Co-Op Lending by Julie Teitel

by 01 Feb 2008
What is the coop and how is it financed? A cooperative apartment (coop) is an individual living unit within a building or development where a buyer purchases shares (equal to the value of the unit) in a corporation that holds title to a building. Coops are predominantly located in New York and Chicago. Normally a sponsor will buy the building, many times holding the underlying mortgage, and then will sell off the shares. Therefore, when buying a coop, you are not purchasing real property but actually shares in a corporation. For example, a sponsor owns a building with 20 units and sells it to a coop corporation. The coop corporation will assume the sponsor?s underlying mortgage and buys 15 units. Each unit that the sponsor sells is assigned a specific share value based on the various characteristics (i.e., apartment size, view, etc.). The sponsor retains the unsold shares for five units and can rent them out and is also responsible for paying his/ her own maintenance on all the shares that he/ she owns. Lastly, any new buyer of a unit, called a share holder, is given a stock certificate for the specific share amount and a proprietary lease for the apartment at closing, instead of a deed. How are the buildings pre-qualified for lenders? To start with, a lender will look at the following factors to see if a particular building corresponds with their guidelines: the property?s presale value, investor concentration, and owner occupancy. Based on the previous example, if there are 20 units, 5 sponsor rentals and 15 sold units (with 12 owner-occupied units and 3 units being rented by the owners), the following ratios and guideline percentages result: Factor Ratio Guideline % Presale Value 15 sold units/ 20 total units 75% Investor Concentration 3 owners renting apartments/ 20 total units 15% Owner Occupancy 12 owners 60% Although guidelines are lender specific, they are generally looking for: ? Presale values greater than 51% ? Not greater than 25% investor concentration ? Not less than 500 square foot unit/apartment ? Walk-ups not higher than four stories ? Sponsors having positive cash flows on the units that they rent ? Coop shares of sponsors not used as collateral for another loan (normally indicated in the financials) What are the basic legal requirements before closing on a Coop purchase? There are four basic requirements normally worked on by the bank attorney: 1. A new UCC (Uniform Commercial Code Financing Statement) is filed before the purchaser closes on the coop. It is the actual recording of the bank?s interest in the stock certification in the cooperative corporation and in the proprietary lease covering the apartment. 2. Lien/ Bankruptcy/ Judgment searches are required to search official records for judgments, bankruptcies, tax liens, mechanics liens, building violations and open UCCs conducted against the borrower, the seller and the cooperative corporation. 3. If the seller currently has a mortgage and it is being paid off at closing, a UCC 3 Termination Financing Statement must be filed in order to discontinue the lien currently held against the seller. 4. The Aztech Recognition Agreement is an agreement among bank, borrower, and cooperative corporation and sealed by the corporation and sealed by the corporation which sets forth the rights and obligations of all parties with respect to the loan. It ensures that the coop board approves of the borrower?s financing. What are some other important items regarding coops to keep in mind? 1. An attorney should review the coop building financials to make sure there is sufficient reserves and that the only debt carried is the underlying mortgage. 2. An attorney should also review the coop board minutes to see if there is an upcoming assessment, pending litigation or discussions about items that might impact future maintenance. 3. Many coop boards will require the purchaser to put down anywhere from 20-50%, while some will not allow financing at all. 4. The coop board application, overall, will be more tedious and time consuming than a standard mortgage application. Additionally, on average, it is more difficult to get board approval than it is to get a mortgage. 5. The coop board can deny an applicant for any reason and does not have to give the reason for denial. 6. Some buildings will charge a small percentage (1-3%) when the property is sold. This is called a flip tax. For example, if the property is being sold at $500,000 and the flip tax is 3% at the time of closing, the seller will only be receiving $485,000 ($500,000 minus $15,000 flip tax). 7. The banks will use the flip tax in the loan-to-value calculation. For example, in order to determine the value of the unit, the bank will use the lower of either the purchase price or appraised value minus the flip tax. Thus, if the purchase price is $100,000 and the appraised value is $125,000 and the flip tax is 3%, the bank calculates the value of the unit to be $97,000 ($100,000 purchase price minus $3,000 flip tax). If the purchaser is at the limit of the bank?s loan-to-value calculation, the unit?s ?bank value? while incorporating the flip tax, can be critical. Julie Teitel has been a senior loan officer at New York Mortgage/ IndyMac Bank for 5 months prior to that she was with Mortgage IT for 15 years. Julie has been listed by ?Mortgage Originator? magazine as one of the ?Top 200 Mortgage Brokers? in the country for the last four years. She specializes in residential mortgages, particularly Coop and Condo loans, but also enjoys working on single family mortgages. Besides national recognition, she is currently one of the top mortgage brokers in her entire company of over 1500 employees.


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