Read More »" /> Co-op Law for Dummies. Randall Pentiuk; Pentiuk, Couvreur & Kobiljak P.C. | National Cooperative Law Center - Part 6

Co-op Law for Dummies

As an aside, we oppose the condo option for two reasons: one is philosophical and the other is pragmatic. We believe
that the cooperative form is vastly superior because it allows for pooling resources and taking care of the needs of the
membership through a democratic process, engendering a mindset that promotes the community as a whole. Condos, on the
other hand, promote an “us versus them” attitude.

Pragmatically, cooperatives are superior in how the law allows problems to be dealt with. We are allowed to use summary
proceedings to evict problem members. We can screen applicants and keep out criminals. Our boards can promulgate rules
and regulations to deal with evolving issues such as pets, parking, and people problems. Condos cannot deal effectively
with any of these matters.

Additionally, the experience with converting to condos in Michigan is very limited. A number of legal issues, ranging
from property taxation and assessment, to fairness among the membership, can and probably will give rise to expensive
litigation. Why rush into a situation that is nearly certain to place the cooperative in financial jeopardy as it
undergoes months or years of lawsuits and appeals? Thus, if for no other reason, we have urged caution and
deliberation to our clients. We think it best, even for those who want to convert to condos, to go slow and let others
pave the legal trail through a morass of issues.

One more point is important to bear in mind: HUD has stated adamantly that no cooperative funds are to be expended to
undertake the condo conversion while the regulatory agreement is still in effect. This fact may be useful to slow down
those who are promoting the condo conversion approach.

Beyond the issues of condo versus cooperative, or limited equity versus market rate, is the option to refinance. This
move achieves several goals: eliminates the original mortgage and replaces it with an new mortgage that allows for cash
infusion to get some improvements done; and it eliminates the burden of operating under HUD. We discuss refinancing in
greater detail elsewhere. But there is a side effect that is important to note for this discussion: the new lender will
not let the cooperative to convert to condo so long as the refinancing mortgage is in place.

L. Mortgage Refinancing

A large number of cooperatives are contemplating refinancing their existing mortgages. Several reasons exist for this.
First, interest rates are at an uncommonly low level which makes it rather advantageous to take out a loan. While the
existing mortgages are typically low, the rates now are extremely attractive and may not last much longer. Thus, there
is a window open now to get great interest rates. Second, many cooperatives complain that HUD has been more unreasonable
in its demands than in the past. They seek to get rid of the Regulatory Agreement with HUD by eliminating the mortgage
that was subsidized by it. A third reason is the need to amass a sufficient sum of money to undertake repairs,
renovations and enhancements of the property. Many cooperatives would prefer not to do these tasks over an extended
number of years but, instead, do it all at once.

Boards ask us what steps are involved. The initial step is to determine where the authority lies to borrow money. Most
bylaws give that authority to the board. However, we do not recommend that the membership be excluded from the process.
Information ought to be shared so the members know and understand what is being done and why. The most common question
is what impact will this have on carrying charges, and you should have an answer. Many cooperatives have refinanced with
no increase in carrying charges because of the low interest rates, and the amount borrowed. Informing the members is an
important part of the process and is a “politically correct” thing to do, but their approval is not required. Again,
typical bylaws allow the board to decide such matters.

It should be noted here that HUD initially demanded a vote of the members. When challenged to point to the law or bylaw
provision that mandated that, HUD backed off and simply requested evidence that the members had been informed. While we
do not agree that HUD can require it, boards that we represent agreed to furnish information to the members. To do
otherwise is an invitation to a disgruntled membership.

The next step is to see what rates are currently available. A quote should be requested from the National Cooperative
Bank in Washington, D.C. But the inquiry should not stop there. Many lenders are interested in competing for your
business and they should be asked to provide a proposal.

Once these are obtained, the board should get professional assistance in analyzing the proposals. It is not as simple as
looking at the various interest rates, although that is an important component. Other issues include the amount of the
closing costs and requirements demanded by the lenders. These are not alike.

We recommend that the board “short list” the lenders and negotiate with the lenders with the best two or three
proposals. We have found a lot a flexibility and willingness to compete when this process is used. Do not accept
proposals at face value. Try, instead, to press the lenders for better deals. Unless expertise exists on the board, this
task should be done by the management agent and the attorney.

Once a selection is made, the lender will issue a formal letter of commitment. This outlines the entire deal and the
requirements of the lender. The management agent and attorney should be charged with handling these tasks. Among them is
securing a full survey of the property, getting a special type of title commitment, clearing up any clouds that may be
in the cooperative’s chain of title, and providing the lender with financial and other records. The existing lender must
provide a payoff letter. HUD needs to be notified of the refinancing.

With respect to HUD, a full discharge and release of the Regulatory Agreement should be obtained. In the case of limited
equity cooperatives, such as 221(d)(3)’s, HUD will require a new deal known as a Use Agreement. The Use Agreement is a
scaled down version of the Regulatory Agreement that does not contain all of the numerous conditions and terms you are
accustomed to, but does require the cooperative to remain affordable housing for the balance of the term of the
Regulatory Agreement. Those who paid off early encountered some difficulty in dealing with HUD on this document, and
there were different directions given by HUD in Washington and HUD’s local offices. This seems to be getting better, but
you should allow for sufficient time to handle this negotiation. This is best handled by the attorney for the
cooperative.

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