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The Legal Aspects Pitfalls of Cooperative Refinancing

It should be noted that the new lender will require certain terms in the deal.  Among them is the mandate that the corporation remain in its present form.  This means that converting to condominium will not be an option as long as the loan is in effect.  The Cooperative will have to stay as a Cooperative.  Similarly, the lender will want to make sure that professional management remains intact and will want to approve any changes in this regard.  A prepayment penalty may be sought as well as mandating that the Board keep a certain level of funds available in reserve for emergencies. Certain levels of property and liability insurance will be required to protect the collateral.  It may also require an annual inspection of the property to ensure that it is being properly maintained.

When all these prerequisites are fulfilled and the terms are negotiated to a successful conclusion, 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 Cooperative Attorney handles these details.

Post Closing

        Once HUD oversight is eliminated, 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 liberalize 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.

It is important to pay close attention to the state construction lien laws.  These are designed to protect suppliers and subcontractors from being cheated by the general contractor, and there are some strict rules that must be followed.  Never pay a general contractor unless there is sworn statements and lien waivers from those who provided materials or services to the project; failure to observe the rules can lead to paying the general contractor and then having the subcontractors and suppliers coming to the Cooperative for payment a second time.  They have the right to file a lien on the Cooperative property and enforce their rights to payment by foreclosing on the property.  Thus, this aspect cannot be overlooked and do not assume that the Management Agent necessarily possesses the requisite knowledge to understand the statutory requirements.  Consult with an experienced Cooperative Attorney to be safe.

Conclusion

        In sum, refinancing is an option that is worthwhile examining to see if it makes sense to your Cooperative.  The analysis should be done now while we still have relatively 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 with less or no oversight from HUD, and typically with enough money to make the Cooperative appearance compete better with other housing stock, leading to less vacancies and greater pride among the membership.

Randall A. Pentiuk and Joseph G. Couvreur are partners in the Michigan law firm of Pentiuk, Couvreur & Kobiljak, P.C. and represent Cooperatives throughout the United States.  They have been involved in numerous Cooperative refinances.  Mr. Pentiuk is a member of the Board of Directors for NAHC, and also serves on the Board for MAHC.  He is a frequent instructor at the NAHC and MAHC conferences, and serves as the Michigan State Vice President for MAHC.  He can be reached at Rpentiuk@pck-law.comcreate new email.

 

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

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