Best Practices: A Brief Overview about Co-ops

SBA lenders often take a security interest in all available fixed assets, including real estate owned by the applicant or guarantor, for certain loans, which may include a lien on a cooperative unit (or “co-op”). Perfecting a lien against a co-op can be challenging. One of the most common questions about co-ops is whether a mortgage or a deed of trust is used to perfect lender’s security interest. The short answer is neither. This article will briefly discuss the nature of a co-op interest and the way to perfect a lien on a co-op.

By way of introduction, a co-op is not a condominium. Instead, it is a type of homeownership often seen in densely populated cities such as New York. Ownership of a co-op is considered to be personal property and not real estate. When a party acquires a co-op, they are not purchasing real estate, but instead they are purchasing stock (or shares) of a corporation which owns the building. The corporation which owns the building operates through an elected board of directors (“Board”), while the shareholding is governed by a legal document called a proprietary lease which is signed between the purchaser of shares, as the lessee, and the corporation which owns the building, as the lessor. As a result, the purchaser of the co-op unit becomes both a shareholder and a tenant.

Since the shares in the co-op unit are considered personal property, the Uniform Commercial Code (“UCC”) governs cooperative lien priority. As such, in order to ascertain and protect its lien priority against any third-party claims, lenders must obtain either an Eagle 9 UCC insurance policy or complete a co-op lien search. Once the lien priority is confirmed, the lender must file a UCC-1 Financing Statement, which, when recorded, creates the lender’s lien. Additionally, the lender should take possession of the stock certificates until the loan is paid off or otherwise satisfied.

Notwithstanding the foregoing, it is crucial to point out the fact that the lender may not unilaterally record its lien without first obtaining written approval from the Board acknowledging lender’s lien against the shares of the co-op unit. This acknowledgement process is completed through a tri-party recognition agreement between the owner of the unit, the lender, and the Board. Most boards have adopted a standard form recognition agreement called the “Aztec Recognition Agreement” or an “Aztec Form” that can be used by the parties to avoid protracted negotiations pertaining to acknowledgement of lender’s lien against the shares of the co-op unit. It is important to note that there exists no legal obligation for the Board to recognize lender’s lien. As such, the Board may refuse to sign a recognition agreement, which will prevent the lender from perfecting its lien against the co-op unit.

For further assistance regarding co-op collateral, please contact the attorneys at Starfield & Smith, P.C. at 215-542-7070.