Housing and Worker Co-ops as Alternatives to Economic Exploitation

LEAP Conference, November 13, 2015, 1:45pm -3:35pm

Introduction of Panelists and Brief Overview of Housing and Worker Coop Movements in NYC (10 minutes)

A) History of Low-Income Housing Coops in NYC and Incorporation of HDFC Housing Coops (Michael Grinthal, Supervising Attorney, MFY Legal Services) (20 minutes)

PART I: What is an HDFC coop? (5 minutes)

A limited-equity coop owned by a housing development fund corporation (HDFC), usually reserved for low- or moderate-income households1

An HDFC is a corporation governed by Article XI of the New York State Private Housing Finance Law (PHFL)

o The HDFC must have “been organized exclusively to develop a housing project for persons of low income” PHFL 573(3)(a)

o “All income and earnings of the corporation shall be used exclusively for corporate purposes, and no part of the net income or net earnings of the corporation shall inure to the benefit or profit of any private individual, firm, corporation or association.” PHFL 573(3)(b)

o An HDFC coop “shall be operated exclusively for the benefit of the persons or families who are entitled to occupancy in such housing project by reason of ownership of shares in such corporation.” PHFL 573(4)

o The corporation must have “Housing Development Fund Company” as part of its name. PHFL 573(2)

1 While outside the scope of this training, PHFL 573(1) also provides for HDFCs that are rental properties owned by non-profit organizations.

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HDFC buildings have usually, at some point in their history, received low- or no-interest loans from the state or city for rehabilitation. Until the HDFC has paid off the state or city loan, it is subject to a regulatory agreement.

o Under PHFL 576, every HDFC regulatory agreement must provide that:

Rent/maintenance will be capped and subject to the approval of the regulating agency (which is HPD in NYC).

Households must meet income eligibility guidelines (originally 6 times rent; later 120% or 165% AMI).

Profits must be used only for capital improvements or to reduce rent/maintenance. Dividends cannot be paid to owners.

The property can’t be sold or transferred without agency (HPD) approval

o There is no other HDFC-specific statute or regulation governing eligibility, succession rights, or tenant rights and responsibilities. Each HDFC is governed by its own regulatory agreements and bylaws, which can vary widely. Regulatory agreements must be recorded with the City Clerk and are available on ACRIS.

PART II: History of HDFC coops (5 minutes)

In 1966, NY passed Article XI of the Private Housing Finance Law, providing for creation of and financial assistance for HDFCs. Article XI differed from other programs under the PHFL (such as Mitchell-Lama) in that it was aimed at nonprofit housing developers such as CDCs, which were then growing and expanding to take advantage of new federal funding.2

Tenant-owned HDFC coops became the dominant form of HDFC housing in New York City after the City became the owner of more than 11,000 distressed and abandoned properties in the 1970s. The City saw HDFC coops as a model for rehabilitation where there was no interest from private developers and the sheer volume of buildings far outstripped local nonprofits’ capacities. The Urban Homesteading Assistance Board (UHAB) was founded in 1973 to build tenant capacity and skills for self-government.

2 From the statute’s legislative findings: “non-profit associations are desirous of organizing companies to build or rehabilitate housing for low income families . . . the provision of technical assistance in the organization and management of housing development fund companies will maximize federal funds and credits.” PHFL 571. Interestingly, the legislative findings make no mention of coops, which are enabled by the statute but does not seem to have been a major part of the Legislature’s vision.

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Tens of thousands of determined tenants took control of and rehabilitated their buildings after the for-profit owners abandoned them. Their efforts often formed the kernel of neighborhood reclamation struggles.

Later, tenants and community activists began using the PHFL proactively to take control of buildings from exploitative, abusive, and absentee landlords. Tenants used rent strikes, litigation, and direct action to pressure bad landlords to give up their neglected buildings to the City so that they could be converted to HDFCs.

