At your cooperative closing, if you are obtaining a mortgage to finance the purchase, you’ll notice that the managing agent hands over at least two original copies of a Recognition Agreement to the bank that is lending you the funds, and then an original is also kept by the building’s Property Manager. So, what is the Recognition Agreement and why do we need it?
A Recognition Agreement is fairly easy to decipher once you are comfortable with the theory of owning a cooperative. Unlike a Condominium, where the apartment is a fee-simple type of ownership, you’re buying shares of the corporation in the Cooperative. With the shares that are presented to you in the form of a Stock Certificate, you also receive a Proprietary Lease that allows you, as the purchaser of said shares, to reside in the apartment so long as you abide by the conditions that are set forth in the Lease itself. So, in essence, you’re not buying an apartment, you’re buying a stock certificate with the rights to occupy the apartment attached to the shares. Got that? Good.
Now that we know what the purchaser is actually buying, we can make the next step towards your bank and what they are entitled to. At the closing, the bank will receive the original stock certificate and Proprietary Lease, to hold onto until such time as the apartment is sold, or the loan is paid off (whichever comes first). In addition to these documents, the bank will also ask for the Recognition Agreement.
This agreement is a three-way contract provided by the bank (usually an “Aztec” Recognition Agreement is required) with the Board of Directors, lending bank and the purchaser that formalizes the relationship between the lending bank and the Cooperative. The co-op corporation, by way of this document, recognizes the relationship and pledges to alert the lender if the shareholder fails to pay maintenance or other fees to the co-op in a timely manner.
Beyond the above information, the Recognition Agreement also lays the groundwork for notifying the lender if the shareholder should look to sublease their apartment, refinance their loan, take on additional financing or sell their apartment. The lender must be made aware and sign off on all of these issues before the Cooperative can proceed with the approval.
As a manager, one way that the Recognition Agreement is certainly helpful is when a Shareholder slides on paying maintenance for a few months. If the building that we manage has a 2-month period where the shareholder goes into legal for non-payment of maintenance, we can first alert their bank, as per the terms of the Recognition Agreement that they are not paying their maintenance and often times, the bank will step in and either force the issue or pay the cooperative while they work on their end to place pressure on the shareholder. There are times that the non-payment of maintenance is in concert with the default of the mortgage by the shareholder, so the bank may look to eventually foreclose on those units.
With that, if you have any additional questions on the closing of a cooperative unit or on anything property management related, feel free to e-mail Mark Levine of Excel Bradshaw Management Group, LLC at [email protected].