By BankingMyWay Staff

In some parts of the country, particularly in the Northeast, multi-unit properties are owned by housing cooperatives (also called a co-ops). A housing cooperative is a corporation formed by building residents to own and control the building they live in. When you buy an apartment in a co-op, you’re really buying shares in the corporation.

Getting financing to buy property in a co-op is more complicated than obtaining a traditional home loan. A cooperative mortgage is commonly called a “share loan.” With a share loan, you borrow funds from a lender in order to purchase shares from the seller. In a co-op, monthly payments are made to the lender to pay back the share loan, and monthly payments are made to the co-op corporation to pay for common expenses like maintenance of common areas, property taxes, management fees and to build a reserve fund.

Securing a share loan can be difficult because few lenders offer them. Northcountry Cooperative Development Fund is one of few lenders to provide share loans in the Midwest. The National Cooperative Bank (NCB), is the leading share loan provided for New York housing co-ops. Many lenders are unfamiliar with the intricacies of share loans, so shopping around is a challenge. The NCB provides an FAQ on multifamily property financing, as well as “experts” on co-op housing and share loans.

Like mortgages, share loans are secured loans. In addition to a promissory note, lenders also require as security agreement and file a lien against the borrower’s property in public records. This lien is created by filing a UCC-1 Financing Statement with the county clerk. The UCC stands for the Uniform Commercial Code, which governs some commercial transactions.

In addition to the UCC-1 Financing Statement, most lenders also require the original stock certificate, and a copy of the borrower’s proprietary lease with original signatures be presented. A “recognition agreement,” which prohibits the co-op corporation from permitting additional financing or canceling the stock or lease without the lender’s permission, is also demanded.

The recognition agreement also compels the co-op to inform the lender if monthly maintenance payments fall into arrears. If a co-op creates a lien against a property for unpaid maintenance charges, that lien is prioritized over the lender’s lien. When the lender is informed, payments can be made on behalf of the borrower to prevent the co-op from foreclosing.

To protect itself in the event of a loan default, lenders usually require a signed stock power and assignment of the proprietary lease. These documents allow lenders to make the necessary transfers should the bank foreclose on the property.

When you take out a share loan, it’s imperative to keep track of all of your loan documents. When you refinance your share loan, pay it off or sell your property, good recordkeeping is essential. When a share loan is paid off, all of the documentation should be returned to the borrower. You should receive a UCC-3 Termination Statement to remove the lien on the property, and that too has to be filed with the county clerk. When working with an experienced share loan lender, navigating this tricky process is manageable.

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