“Today, there are an estimated 25,800 of these apartments across some 1,200 buildings, according to the New York City Department of Housing Preservation and Development.”3

Unfortunately, due to a general lack of enforcement of regulations, many HDFC coops have become less and less affordable as the neighborhoods around them (which they helped to reclaim from abandonment) are gentrified. In other HDFC coops, resident aging and turnover has resulted in loss of knowledge, commitment, and skills, causing deterioration of buildings and finances. During the Giuliani administration, the City began prioritizing the transfer of city-owned buildings to private developers rather than to HDFCs. All of this has led to a decline in the role of HDFC coops in the creation and preservation of affordable housing. This decline is the result of deliberate, politically-driven policy and resource-allocation decisions, and is part of a larger shift away from government regulation and community control of housing and towards market-driven development. There is no reason to conclude that HDFC coops cannot continue to be relevant, effective, and sustainable when provided with appropriate support.

PART III: How does a building become an HDFC coop? (10 minutes)

HDFC coops are created when the City transfers ownership of a building (usually acquired through tax foreclosure) to tenant ownership through an HPD-run transfer program, such as:

Tenant Interim Lease (TIL) Program:

o Tenants of a city-acquired building must form a tenant association and apply to HPD to enter the TIL Program. To be eligible, the building must require rehabilitation, at least 60% of tenants must sign on (100% if building has 5 units or less), and at least 50% of tenants must be up to date on rent. 28 RCNY 34-03.

o If the building is found eligible, the City enters into a net lease of the building to the tenant association, which manages it with HPD supervision and training. 28 RCNY 34-04.

3 http://www.nytimes.com/2014/06/29/realestate/affordable-new-york-apartments-with-a-catch.html

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o If the tenants continue to meet the program requirements (complying with HPD supervision, remaining up-to-date in rent, etc.), and if at least 80% of tenants sign agreements to purchase shares, the building is ultimately sold by the City to a shareholder-controlled HDFC coop and is run by its resident shareholders from then on. 28 RCNY 34-05.

o Buildings in the TIL program are City-owned, and therefore exempt from rent stabilization and rent control while in the program

Third-Party Transfer (TPT) Program:

o City-owned, tax-foreclosed property is transferred to Neighborhood Restore HDFC. (Neighborhood Restore is a private corporation created by HPD, so apartments are not exempt from rent regulation while the building is at this stage.) 28 RCNY 8-02.

o Neighborhood Restore HDFC usually transfers the building to a private owner, either for- or non-profit, in which case the building is no longer an HDFC. 28 RCNY 8-04, 8-05.

o However, the tenants can petition to have the building transferred to a non-profit that will sponsor conversion to an HDFC coop (and will train the tenants). In order to do so, the tenants have to meet basically the same requirements as under the TIL program (buy-in of 80% of apartments, up-to-date payment of rent, etc.) 28 RCNY 8-06, 8-07.

B) HDFC Coop Litigation and Policy Reform Issues (Garrett Wright, Senior Staff Attorney, Urban Justice Center Community Development Project) (20 minutes)

PART I: Tenants’ Rights in HDFC Buildings (10 minutes)

Due to HDFC buildings’ entwinement with government agencies such as HPD, tenants of such buildings are often entitled to constitutional due process protections. This can potentially apply to both HDFC rental buildings and HDFC co-ops, as some HDFC co-ops still contain rental apartments. Many HDFC rental buildings are subject to either rent stabilization or rent control, at least for the duration of the regulatory agreement with HPD. Furthermore, some purported co-op buildings may have never been properly incorporated under the Business Corporations Law and thus are arguably still HDFC rental buildings.

