Limited-Equity Co-ops: How Resale Price Caps Work

A limited-equity cooperative is a housing co-op where residents buy a share in the building and agree to resell that share at a price set by a formula, not at the market price. The Housing Solutions Lab at NYU Furman Center puts it this way: residents purchase a share in a development rather than an individual unit and commit to resell at a price determined by formula, an arrangement that keeps the home affordable at purchase and over the long term. The seller gets back what they paid plus a limited amount of growth. The next household buys at a price it can afford.

Want to see a capped price worked out? Use the housing co-op resale calculator. Enter the original share price, the years held and your co-op's formula, and it shows the most the share can sell for. Your building's own documents decide the real number, so check the formula there first.

This page explains what a cap is, the formula types that exist, who writes them, how long they last and what to check before you buy. For the wider picture of co-op housing, start with housing cooperatives. For one New York example in depth, see HDFC co-ops.

What "limited equity" means

Equity is the part of a home's value that belongs to the owner. In a market-rate co-op, the owner's equity can grow or shrink with the market, and a seller keeps whatever the buyer pays. In a limited-equity co-op, the documents cap how much of any rise in value the seller can keep. The cap is the trade for a lower entry price.

New York City's housing agency, HPD, states the trade-off for its HDFC co-ops directly: a shareholder's ability to gain a profit from selling a unit is limited to ensure the continued affordability of the unit to future low-income purchasers. HPD also says these co-ops benefit from reduced real estate taxes in exchange for following income and resale restrictions.

Three features usually come together:

• A price formula. The resale price is worked out from the original price, not from what buyers are bidding.
• A buyer test. The Housing Solutions Lab says eligibility is typically limited to households with incomes below a set threshold at purchase. It adds that buyers still need enough income to qualify for a reasonably priced fixed-rate mortgage and to keep up with the monthly membership fee.
• Shared ownership of the building. Residents own shares in a corporation that owns the property, and the corporation is run by an elected board, as in any co-op apartment.

The Housing Solutions Lab adds that initial affordability is typically achieved with some form of government help, such as construction subsidies and low-interest financing. It also notes that the formula documents may give the co-op a right of first refusal when shares come up for sale, which helps make sure the share goes to an eligible household at the formula price.

How resale price caps work

The formula starts from a known number, usually the price the seller paid, and adds a limited amount. Formula types in use fall into a few families. The table names a primary source for each.

Each family is described below.

Fixed yearly rate

HUD describes a fixed-rate formula in its HOME program rule. The fixed percentage per year, for example 3.5 percent, is multiplied by the number of years the owner held and lived in the home. In HUD's own example, 3.5 percent for 10 years is 35 percent. That rate is then applied to the sum of the original price and the value of capital improvements, and the result is the owner's fair return. The Housing Solutions Lab says co-op formulas may use a flat rate such as 1 to 3 percent.

Index formulas

The Housing Solutions Lab says a formula may peg growth to the Consumer Price Index or another index, or to the change in area median income. HUD's rule describes the index version as multiplying the original price plus capital improvements by the change in the chosen index over the time the owner held the home. The cap goes up when incomes or prices go up, but not faster.

Itemized and appraisal formulas

HUD lists two more methods. An itemized formula adds and subtracts clearly defined factors, and HUD says it must include the value of capital improvements and the down payment plus all principal payments on the loan. An appraisal formula gives the owner a defined share of the market appreciation measured by licensed third-party appraisers.

Cost-based prices in Mitchell-Lama co-ops

HPD's Mitchell-Lama rules show a different shape. Under Section 3-06(b), the resale price of shares is fixed by the housing company, subject to HPD approval, and equals what the seller paid for the shares, plus capital assessments and voluntary capital contributions that HPD approved and the seller paid, plus, if the company has set it up, a proportionate share of the mortgage principal paid down. The rule also allows a non-refundable administrative charge of up to $150. There is no market-price component. See Mitchell-Lama co-ops.

