By Randall A. Pentiuk, Esq
With increasing interest, Cooperative Boards are asking us about share loans. These are loans that are made by a third party lender to a member usually for the purpose of purchasing a membership share in the cooperative. The reason for the deep interest is that it serves as a marketing tool for the cooperative, in order to make acquiring membership more affordable to people. This is particularly true for market rate cooperatives where an incoming member need to come up with tens of thousands of dollars.
Share loans are necessary for or incoming members because lenders want collateral. The typical applicant does not have the financial means to pay the full purchase price to buy into a cooperative, especially a market rate cooperative. Lenders will not accept the member’s personal promise to repay the loan without more; and unlike other forms of home ownership, there is no real estate that the member can pledge as security.
Thus, special arrangements are needed in order to make such loans available. Since the member has only the share in the corporation to offer as collateral, the lender needs the cooperative’s commitment to aid it in the case of default
This commitment takes the form of a “Recognition Agreement” in which the cooperative agrees to step in if there is a default by the member and use its special legal standing to evict the member and to resell the share or membership, giving the lender enough of the proceeds to recover its loan.
In Michigan and elsewhere in the Midwest, it has been difficult historically to find lenders who understood cooperatives well enough to feel secure in offering share loans. That is changing and more lenders than ever are finding that these types of loans are safe and secure. While the National Cooperative Bank has been in this field for a long time, there are now others which are willing to compete for this opportunity.
Boards are encouraged to consider this tool as a way to enhance their cooperatives’ ability to compete with other forms of housing. Our view is that it creates a “win win” for all parties: the cooperative benefits by being more marketable; incoming members get the money they need to buy into the cooperative; and the lender get the chance to loan money with relatively low risk.
Volume 1, Issue 4