Due Process Protections: Accordingly, HDFC landlords often must alleged grounds for eviction aside from the mere

expiration of the lease. See 512 E. 11th St. HDFC v. Grimmet, 181 AD2d 488 (1st Dept 1992); Hudsonview Terrace v. Maury, 419 N.Y.S.2d 409 (App. Term, 1st Dept. 1979); 50 W. 112th St. HDFC v. Ali, 831 N.Y.S.2d 353 (Civ. Ct. 2006) (Unreported Disposition); Saunders Homes HDFC v. Lamar, 862 N.Y.S.2d 811 (Civ. Ct. 2008) (Unreported Disposition); but see

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757 East 169th Street HDFC v. Haney, 656 N.Y.S.2d 92 (Civ. Ct., 1996) (Heymann, J.) (holding that Grimmet protections should not extend to sublessors or other licensees).

These due process protections in HDFC buildings apply even for tenants who moved into an apartment after a building’s purported co-op conversion. (330 S. Third St., HDFC v. Bitar, 28 Misc.3d 51, 54 (N.Y. Sup. Ct. 2010) (also holding that “landlord’s conduct is similarly not private, given the extensive entwinement between the City and landlord and the fact that landlord’s ‘very purpose is to meet the governmental concern of housing the poor,’ and notwithstanding that here, unlike in Grimmet, the City’s approval was not required for the commencement of a holdover proceeding”); 823 East 147th Street Housing Development Fund Corporation v. Hinnant, L&T 051880/2013, N.Y.L.J. 1202649981134 at *1 (N.Y.City Civ. Ct., Bronx County March 28, 2014) (Vargas, J.); 303 W. 122nd St. HDFC v. Hussein, 969 N.Y.S.2d 806 (Civ. Ct. 2013) (Unreported Disposition); Marcus Garvey Park Homes HDFC v. Franco, 815 N.Y.S.2d 807 (Civ. Ct. 2006)).

In 408 East 10th Street Tenants Association v. Hernandez, a case involving a building participating in HPD’s Tenant Interim Lease (“TIL”) program, the court also explicitly applied the protections of Grimmet to a licensee who was not the tenant of record for the apartment, but was instead the son of the tenant of record. 408 E. 10th St. Tenants Ass'n, 36 Misc.3d 1210 (Civ. Ct. 2012). The court held that the licensee-son could only be evicted for cause, even in the absence of any proof of a statutory succession rights scheme for a TIL building. Id. at 9.

Although Judge Heymann held in Haney that Grimmet protections did not extend to a remaining family member of a deceased tenant of record, most of the other cases cited supra do not explicitly discuss whether the tenants were the official tenants of record, subleassees, or licensees.

Purported co-ops that may not have been properly incorporated: Furthermore, some purported HDFC co-ops may not have been properly incorporated at the

time of their ostensible co-op conversion. Under PHFL §573, HDFCs are typically either incorporated pursuant to either the business corporations law (“BCL”) or the not-for-profit corporation law (“N-PCL”).

If the HDFC is incorporated pursuant to BCL it must file a certificate of incorporation (see BCL §402) and issue shares (see BCL §501) after receiving a “no-action letter” or approval of offering plan from the attorney general. (See NYC Administrative Code §13-18.9 and GBL §352-e, respectively).

However, if the HDFC is incorporated solely pursuant to N-PCL then it is a rental building and not a cooperative because the issuance of shares is prohibited. N-PCL § 501 states that

“A corporation shall not have stock or shares or certificates for stock or for shares, but may issue non-transferable membership certificates or cards to evidence membership, whether or not connected with any financial contribution to the corporation, as provided in section 601 (Members).”

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The intent of the New York State Legislature to clearly demarcate BCL co-ops from N-PCL rental buildings is also demonstrated in other sections of Article XI of the PHFL. For example, PHFL Section 573(4) states that

“The certificate of incorporation of any such corporation organized pursuant to the business corporation law and this article shall, in addition, provide that each housing project of such corporation shall be operated exclusively for the benefit of the persons or families who are entitled to occupancy in such housing project by reason of ownership of shares in such corporation, and that such corporation may issue shares for home owners purchase notes if the purchase transaction has received the written endorsement of the commissioner in accordance with supplementary rules and regulations of the commissioner made therefor and if at least two hundred dollars in money or property is received by such corporation toward the issuance of such shares.” (emphasis added).

