistance Helps LECs

A strong example of how ongoing technical assistance supports LECs is provided by the Urban Homesteading Assistance Board (UHAB). Established in 1973, UHAB emerged during a period of widespread urban decay—a time when landlords abandoned buildings and often left tenants to fend for themselves. Recognizing the potential for tenant ownership as a means of preserving housing, UHAB pioneered efforts to convert distressed rental properties into cooperatively owned buildings.

UHAB is a significant developer of affordable housing cooperatives. Since 2002, it has renovated over 96 buildings and created 1,720 units, and asserts that it has a 99 percent success rate on its cooperatives. While UHAB expends considerable energy identifying and converting occupied distressed rental properties into LECs, it spends as much, if not more, on getting tenants ready for responsibilities that come with an LEC.

This includes providing comprehensive support services to its newly created LECs and members to assist with property management and governance. UHAB’s holistic approach enables the residents not only to acquire their building but also to maintain its long-term viability as affordable housing. By fostering resident ownership and self-governance, UHAB has helped stabilize neighborhoods and prevent displacement, illustrating the transformative potential of LECs in addressing urban housing challenges.

Not Just a New York City Model

When people talk about LECs, New York City is often the focus, but the model is replicable in many other communities.

Lakewood, WA, a 64,000-resident suburb located about 40 miles south of Seattle, may not be a typical home for an LEC. Yet when Gadiel Galvez and his fellow, primarily Latinx, residents of a manufactured housing community sought to own the land underneath their homes, they opted to use an LEC structure.

In 2022, residents of this community consisting of 63 homes and two apartments learned that the mobile home park owner was considering a sale to a new owner that would likely repurpose the land as a warehouse site. Fearing eviction, the residents decided to organize to buy the community. With the assistance of ROC USA (ROC stands for resident-owned communities), a nonprofit specializing in helping residents purchase their parks, the residents formed Bob’s and Jamestown Homeownership Cooperative (BJH Co-op) and purchased the land.

The BJH Co-op is led by its elected board of directors, which consists solely of co-op member-owners and is charged with managing day-to-day operations. ROC USA helped the BJH Co-op secure $5.25 million in financing to purchase the land. The rent previously paid by residents is now paid instead to the BJH Co-op to service the debt and to fund management and maintenance services. The participating residents not only staved off eviction but now own homes that are building equity and the wealth that comes with homeownership.

Building Scale

How can LECs be deployed to provide affordable homeownership for more people?  A few pathways are available:

• Policy: A growing number of jurisdictions offer tenants a right of first refusal to purchase their properties. In cities, this legislation is typically titled a Tenant Opportunity to Purchase Act (TOPA) or a Community Opportunity to Purchase Act (COPA). Additionally, many jurisdictions have extended a right to first refusal specifically to residents in manufactured housing communities.
• Training: A few nonprofits, such as UHAB, train nonprofit community development practitioners on how to deploy effective housing models. Expanding training capacity could lead to more nonprofits being able to do the necessary technical assistance work to make resident self-management of large buildings or communities viable.
• Resources for real estate acquisition: There are many ways to achieve this including a) transfers of underutilized land or buildings by state or federal entities, b) provision of necessary funds from foundations and impact investors, and c) issuance of state bonds to support housing acquisition and development funds.

Key Takeaways

For nonprofit practitioners that wish to establish LECs, it is critical to be mindful of a few things:

1. Partner with state and local governments to identify and acquire property through donations, discounted sales, and/or eminent domain. This includes exploring creative funding sources, such as grants and low-interest loans, to support land purchases. For example, in 2023 voters in Los Angeles passed a ballot measure called Measure ULA, organized by the coalition United to House LA, to raise funds for alternative housing models such as housing cooperatives, multifamily housing, acquisition rehab, homeownership capacity building, and operating assistance. This victory provides a model that perhaps can be replicated in other jurisdictions.
2. Engage partners to secure funding. This includes collaborating with state and local jurisdictions, foundations, impact investors, and financial institutions to secure funding for initial development and ongoing operations.
3. Conduct a comprehensive feasibility assessment. Consider (1) how much rehabilitation will be required; (2) the site and building configuration (consider economies of scale); (3) availability of subsidies to lower project costs and LEC share price; (4) whether permanent financing is available and who holds the mortgage; (5) whether residents are sufficiently committed to the project’s success and understand the collective commitment required; and (6) the nonprofit’s ongoing stewarding role, which—as noted above—is critical for long-term success.
4. Engage the community and prospective members early and often. This requires building trust and buy-in by involving community members in the planning and governance structuring of the LEC. This participatory approach ensures that development aligns with local needs and priorities.
5. Get comfortable with the affordability mechanisms. Develop resale formulas and governance structures that balance homeowner equity building with long-term affordability. Provide education and support to help residents understand these mechanisms.
6. Invest in capacity building and stewardship. LEC owners must fully understand the necessity to manage the complexities of LEC operations, including property management (such as setting aside reserve funds for long-term building maintenance), resident education, and compliance with affordability guidelines. The nonprofit partner must act as a strong steward for the LEC throughout the development process and beyond, as it may be called upon to settle member disputes, assist in governance, or ensure compliance with ground lease or mortgage terms.

In short, LECs offer a powerful and tested strategy for creating affordable housing for low- and moderate-income households. Through community involvement, strategic partnerships, and a commitment to long-term affordability, LECs done right can help dismantle some of the barriers to homeownership and provide a pathway to stability and wealth accumulation. By adopting these as yet underutilized approaches, nonprofit housing developers can make affordable homeownership far more accessible and widespread.