Wednesday, April 25, 2007

Minnesota Common Interest Ownership Act - Financing

Cooperative housing is housing owned by a cooperative corporation, usually a nonprofit corporation. In Minnesota, a cooperative corporation is formed under Minnesota Statutes, Chapter 308A. A housing cooperative is also a common interest community under the Minnesota Common Interest Ownership Act, Minnesota Statutes, Chapter 515B. In order to create the common interest community, a declaration must be filed when the construction is complete. A cooperative corporation typically is formed by a developer/sponsor, which will build the cooperative housing and sell the completed facility to the cooperative corporation. The developer/sponsor usually controls the board of directors until a certain percentage of the cooperative memberships have been sold (the statute caps that percentage at 75 percent).

The primary distinction between a housing cooperative and other forms of homeownership is that, in a housing cooperative, the owners do not own real estate. The real estate is owned by the cooperative corporation. Each member of the corporation owns a share in the corporation. Each membership share represents a unit of housing in the cooperative. Each membership entitles the member to an exclusive right to live in a specific unit (established through an occupancy agreement or proprietary lease) for as long as the member wishes. It sets forth the rights and obligations of the member and the cooperative to each other. Legally, it is viewed as a lease by the member with the housing cooperative.

Ownership of a share and the ability to occupy a unit may not be separated. Each unit carries with it the right to one vote in the business of the corporation. A cooperative operates for the benefit of its members on a not-for-profit basis in order to provide the goods and services members need at the lowest practical cost. Each month the members pay an amount that covers their share of the operating expenses of the cooperative corporation.
The interest on the financed portion of the price of a share is deductible by the member for federal income tax purposes and, in Minnesota, for state income tax purposes. Real estate taxes are also deductible. Other benefits include lower turnover rates, controlled maintenance costs, and resident participation and control.

A purchaser of a membership share in a housing cooperative is paying for a share of the cooperative housing corporation. The purchase price will vary depending on amenities, the location, the size of the unit, whether the cooperative limits resale prices, and whether the cooperative has an underlying mortgage for the entire property.

There are two common methods of financing in Minnesota. One is through an FHA-insured mortgage that is made to the cooperative corporation and secured by the real estate owned by the cooperative corporation. The other is through a construction loan from a conventional lender followed by individual loans to the purchasers of the shares in the cooperative corporation. The proceeds of these individual loans are used to pay off the construction loan.

Loans made to individual members to purchase shares in the cooperative corporation are commonly called share loans. A share loan is like a mortgage. It provides the member with borrowed funds to buy the share from the cooperative corporation. The member makes monthly payments on the share loan to the lender and monthly carrying charge (maintenance) payments to the cooperative corporation.

A loan made to a member of a cooperative is evidenced by a note payable to the lender. security for repayment of the share loan is a pledge of the share in the cooperative corporation. This share and its attendant rights are pledged by a security agreement. Instead of recording a mortgage, a UCC Financing Statement is filed with the secretary of State. The lender will also take possession of the stock or membership certificate evidencing the ownership of a share in the cooperative corporation. The occupancy agreement or proprietary lease (the contract between the cooperative corporation and the member that sets the conditions for the right to occupy a particular unit) is conditionally assigned to the lender as additional security for repayment of the share loan.

The lender will also sign a recognition agreement with the cooperative corporation. The recognition agreement is an understanding between a cooperative and the lender that provides share loans to the cooperative's members or shareholders. The recognition agreement outlines the responsibilities between the cooperative corporation and the lender and the courses of action that must be taken by each party if a shareholder/member defaults on the loan. It should also provide for notice to the lender of any default by the member under the occupancy agreement. In particular, it should require the corporation to notify the lender if the member misses a monthly maintenance payment.

If the member defaults in repayment of the share loan, the lender may enforce its rights under the collateral assignment of the occupancy agreement and under the uniform commercial code with respect to the share in the cooperative corporation. Both these actions must occur in order for the lender to sell the share and assign the occupancy agreement to a new member. This process is significantly quicker than foreclosure of a mortgage. Any purchaser of the share must meet the criteria in the cooperative documents (particularly the declaration, the occupancy agreement, and the bylaws) for membership in the cooperative corporation and occupancy of a unit. Written by:

Bank & Finance Group

Steve Hoogenakker

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