The Section of PHFL Article XI that addresses regulatory agreements between a HDFC and certain government agencies also distinguishes HDFCs incorporated under the N-PCL and the BCL. Section 576(1)(b) of the PHFL states that

“Dwellings in any such project shall be available for persons or families whose probable aggregate annual income does not exceed six times the rental (including the value or cost to them of heat, light, water and cooking fuel) of the dwellings to be furnished such persons or families, except that in the case of persons or families with three or more dependents, such ratio shall not exceed seven to one. For purposes of this paragraph, tenants in a housing project of a housing development fund company organized under the provisions of the business corporations law and this article shall have added to their total annual carrying charges an amount equal to six per centum of the original investment of such person or family in the equity obligations of such housing company.” (emphasis added).

The legislative history of Article XI of the PHFL also clearly demonstrates that the New York State Legislature intended to create separate and distinct HDFC co-ops and HDFC rental buildings, with the former incorporated under the BCL and the latter incorporated under the N-PCL. “The bill creates two different types of non-profit corporations: a type of membership corporation which will provide rental housing and a type of business corporation which will provide cooperative housing.” Assembly Intro No. 5306 Senate Print No. 5647.

In Spencer v. Petrone, the New York Appellate Division reversed a lower-court decision that declared a plaintiff the sole officer and director of a not-for-profit corporation after the Spencer plaintiff had acquired 50% of the shares issued by the not-for-profit corporation. 297 A.D.2d 730, 747 N.Y.S.2d 569, 570 (2d Dep't 2002). The Appellate Division held that an agreement, in which the plaintiff acquired an additional 25% of the not-for-profit corporation's shares by paying the previous owner of the shares $15,000, was null and void, and declared all members of the corporation to have equal voting rights. Id. at 570. The court stated that “[a] not-for-profit corporation… is statutorily prohibited from issuing shares (see N-PCL 501; 502). Therefore, there were no shares for the plaintiff to acquire, and the purported sale has to be declared null and void.” Id. See also, IDT Corp. v. Touro Coll.,

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CIV.A. 07-6080 (JAG), 2008 WL 5381268 (D.N.J. Dec. 17, 2008) aff'd, 376 F. App'x 245 (3d Cir. 2010) (unpublished decision) (holding that “New York courts have applied [N-PCL] § 501 to declare agreements null and void in cases involving not-for-profit corporations that issued shares” and invalidating an alleged transfer of shares in a not-for-profit to another party). But see Thakur v. 210 Forsyth Street Housing Development Fund Corp. 17 Misc.3d 1012, 844 N.Y.S.2d 686 (N.Y.Sup.Ct.2007) (holding that “a corporation organized under the N-PCL ‘shall not have stock or shares or certificates for stock or for shares’ and invalidating a bylaw change which claimed to give the tenants of the building shares in the HDFC, but not directly addressing question of whether tenants could otherwise lawfully own apartments as cooperative units).

Because a HDFC incorporated pursuant to the N-PCL cannot issue shares and because Article XI of the PHFL distinguishes BCL co-ops from HDFC rentals, some purported co-ops may actually be HDFC rental housing. While purported “shareholders” in such buildings may have possibly paid money to become a member of the HDFC entity, such membership in a Not-for-Profit Corporation arguably did not grant the “shareholders” any equitable rights or property rights. It merely allowed them to become members of the HDFC and to participate as members in the governance of the HDFC.

Furthermore, such a membership interest in a N-PCL entity is not transferrable, which would mean that any claim of a membership interest in an alleged “cooperative apartment” could never legally be sold back to the HDFC or to any other party. See N-PCL § 501. This claim would thus be inconsistent with the concept of shares in a cooperative being a form of property which can be transferred to other parties or inherited upon the death of the shareholder.

