Limited-Equity Cooperatives

What Are Limited-Equity Cooperatives?

LECs attempt to keep housing prices and options manageable for a certain segment of the population. Simply put, LECs are like condominiums for the “underclass”: that is, low- to moderate-income people are able to buy or opt-in to being homeowners, but in a limited way. By pricing LECs in an affordable manner and by restricting the amount of profit that can be taken out of the unit, the dream of homeownership is realized. However, the amount of money that could be made on rising housing prices, particularly in a speculative market, is capped. Although it can vary, the typical amount of profit that can be made is usually between 5% and 10% per year. Any additional profit that is part of rising housing prices is kept within the LEC, thus keeping the buy-in for the next person lower and theoretically more affordable.

Of course, this implies an inflationary housing market. Today, with many deflationary housing markets across the United States and other parts of the world, this model may not work as well. However the impact of decreasing housing prices plays out in the private market, in the nonprofit world of the LECs, the implications are different. At the very least, people's liability against falling housing prices is limited just as their ability to profit in an inflationary housing market is limited. Although those living in LECs might see their investment devalued (that is, the price of their unit or share in the LEC could decline), because they are unlikely to move anyway—those taking advantage of LECs are not in it to make money—the effect should be smaller.

For a housing entity to be an LEC, it must meet certain criteria. Among those are cooperative ownership (that is, each member of the LEC owns a share of the cooperative), democratic participation in the management of the co-op, and an income level below a certain amount. Each LEC has a set of bylaws that govern the way the housing entity operates. The housing may be newly developed or rehabbed. Ideally, there is a sense of community that develops among those living in the co-op. Thus, LECs are a form of shared housing; however, not all forms of shared housing are LECs.

History of LECs

LECs have a long history, dating back to the late 19th century. The first of these types of organizations was started in New York City, which is appropriate given that about half of all U.S. housing co-ops, limited as well as full equity, are there today. After World War I, there was an initial spurt in the [Page 426]development of the co-op movement, which stalled and failed during the Great Depression. Another spurt occurred after World War II, first without federal subsidies, then with them. During the 1970s, federal support for co-ops ended and the movement essentially stopped. The condominium craze began at around the same time, and housing co-ops, with few exceptions, were left in the dark.

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