Five Steps for Co-op Boards to Take When Shareholders Refinance

But do it on firm legal ground. Attorney James Samson, a partner at Samson, Fink & Dubow, says it is an "urban myth" that boards have the right to review refinancing financials. "Virtually every proprietary lease has a Paragraph 17 that says a shareholder has the right to pledge shares for a loan period," says Samson, whose firm represents about 85 buildings. "That means that they have the right to finance. Period," Samson says. "Most boards and managing agents say they have the right to approve or disapprove. They don't."

Samson's position runs counter to common practices, and manager Don Levy, vice president at Brown Harris Stevens, argues that proprietary leases give boards the latitude to set procedures and reasonable fees for all financial transactions.

Following from that position, here are the steps prudent boards should follow:

Alert the shareholders

 Boards should make sure everyone knows that board approval is needed for refinancing. Provide a list of what is required. If a shareholder can demonstrate that the new loan is the same or less than as his or her current monthly obligations, some co-ops will forgo the financial scrutiny, says Levy. "But still there is a fiduciary obligation to be aware of what's going on in their co-op," he notes. "They need to know how much money is outstanding. It's more than just mechanics and i-dotting."

Review the paperwork — again

 According to Levy, most boards ask owners and shareholders to submit the same paperwork they're sending to the bank for the refinancing: tax returns, pay stubs, financial statements, the appraisal and the commitment letter from the lender. "The board is looking at the liquidity of the shareholder, and any other current obligations that may not have existed when they first bought that may impact their ability to make the current payment," Levy says.

Cap the amount to be financed

One 60-unit Brooklyn co-op in Park Slope requires that no more than 80 percent of the purchase be financed — a fact that holds true at an initial purchase and refinancing, and a rule that is similar at many co-ops and condos. That issue can crop up because of increased values — say if a shareholder bought into a building when the apartment was worth $400,000 and now it's worth $1.2 million. "You don't want them refinancing 100 percent and going up to that $1.2 million," she says.

Review the recognition agreement

Levy says you should be clear on the details of this document. "The board wants to know what it is agreeing to," he says. If the board does approve the refinancing, the next step is to sign the recognition agreement and give it to the managing agent, who gives it to the shareholder, so he or she can have it for the closing, he adds. Mary Fran, the president of the board at a 387-unit co-op in the Inwood section of Manhattan, says as long as shareholders are in good standing with maintenance payments, the board does not get involved in a refinancing. "These days, if the bank approves you, you're going good already," she says. "Because they don't want to give anyone money."

Know who owns the shares

Lisa Finstrom, the former treasurer at the Park Slope co-op mentioned above, says she has heard of problems when the loan is sold from lender to lender and the proprietary lease or stock certificate does not make its way down the chain. "You can have a situation where you don't know who owns the shares legally because banks are selling loans so frequently," she says. "You want to make sure that the share ownership is very clear."

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