Housing cooperatives do not fit into a one size fits all category. Not only may cooperatives’ governing documents be organized differently, but they also vary as to their structures. Typically speaking, cooperatives are comprised of multifamily townhomes or apartment style dwelling units. However, some cooperatives are high rise style living or are even comprised of detached single dwelling properties.
Even the purchasing of a membership is different amongst the various types of cooperatives depending on how the cooperative is organized per its governing documents. For example, memberships for limited equity cooperatives are offered at low equity amounts, which is set pursuant to their Bylaws, while market rate cooperatives bear the market with no restrictions set on sale price. Some market rate cooperatives even provide for share loan financing for the price of the membership in their cooperative bylaws.
Just as cooperatives do not fit into a one size fits all category, neither are cooperative share loan policies and procedures. Some cooperatives limit share loan financing to prospective members only or some cooperatives allow current members to obtain a share loan to refinance their original share note or to make improvements to their unit in addition to offering share loans to future prospective members. Often times, cooperatives will implement bylaw amendments or set in place policies and procedures for share loan financing. It is vital that you are guided by experienced cooperative legal counsel during the implementation of the share loan program as well as during the negotiations with the share loan lender regarding the recognition agreement.
How does a share loan work?
First a cooperative must authorize share loans. Once authorized, the parties to the share loan are: (i) a prospective or present member as the borrower, (ii), the lender and (iii) the cooperative. The borrowing member executes an agreement, called a recognition agreement, with the share loan lender and the cooperative, in order to finance the purchase of the membership. The collateral for the share loan is the borrowing member’s membership certificate and occupancy agreement. Additionally, the cooperative consents to pledge and assign said documents to the lender.
The Recognition Agreement
The crux of the share loan is the recognition agreement. The recognition agreement will be effectuated by the cooperative, the lender and the borrowing member. The recognition agreement outlines the duties and responsibilities and rights of the parties.
For example, under the recognition agreement, the lender has certain rights to cure a monetary default of the borrowing member pursuant to the borrowing member’s occupancy agreement. The lender can either cure the default by paying the monies due to the cooperative or entice the borrowing member to pay such sums. However, most recognition agreements provide that a cooperative taking any action against the borrowing member for a default under the occupancy agreement must provide written notice to the lender specifying the default or nonperformance.
The recognition agreement also provides for the mechanisms available to the lender and the cooperative should the borrowing member defaults on his/her loan or if there is a cross default under the loan when the borrowing member defaults under his/her occupancy agreement. When the borrowing member defaults under his/her share loan or default’s under his/her occupancy agreement, the lender typically has the right to request the Cooperative to commence legal action against the defaulting borrower.
When the lender assumes the defaulted borrower’s membership, most recognition agreements provide that the cooperative agrees to recognize the right of the lender as the new owner of the membership certificate and occupancy agreement. The recognition agreement further requires the lender to abide by a cooperative’s governing documents with respect to the transferring or selling the membership to a prospective purchaser. However, recognition agreements offered by banks often have boilerplate language that is weighted in their favor as to how any distribution of proceeds that are made in the event the borrower’s membership is terminated and for that reason great care must be given to negotiating the terms of the agreement to protect the cooperative and ensure that it is given priority over the lender as to such proceeds, and is made whole first.
Administering the Share Loan Program
Once the recognition agreement is negotiated between the cooperative and the lender, the share loan program commences. The loan borrower - applicant will initiate the process by contacting the lender to obtain an application for the share loan. The lender will apply its due diligence on evaluating the borrower and make its decision on whether to make the loan. The cooperative continues to have its rights to also evaluate whether to accept a prospective member. If a current member is obtaining an application for a share loan, generally, it would be for either refinancing or making improvement to their unit.
Assuming the share loan is given, it is important that management institutes policies and procedures for administering the program. Memberships that are subject to the terms of the recognition agreement need to be flagged in the event of any default so proper notice to the lender can be given. Strict compliance with notice requirements under the recognition agreement is crucial. Should a default by the member occur, make sure the cooperative attorney gets involved to oversee the process under the agreement.
If the borrowing member fails to cure the default and the lender ends up becoming the member, it has to abide by the terms of the occupancy agreement and work towards disposing of the membership in a reasonable fashion and timeframe pursuant to the cooperative’s bylaws. It must pay the carrying charges and its failure to do so constitutes a breach for which legal action to terminate is appropriate. Again, such instances should be referred to the cooperative attorney for proper handling.
In sum, share loans can be beneficial to cooperatives by making membership more accessible and therefore more marketable. However, boards must keep in mind that it must consult with experienced cooperative counsel so that the recognition agreement is tailored to the cooperative’s benefit. Moreover, the cooperative and its management agent along with the cooperative’s attorney must work together to properly administer the share loan program, and pay attention to the strict terms of the agreement and take any action necessitated by borrower default in a timely manner.