The only lawful way that a N-PCL HDFC entity can perform a cooperative conversion would be to create a new HDFC entity that was incorporated pursuant to the BCL. The N-PCL HDFC could then convey the title to the property to the new entity, which then would have had the legal right to submit an offering plan or no-action letter to the Attorney General’s office. If the Attorney General’s office then approved such a plan, the new entity (as a BCL entity) could issue shares and the concomitant stock certificates and proprietary leases.

PART II: HDFC Policy Reform Issues (10 minutes)

The Task Force on City Owned Property (“TCOP”) has been campaigning recently around several major HDFC Policy Issues. These include affordability restrictions on sales of HDFCs co-ops, increased co-op support and oversight and possible wave of foreclosures due to unpaid water and property taxes.

o Some co-op unit owners have been selling their apartments for $1 million or more or to new shareholders who have high incomes, which contravenes the express purpose of co-ops remaining affordable for low-income individuals.

o Some co-op Boards of Directors have been selling or attempting to sell the entire building to a new owner, which may then result in dissolution of the co-op and rentals or sales of apartments at unaffordable amounts

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o “Approximately 150 HDFC co-ops are at risk of foreclosure due to accumulated property taxes and water and sewer charges.” [From TCOP white paper on “Preserving Affordable Housing: The Importance of Regulating, Monitoring and Incentivizing HDFCs”]

TCOP has proposed several legislative solutions to these problems. One proposal is for the City to provide a 100% property tax abatement to HDFCs for the next forty years in exchange for opting into regulatory agreements with the City that would keep the units affordable and restrict the resales prices of co-op units and include income limitations for new co-op owners.

o Re-sale prices would be set at amounts that would be affordable to households of income levels below 80% of AMI.

o Regulatory agreement would include “provisions requiring approval both from HPD and the New York State Department of Law (“AG”) for dissolutions, sales of the entire building and sales of substantially all of the HDFC’s assets.” [TCOP white paper]

TCOP also recommends extension of the City’s Division of Alternative Management (“DAMP”) tax cap to include HDFC co-ops not incorporated via the TIL program and to cap taxes at a lesser percentage (current DAMP tax cap is 13.1450%). The current DAMP tax cap will also expire in 2029.

C) Incubation and Operation of Worker and Housing Cooperatives in Northern Manhattan (Jennifer Welles, Housing and Worker Coop Developer Northern Manhattan Improvement Corporation) (20 minutes)

PART I: Community Profile: Washington Heights and Inwood (5 minutes)

a) Low-income immigrant community facing pressures of gentrification and loss of affordable housing. Buildings are being bought up by the dozen by foreign investors and hedge funds who drive out long term tenants paying lower rents.

In a June 2015 report by the New York State Comptroller's Office:

Neighborhood of 218,500 people- an increase of 6% between 2010 and 2013 Immigrants accounted for 48 percent of the population, with two-thirds coming from the

Dominican Republic. In 2013, median household income was only $37,460 (less than the citywide average of

$52,220), and one-quarter of the households had incomes below the poverty level. The area also has a high concentration of seniors with incomes below the poverty level (In

the HDFC buildings we’ve worked a third have been senior residents)

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Even after taking subsidies into account, 40 percent of all renters devoted more than 30 percent of their household income to rent.

b) Employment opportunities that residents once had in factories and small businesses are no longer available or pay very little. Wage theft is a big problem in service jobs like house cleaning. In June 2015, the unemployment rate in Washington Heights and Inwood was 4% higher than the city average.

c) Domestic Violence: Domestic Violence survivors face particular challenges to employment.

