Read More »" /> The Legal Aspects Pitfalls of Cooperative Refinancing. Randall Pentiuk & Joe Couvreur | National Cooperative Law Center - Part 3

The Legal Aspects Pitfalls of Cooperative Refinancing

So what does it mean to discharge the mortgage?  Simply, it is an end to payments to that particular lender, and either the elimination or reduction of HUD’s close oversight of the Cooperative through its Regulatory Agreement powers.

We recommend that the board undertake careful and deliberate study.  It must be ready to debunk these 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 needs to be prepared to discuss the various options and the consequences of each.  It ought to be ready to lead and make decisions, while at the same time furnishing accurate, understandable information to the members.  To do otherwise is an invitation to create a disgruntled membership.

The Due Diligence Stage

        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.  Lenders are not alike, and will take different positions on these matters.

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 of 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.  The Auditor or Accountant for the Cooperative has expertise that would be helpful at this stage.

Part of this process helps answer the question of how much to borrow.  Obviously, the Board will borrow enough to pay off the underlying mortgage.  How much beyond that will depend on a variety of factors such as interest rate, payment terms, the impact upon carrying charges, and the Cooperative’s needs for improvements.  Careful study and research by the Board and its professionals is critical to making a proper decision on the loan amount.

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