Profit splits in HDFC co-ops

HPD says the sale of apartments in many HDFC co-ops is subject to a flip tax, which divides the sale profit between the selling shareholder and the HDFC. HPD's worked examples:

In HPD's examples the same split applies to every sale in that building, whatever the years held. Profit here means sale price minus the original purchase price. For market-rate buildings, see flip tax.

A formula tied to buyer income

Some HDFC co-ops use a formula in Section 576 of New York's Private Housing Finance Law. The statute text says residents' income may not exceed six times the annual carrying cost, including heat, light, water and cooking fuel, or seven times for families with three or more dependents, and that an amount equal to six percent of the original investment is added to the carrying charges for that test. HPD describes the same rule as limiting a new shareholder's income to 6 times (one or two people) or 7 times (three or more) the annual maintenance plus utilities plus six percent of the seller's original investment. It limits who can buy, which in turn limits what the market can pay.

A worked example (illustrative)

These numbers are illustrative only. They are not from any real building.

A seller paid $10,000 for a share ten years ago. The building's formula grows the price 2 percent a year.

• If the documents say the rate compounds, the formula price is $12,189.94.
• If they say simple growth, the formula price is $12,000.00.

The two readings differ by $189.94 on a small share. On larger shares or longer holds the gap widens, which is why the wording of the formula matters.

Now an index formula. A seller paid $20,000 and held the share eight years. The index rose from 100 to 120, which averages 2.31 percent a year. The documents set a yearly floor of 1 percent and a cap of 3 percent, so the actual average is within the band and the grown price is $24,000.00. The seller also made a $2,000 improvement two years ago that the board approved, and the formula reduces improvements in a straight line over a 10-year life, so the credit is $1,600.00. The seller owes the co-op $300 in unpaid charges. The formula price is $24,000 plus $1,600 minus $300, which is $25,300.00.

The calculator handles fixed rates (compounded or simple), index formulas with an optional yearly cap and floor, approved improvements with optional straight-line reduction, and money owed. It does not model profit splits or appraisal formulas.

Who sets the cap

No single national rule fixes the cap. It comes from one or more of these layers:

HPD says HDFC co-ops are often subject to stricter requirements in their deed, certificate of incorporation, bylaws, offering plan and regulatory agreement, and that each HDFC must comply with the most restrictive requirements in place. HUD adds that the resale rules in HOME-assisted housing must be imposed through deed or use restrictions, a recorded agreement restricting use, covenants running with the land or a similar mechanism HUD approves in writing.

HUD's HOME rule applies only to housing that received HOME funds, and it leaves it to the state or local program to decide whether co-op membership counts as homeownership under state law. Treat it as a named example of how a public program writes a resale rule, not as a rule for every co-op.

How long the caps last

The documents set the length. The Housing Solutions Lab explains the range: in some cases the minimum period is set by the terms of the financing, and it gives the example of early limited-equity co-ops that used 30 or 40 year HUD mortgages, after which members could vote to convert to market-rate and drop the resale limits. Many limited-equity co-ops, it says, include permanent restrictions, and it notes that pairing a co-op with a community land trust can help make restrictions permanent.

For HOME-assisted housing, HUD says the affordability period is based on the total HOME funds invested in the home, and that the restrictions may end if there is a foreclosure, a transfer in lieu of foreclosure or an assignment of an FHA-insured mortgage to HUD. If the previous owner later regains an ownership interest, HUD's rule revives the restrictions on the same terms.

New York's HDFC co-ops are different again. The state Attorney General's Real Estate Finance Bureau issued guidance in 2015, reflecting the views of the Department of Law, HPD and the state housing agency. It says Article XI, unlike Article II for Mitchell-Lama companies, does not authorize an HDFC to reconstitute itself as another type of entity, and that the Department of State will not file an amendment removing the low-income purpose. It adds that sale proceeds must be used for the corporate purpose and that distributing sale proceeds to an HDFC's shareholders is prohibited by law. It says a building that wants to sell needs its supervising agency's written approval.