Forced Economic Dependence: Studies indicate that one of the best predictors of whether a victim will stay away from his or her abuser is the victim’s degree of economic independence. However, violence often jeopardizes victims’ ability to keep a job, whether because of the need for time off for court appearances or medical attention, or abusers’ active interference or sabotage, i.e. preventing victims from going to work, harassment at work, limiting access to cash and transportation, and manipulating child-care arrangements. Accordingly, female victims are more likely than other women to be unemployed, to suffer from health problems that can affect employability and job performance, to report lower personal income, and to rely on welfare.

Victims of Domestic Violence also face issues of discrimination in the workplace because of needing to take time off. They also deal with issues of Mobility/Safety- survivors often have to leave jobs due to safety reasons, including on the job harassment and assaults.

PART II: Why Cooperatives? (5 minutes)

a) Community Stabilization: Ability for low income people to obtain assets, generate wealth and stay in the community

b) Non-Wealth Extraction Model: When the communities control the resources, they care for them. Cooperatives can stabilize communities-worker and housing coops are locally owned, so owners don't move the company or abandon properties based on market trends or lower costs of labor and taxes. The money that is earned or saved by cooperatives, tends to be spent in the community.

c) Leverage City money: HDFCs have access to low interest City loans, tax abatements, Section 8 subsidies and other financing streams that are invested in these buildings for their long term preservation as affordable housing. Worker Cooperatives are now also receiving City funding through the recent initiatives of the past two years.

d) Develop skills of community residents: Members of Coops develop transferable skills that stay in the community and help them in future jobs or enable them to be promoted.

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e) Engagement of Community Organizations: Role of CBOs and other technical assistance providers key to success--also have stake in their success and are not profit driven. Mission driven nonprofits have the wherewithal to stick with start-up worker coops and developing HDFCs through the long process of becoming self-sufficient. This also helps the cooperatives stay connected to the principles upon which they were founded and receive other services provided by those organizations.

f) Community Economic Solidarity: Cooperatives encourage interactions and transactions across class and culture, which we have observed in our neighborhood. There is also a tendency for cooperatives to support local businesses, contractors and other professionals. Examples: local real estate attorney, credit union, managing agents, contractors, insurance broker, accountants, etc.

PART III: Case Studies (10 minutes)

a) HDFC Housing Cooperatives:

1. 504 W. 171st St.: 20 unit building, converted to cooperative in 2009, 2nd cooperative to be formed as part of the Third Party Transfer Program of HPD.

In 2003, The building entered the Third Party Transfer Program. Drug dealers occupied 3 apartments, former building owner was serving 36 year in federal prison for arson conspiracy, the tenants were extremely low income (less than 30% AMI), over 650 housing code violations and one could see from one apartment to the one below because of holes in the floor.

2005: Construction financing secured through the National Cooperative Bank (now known as Capital Impact), architectural plans were drawn up, construction commenced, tenants checker boarded in the building or relocated outside the building in other apartments, 2 years of construction, tenants go through cooperative housing training program

2007-2009 Section 8 vouchers procured to cover monthly maintenance increase, cooperative formed, 17 existing tenants purchase shares in the apartment for $2500, 1 unit sold to outside buyer who lived around the corner for less than $50,000, and 2 tenants remained as renters.

2012: A vacancy due to the death of an elderly tenant, who lived in the building since 1939, resulted in the sale of a unit to a community health educator who was living in the neighborhood.

2015: The coop has about $65,000 in their operating account, in addition to their reserve accounts, have no outstanding bills and no ongoing court proceedings. They have well attended annual meetings and a board of directors elected by the shareholders who meet regularly. The residents have stayed largely the same since the beginning of the development and many are paying less for their housing costs, because of Section 8 vouchers, than they were prior to the cooperative conversion.

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2. 652-656 W. 160th St. -2 buildings with 29 units each, converted to cooperative in 2012

(see handout for detailed information)

a) Most successful building in our portfolio in terms of financials and involvement of the 9 member board of directors. They have over $300,000 in their operating account, in addition to their reserve accounts and no ongoing court cases. They continue to make improvements to the buildings while they grow their reserves.

b) Need to engage larger community in improving the area. It's not enough to have their own buildings renovated and under cooperative ownership. For example, the buildings are located on one of the worst drug dealing blocks in the neighborhood. Weapons and large quantities of drugs were found in one of their apartments occupied by a major leader of drug traffickers on the block.

