Read More »" /> Co-op Law for Dummies. Randall Pentiuk; Pentiuk, Couvreur & Kobiljak P.C. | National Cooperative Law Center - Part 7

Co-op Law for Dummies

When all these prerequisites are fulfilled, the closing will take place and the loan proceeds will be dispersed. From
the loan proceeds, the existing mortgage will be paid off and a discharge will be obtained from that lender, which needs
to be recorded with the registrar of deeds. The Regulatory Agreement needs to be released and recorded. The attorney
handles these details.

Once HUD is gone, a number of opportunities exist. The cooperative may want to amend its governing documents to remove
references to HUD and the Regulatory Agreement. While doing so, you may also want to clear up nagging problems such as
quorum issues, as well as liberlaize the manner in which voting takes place – such as absentee ballots, day-long voting
and the like. Where the law has changed and made bylaw provisions obsolete, such as in the limited proxy area, you may
want to take advantage of the opportunity to clean up such matters. The cooperative attorney needs to be involved in
these issues.

If the cooperative is going to undertake repairs or renovations with what money is left over, you need to seek proposals
from various contractors. Before that can be done, the board must determine with some degree of specificity what it
wants to accomplish and develop specifications that are written and sent out to a number of contractors. Proposals
should be sought, a “short list” derived by the board and negotiations should be undertaken to get the best deal
possible. Your management agent should take the lead in this process. Once that is done, the attorney needs to prepare a
contract to protect the cooperative. Make sure that there is adequate insurance and indemnifications, that there are
warranties, and consider including liquidated damages for delayed performance and perhaps a bonus for early completion.

Depending upon the magnitude of the project, it may be desirable to engage a construction manager to coordinate the
contractors and deal with such issues as partial payments and subcontractor issues. Of course, this adds to the expense
but may be merited if you are going to have numerous contractors engaged instead of just a single one. Perhaps your
management agent is experienced in this role and can provide assistance.

In sum, refinancing is an option that is worthwhile examining to see if it makes sense to your cooperative. It should be
done now while we still have good interest rates. A team approach including the board, management and the attorney, will
ensure that it is done properly and in good order. It is not a quick process but if experienced professionals are used,
it can be expedited. Once it is complete, it opens up a wide range of opportunities for the cooperative to move forward
into the future without the hassle of HUD, and typically with enough money to make the cooperative appearance compete
with other housing stock, leading to less vacancies and greater pride among the membership.

M. Share Loans

With increasing interest, Cooperative Boards are asking us about share loans. These are loans that are made by a third
party lender to a member, usually for the purpose of purchasing a membership share in the cooperative. The reason for
the deep interest is that it serves as a marketing tool for the cooperative, in order to make acquiring membership more
affordable to people. This is particularly true for market rate cooperatives where an incoming member needs to come up
with tens of thousands of dollars.

Share loans are necessary for incoming members because lenders want collateral. The typical applicant does not have the
financial means to pay the full purchase price to buy into a cooperative, especially a market rate cooperative. Lenders
will not accept the member’s personal promise to repay the loan without more; and unlike other forms of home ownership,
there is no real estate that the member can pledge as security.

Thus, special arrangements are needed in order to make such loans available. Since the member has only the share in the
corporation to offer as collateral, the lander needs the cooperative’s commitment to aid it in the case of a default.
This commitment takes the form of a “Recognition Agreement” in which the cooperative agrees to step in if there is a
default by the member and use its special legal standing to evict the member and to resell the share or membership,
giving the lender enough of the proceeds to recover its loan.

In Michigan and elsewhere in the Midwest, it has been difficult historically to find lenders who understood cooperatives
well enough to feel secure in offering share loans. That is changing and more lenders than ever are finding that these
types of loans are safe and secure. While the National Cooperative Bank has been in this field for a long time, there
are now others which are willing to compete for this opportunity.

Boards are encouraged to consider this tool as a way to enhance their cooperatives’ ability to compete with other forms
of housing. Our view is that it creates a “win – win” for all parties: the cooperative benefits by being more
marketable; incoming members get the money they need to buy into the cooperative; and the lender gets the chance to loan
money with relatively low risk.

 

For more details please feel free to contact an attorney familiar with cooperative housing law.

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