Read More »" /> The Legal Aspects Pitfalls of Cooperative Refinancing. Randall Pentiuk & Joe Couvreur | National Cooperative Law Center - Part 4

The Legal Aspects Pitfalls of Cooperative Refinancing

In the event the Cooperative received a “Flexible Subsidy Loan,” it will need to be paid in full at the closing.  However, there some rare exceptions to this rule for certain Cooperatives which fit the criteria for an extension of the so-called “Flex-Sub Loan.”  Cooperatives which were originally occupied by low income members but are now largely occupied by over income families whose incomes have increased over the time are not likely candidates for flexible subsidy loan payment extensions.  In the event approval to extend the loan is granted, the Cooperative will be subject to afford ability restrictions until the flexible Subsidy is paid in full.  This is likely to be the term of the new mortgage.

Another form of subsidy is the “Interest Reduction Payment” which is provided to pay a portion of the interest component of the Cooperatives’ original financing.  A Cooperative which receives a IRP subsidy should seek approval to “decouple” the interest reduction payment from the loan which is being paid off and transfer it to the new loan.  The “decoupling” process is lengthy but is well worth the effort to insure this form of funding is not forfeited due to the refinancing.  Here again, the Board should obtain the expertise of a Cooperative Attorney with experience in such issues.

The Mechanics of Closing

        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 approve of the refinancing and in the event HUD services the loan, HUD will provide payoff letters.

Occasionally, the title search will reveal a problem with the chain of title.  We have found parcels of land which were not conveyed to the cooperative, stray deeds, mistakes in legal descriptions and liens that no one knew about.  Some of these problems can be easily cured; others may require litigation to clear up.  These issues can be time consuming, so we recommend that this step be undertaken as early as possible.  Some lenders will lock in the interest rate for a period of time while these problems are addressed.

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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