3. Ecomundo Cleaning- 15 current worker-owners, 5 in training, launched in 2012

a) Green cleaning company for residential and commercial clients.

b) First worker cooperative in Washington Heights and Inwood

c) Over 1/2 the members are survivors of domestic violence

d) Blood, sweat and tears: long term project several years from initial planning, recruitment, training, business planning, and start-up to becoming a self-sustaining business

e) Support and resources from local and national cooperative associations have helped them get the training and resources they need and understand cooperative principles.

f) Eco-Cleaning industry: Big growth industry, easy early success, exponential growth in sales revenue. In 2014, the annual revenue was about $209,000 and by August of this year it was already $235,000.

h) Member benefits: Voice in how the business is run, flexible self-directed schedules, increase in income (average $20/hour), learned new skills(business management, personal development and relationship skills), opportunities to travel to other states for conferences and meet other cooperators, opportunity to use education and experience from their native countries in ways that they haven't been able to before (accounting, teaching, community organizing, etc), self-confidence, pride in ownership and sense of belonging and community, possibility to add more financial benefits for members as the business grows.

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D) Formation of Worker Cooperatives in New York (Melissa Risser, Staff Attorney, Urban Justice Center Community Development Project) (20 minutes)

PART I: What is a Worker Cooperative (5 minutes)

• A cooperative is an organization that is democratically owned and governed by its members. Each member has one vote on important decisions, such as electing the Board of Directors. Cooperatives may also hire professional managers to run the day-to-day operations of the business. Cooperatives provide some type of economic advantage to members.

• Worker cooperatives are businesses that are democratically owned and managed by their worker-owners. Each worker has one vote. Typically, members pay a fee to join a cooperative and are compensated for the labor they provide the cooperative throughout the year. At the end of the year (or accounting period), if the coop has profits to distribute, it rewards members based on “patronage” (how much a member has participated in the cooperative that year).

• CDP’s worker cooperative clients tend to be incubated by one of our community partners. Worker cooperatives allow members who work in sectors with high levels of exploitation or who have significant barriers to employment the opportunity for stable, safe, dignified, and better-paid jobs. Worker cooperatives give members the opportunity to control their workplace, build leadership, civic engagement and self-advocacy skills, and encourage participation in broader movements for social and economic justice.

PART II: Entity Options in New York (10 minutes)

Cooperative Corporations Law

• New York’s CCL functions in conjunction with the New York Business and Not-for-Profit Corporation Laws.

• CCL: "It is the declared policy of this state, as one means of improving the economic welfare of its people, particularly those who are producers, marketers or consumers of food products, to encourage their effective organization in cooperative associations for the rendering of mutual help and service." § 2 of the CCL (emphasis added).

• The CCL permits the formation of four types of coops: (1) agricultural, (2) general, (3) membership, and (4) worker. Generally, the membership and worker types are most relevant for our practice. However, where food production is the primary activity, clients could consider the agricultural or general types. For the purposes of this presentation we shall focus on the membership and worker cooperative corporations.

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Membership Cooperatives (Governed by the CCL & NPCL)

• § 3(k) of the CCL defines a membership cooperative as "a non-stock cooperative which admits only natural persons to membership, which provides services only to members and which makes no distribution of net retained proceeds other than to its member on the basis of their patronage." § 5 of the CCL states that membership cooperative corporations are governed by the Not-for-Profit Corporation Law (NPCL).

