Read More »" /> Co-op Law for Dummies. Randall Pentiuk; Pentiuk, Couvreur & Kobiljak P.C. | National Cooperative Law Center - Part 5

Co-op Law for Dummies

J. Know How to Deal with Your City Government

1. Early Warning System: You need to be aware of what is going on & what they are thinking about at City Hall

a. Under FOIA, request copy of agendas to be mailed to you in advance

b. Attend or watch on cable meetings of Council

2. Make City Hall Your Friend: LBJ said it is better to bring the camel in the tent

a. Host events that make your Coop known to the elected officials
-Invite them to Coop picnics and parties

b. Keep a friendly demeanor at all times

c. Get involved: volunteer

d. Community Block Grant Advisory Committee

e. Planning Commission

3. Mobilize & Make Your Voice & Power Known

a. Voter registration

b. Election day – promote voting at the Coop

c. Show of Force at Council Meetings where issues affecting your coop will be discussed
Example: Georgetown, Branford & Westminister – inspection ordinance

K. After the Mortgage Payoff: Options for the Cooperative

Excitement is growing as cooperatives that were developed over three decades ago look ahead to the day when their
original mortgages are finally paid off. Boards everywhere are asking that lies ahead, and how they should prepare. This
article gives valuable guidance on how to look at the issue and to plan properly for the mortgage burning (and its
corresponding HUD regulatory agreement termination) event.

First, it is important to debunk certain myths. First, there are many members who hold the belief that they will somehow
automatically own their units when the mortgage is discharged. This is simply false. The legal structure of the
cooperative is unaltered, regardless of the mortgage. The member will still be a member on the morning after; and he or
she will still have a proprietary lease (known as an occupancy agreement). The very same board will run the cooperative
as the day before. In essence, there is no change except the removal of debt from the balance sheet, and expiration of
the HUD regulatory agreement.

This leads to the second myth. Many believe that the cooperative must take some action at the time the mortgage is paid
off. Nothing is farther than the truth. Cooperatives are corporate entities, with perpetual existences. This means that
they will continue on and on, and theoritically forever. Therefore, no rush to take some action is needed.

We do not mean to imply that the board should not evaluate its options. As fiduciaries, board members need to be ever
vigilant and consider opportunities. But our point is that the cooperative does not have to do something – rather, it
may choose to do so. The difference lies between “must” and “may.”

So what does it mean to discharge the mortgage? Simply an end to payments to that lender, and the end of HUD’s close
oversight of the cooperative through its regulatory agreement. And while there is no need to join the “herd” of
cooperatives in a headlong rush to the future, it is advisable for boards to inform themselves of opportunities and
options in the post-HUD era.

We recommend that the board undertake careful and deliberate study. It must be ready to debunk myths. It needs to have
answers for members who suddenly want to convert the cooperative into condominium units in an attempt to get rich quick.
It ought to be ready to lead.

As aids to the board’s study of the post-HUD era, organizations such as Midwest Association of Housing Cooperatives and
National Association of Housing Cooperatives hold frequent classes. Also, a group of professionals in southeastern
Michigan have held a series of forums to facilitate study and discussion on the options . We suggest that boards – or
committees formed to advise the boards – take advantage of these resources, as well as consulting with the cooperative’s
own professionals. Beyond the expertise of these professionals, there are networking opportunities with other similarly
situated cooperatives that are wrestling with identical concerns, allowing the exchange of experiences.

A library should be amassed from the literature obtained in this quest for guidance within the board records. Written
opinions should be requested of the cooperative’s professionals on the question. This is an important proactive measure
to protect the board from lawsuits brought by members, since it creates evidence that the board relied on expert advice
– thus invoking the business judgment rule, that can be used to defeat challenges to the ultimate decisions made.

As noted above, the cooperative – regardless of whether it is a limited equity or a market rate type – need not take any
action simply because the mortgage is paid off and HUD is gone. Beyond doing nothing are a few options that need to be
understood in order to fulfill the boards’ role as fiduciaries.

For the limited equity cooperative, it may consider transforming itself to a market rate. The obvious reason for doing
so is to unleash the captive equity, and allow the market to determine what an outgoing member can sell his or her
membership for. While this may sound appealing and a clear choice, it is not so simple. If a cooperative is located
within a depressed market area, memberships may not be so marketable and capable of commanding a significant sum from
buyers. This may result in vacancies and those members who remain get saddled with covering the costs of empty units.

Moreover, the membership may believe in the goal of providing low and moderate income people with affordable housing
options. Thus, as a matter of policy, the cooperative may wish to remain limited equity.

Another choice, which we do not embrace, is the conversion to condominiums. While we oppose this option, it still must
be studied and considered. Members will raise it because it is commonly felt that it represents a pot of gold for those
who remain at the cooperative through the conversion process and then sell their condo units for significant returns. A
board needs to know of the pros and cons of condo versus cooperative, and be ready to explain why the cooperative form
of ownership is preferred.

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