Before you buy a limited-equity share

Ask for the papers that carry the cap, in this order:

1. The resale formula. It may be in the bylaws, the proprietary lease, the offering plan or a recorded regulatory agreement. Read how it grows the price, whether growth compounds, and how improvements and amounts owed are treated.
2. The most restrictive document. HPD says the most restrictive requirement in place governs. If two documents disagree, ask which controls.
3. Public records. HPD says New York City's ACRIS records system holds deeds, regulatory agreements, security agreements and mortgages for HDFC buildings.
4. The building's finances. A capped co-op still has bills. Ask for recent financial statements, reserves and any assessments.
5. Buyer eligibility. Confirm the income limit and household rules for your situation and who checks them.
6. A lawyer who knows the building type. A cap that is misread costs real money.

Pay nothing outside the documented price. If a seller asks for any amount beyond the price the documents allow, stop and tell the supervising agency. In New York that is HPD or the state housing agency, depending on the building.

When a cap changes how you sell

A seller in a capped co-op usually cannot list at market price. Check, before listing:

• Who sets the price. In the Mitchell-Lama example above, the housing company sets it subject to HPD approval.
• Who may buy. The next buyer has to meet the income test.
• What is deducted. Flip tax shares and amounts owed to the building come off the seller's proceeds under the building's documents.
• What can be added. Approved improvements may count, depending on the formula. Keep receipts and board approvals.

Frequently Asked Questions

What does limited equity mean in a co-op?

It means the co-op's documents limit how much a seller can gain on resale. The seller gets back the original price plus a limited amount set by formula, and the next buyer pays a price that stays within reach of the target income group.

How is the resale price of a limited-equity share calculated?

By the formula in the co-op's documents. Common shapes are a fixed yearly rate, an index such as median income or the Consumer Price Index, an itemized formula, an appraisal formula, a cost-based price with approved capital contributions, or a profit split. Use the resale calculator to try a fixed-rate or index formula.

Who sets the cap?

It depends on the building. The cap can come from a program rule (HUD's HOME rule asks the local program to define it), state law (New York's Private Housing Finance Law for HDFC co-ops), a city agency (HPD approves Mitchell-Lama share prices) or the co-op's own documents. HPD says the most restrictive requirement governs.

Do limited-equity co-ops have income limits?

Usually yes. The Housing Solutions Lab says eligibility is typically limited to households below a set income at purchase. For New York HDFC co-ops, HPD says state law caps household income at 165 percent of area median income, and many buildings set a stricter limit in their own documents.

Do the caps last forever?

Not always. The length is set by the co-op's documents and financing. The Housing Solutions Lab says some early co-ops could vote to convert to market-rate after their HUD mortgages were paid off, while many include permanent restrictions. New York's Attorney General guidance says an HDFC cannot simply convert to a market-rate co-op.

Is a limited-equity co-op the same as an HDFC co-op?

An HDFC co-op is one type. HPD calls its HDFC co-ops limited-equity cooperatives organized as Housing Development Fund Corporations. Limited-equity co-ops also exist under other programs and as stand-alone nonprofit projects. See HDFC co-ops.

Is a Mitchell-Lama co-op limited equity?

Yes, in the sense that the resale price is set by program rules, not the market. HPD's rules fix the resale price of shares by formula, subject to its approval. See Mitchell-Lama co-ops.

Can I get a loan on a limited-equity share?

Lenders decide building by building. Read co-op share loans for how lenders look at shares, and ask early whether a lender will lend on a building with resale limits.

Where to go next

• Resale calculator for housing co-ops
• Housing cooperatives: how co-op housing works
• HDFC co-ops
• Mitchell-Lama co-ops
• Flip tax
• Co-op share loans
• Proprietary lease
• Resident-owned communities
• Housing cooperative vs condo