• A nonprofit membership cooperative is governed by its worker-owners. The purpose of a nonprofit membership worker cooperative is to collectively train and market the services of the member-owners. Member-owners also receive job referrals from the membership cooperative. Member-owners then contract directly with clients. The coop itself does not directly contract with clients. Because the purpose of the cooperative is just to provide training, marketing, and referral services to members, and not to make money at the business level, it is considered a nonprofit. Nonprofit membership cooperatives are not considered charitable 501(c)(3) tax-exempt organizations. They may, however, qualify for tax exemption as a labor organization under section 501(c)(5) of the tax code.

Worker Cooperative Corporations (Governed by 5-A of CCL & BCL)

• § 80 of the CCL states that a worker cooperative is a cooperative incorporated under Article 5-A of the CCL & under the BCL. It is democratically controlled and operated by its members. A worker cooperative corporation in New York may be formed for any lawful business purpose and may be conducted for profit. CCL § 13. No worker cooperative shall be classed as a non-profit or not-for-profit corporation. CCL § 83.

• Typically, members are employees of the Cooperative. Members receive wages throughout the year, and patronage dividends at the end of the year (or accounting period). Article 5-A Worker Cooperatives often have internal capital account systems. Internal capital accounts allow coops to issue members patronage dividends, but retain some of those earnings within the cooperative to use for cash flow needs. These function like IOUs, and are paid out to members within an agreed upon amount of time.

LLC Cooperatives (LLC Law)

• LLCs combine corporation-style limited liability and partnership-style flexibility. This flexibility allows LLC Coops to structure themselves as cooperatives.

• In many LLC Cooperatives, members are viewed as owners, and not employees of the Cooperative. Most LLCs are taxed as a partnership – the income, losses, deductions, and/or credits pass through to members for federal tax purposes. Members include their share of the LLC’s income or losses on their individual tax returns.

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Cooperative Structures (under NY Statute)Membership Cooperative

Corporation (under Not-for-Profit Corporation

Law)

Article 5-A Worker Cooperative Corporation

(under Business Corporation Law)

Limited Liability Company (LLC)

Formation Costs

$110 to form $160 to form $750-$1,100

Taxes If cooperative meets certain criterion, may be exempt from federal & state taxes. Otherwise,

must pay federal & state taxes based on any

income left over at the end of the year, but can deduct amount that goes

to members

Corporation pays federal & state taxes based on any

income left over at the end of the year, but can deduct

amount that goes to members.

No tax on organization. Federal and state income

tax passes through to members. Must pay $25-

500 a year in NY corporate franchise tax.

Governance Requirements

Need at least five directors on board of

directors, with three-year, staggered terms

2/3 of members needed to adopt or amend by-

laws

Need at least one DirectorFlexible regarding

governance

Name Must have “Cooperative,” “Corporation,”

“Incorporated,” or “limited” in name

Must have “Cooperative,” “Corporation,”

“Incorporated,” or “limited” in name

Cannot use name “Coop” or “Cooperative” in name.

Must use “Limited Liability Company,”

“LLC” or “L.L.C.” in name

Employment Law

Members generally not considered employees

Members generally considered employees

Members generally not considered employees

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PART III: Step-by-Step Guide to Formation (5 minutes)

• Check Name Availability in the DOS Corporation and Business Entity Database

• File Articles of Organization (AOI) ($200; for LLC) or Certificate of Incorporation (COI) ($125; for Corporations) with DOS

• Draft Bylaws (Generally only Corporations)

• Adopt a Written Operating Agreement Within 90 Days (LLCs Only)

• Comply with Publication requirements: Within 120 Days After AOI Has Been Filed, Publish in 2 Newspapers Designated by County Clerk Information About Formation of LLC, For Six Weeks Each ($500+). Get Affidavits of Publication From Newspapers & Send in Affidavits With a Certificate of Publication to DOS ($50) (LLCs only)

• Obtain EIN, Insurance, Required Licenses & Permits; Open Bank Account; Identify Bookkeeper/Accountant; Draft Additional Contracts, Manuals, etc.

Question and Answers (20 minutes)

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