Re: Perhaps some clairity on why Coops and LLC are not a mortgable entity
From: ken (gebserspeakeasy.net)
Date: Mon, 8 May 2006 03:39:38 -0700 (PDT)
Rob,

Thanks for providing the clarity.  There are still some points I don't
understand.  Please see these inserted into your text below.  There's
also some other background which some people might need.

You touched on it, but probably some who are new to the world of loans
would appreciate a little more.

For a lending institution to loan money, it needs to be assured that it
will be able to recoup at least the amount loaned.  So, among other
factors, there must be collateral which the lender can foreclose on,
generally the property/land to be purchased.  E.g., someone I met at a
communities conference didn't understand why a bank wouldn't loan her
money to buy land to put into a land trust.  It seemed to me, I said,
that putting the land into such a trust created ownership issues which
would frustrate the lender's ability to foreclose (if that eventuality
came up).  So, as you quite succinctly put it, there would no longer be
a clear foreclosure/resale path.  Said another way, the bank wants to
get their money back (plus some... they are a business after all) and
they don't know you.  So they're not going to lend you money solely on a
promise to pay it back.  They want to have some recourse if the
borrower, for whatever reason, fails to pay back the loan.

Experience has shown me that a lot of people don't understand legal
entities such as nonprofits, LLC, condominium associations, and others.
 These are various kinds of corporations and, as corporations, provide
some legal and tax advantages.  (I'm familiar only with US laws, and am
not at all an authority even on them.  I'm just trying to share what I
have read and other information I've found trustworthy.)  The
definitions of these different kinds of corporations has been written
into state and federal laws.  One place to find out more about them is
in your state's legal code.  Many states have it online.  Another place
to read up on the various types of corporations is at the IRS website,
www.irs.gov.  There's a few links on
<http://groups.yahoo.com/group/IC-info/>, but probably a search of the
IRS site would get you there too.

One other point I've seen people stumble on could be roughly termed
"sentiment".  That is, they say, "We don't want to be a corporation.  We
want to be a nonprofit."  First, a nonprofit (and there's several
different kinds of these) *is* a type of corporation.  Secondly, though
each type of corporation has different tax laws and tax rates applied to
it, and each bears differing legal responsibilities, after considering
all of those factors, the different categories of incorporation are only
different names.  Calling your group a nonprofit won't make it any more
or less ethical or good-hearted than if it's an LLP.  You should want to
select the type of corporation which best suits your financial and legal
needs, regardless of the name of its category.  Note that it's possible
and sometimes advisable to change the group's legal structure.  It's
also possible to have one legal entity own one or more other legal
entities.  The Cleveland Clinic, for example, is a 501(c)3 (a nonprofit)
which owns a for-profit corporation.  For some reason its lawyers found
that to be workable-- and probably advantageous in some ways-- and
there's no law against it.  All of this, plus the information below,
tells me that starting up cohousing is a lot more detailed and
complicated than I'm confident handling.  If I were doing anything more
than sharing a house, I'd be looking for a good attorney.  Maybe even
then....

Questions I have:

Rob Sandelin wrote:
> After reading my previous post on this topic I realized I was assuming a lot
> of prior knowledge.  So, to the basic points of the lending process. 
> 
> When you build a cohousing devleopment all at once, you get a construction
> loan to cover the costs of the construction, minus the upfront planning
> costs that you have already paid.

Before getting to this step (above), you should already have created the
 chosen corporation (LLC, condo association, or whatever).  Do the steps
described below assume any particular type of corporation?


> Once you have completed building your
> community, you need to convert your construction loan to mortgages. 

Is this done by the lending institution or does the corporation (the
cohousing group) itself do this?


> The vast
> majority of lending for mortgages is done between a lender and a home buyer,
> it is an individual contract that you sign which you agree to pay a certain
> amount over a period of time. During the mortgage time period, the bank
> technically owns your home, and after 15-30 years you pay off the loan, then
> the title transfers back to you. If the individual owner can not pay their
> mortgage the bank forecloses on the home, and resells it, thus getting their
> money back. Condominiums are the most common format for cohousing private
> home ownership which banks fund. 
> 
>  In a coop or LLC ownership, the bank signs a contract with a legal entity
> for the mortgages of ALL the units. The entity is responsible to make the
> payment each month for ALL of the units. If an individual owner goes
> bankrupt and can not pay their mortgage, the group must make up the
> difference to cover the unpaid mortgage share or EVERYBODY loses their home
> as the bank would foreclose on the entire project, not just the individual
> unit.  Obviously banks do not want to foreclose, and especially on an entire
> 30 unit development so they write in all kinds of clauses and such into the
> group mortgage, the most common being exorbitant interest on unpayed
> balances. An LLC as a mortgage owner also complicates things because,
> depending on state definition, LLC's can have many of the protections of a
> Corporation, which would complicate banks abilities to foreclose. 
> 
> With any given lender there are loan specialists who scrutinize loans for
> several factors which favor the banks. A clear foreclosure/resale path is a
> key element loan executives consider when examining loan applications. Is
> the property worth what it is being loaned, can that money be recovered
> easily and quickly should the loan default? Selling an invidivially owned
> unit in a development is pretty straight forward. Selling an entire
> development, is much less attractive.
> 
> In order to have money to lend, banks bundle up and resell their loans to
> other financial groups which is often called the secondary loan market. This
> frees up captial for them to be able to make more loans. FannyMae is a
> federal/private banking partnership that creates loan markets and makes the
> federal rules for the reselling of loans.  Loans which are unique or held by
> individual banks and not resold are called portfolio loans. The federal
> government, in response to the savings and loans disasters of the 1980's
> placed severe restrictions on the percentage of portfolio loans that banks
> insured under FDIC can hold. Last I heard, 1.5% of the banks holdings is all
> that can be held as portfolio loans. Portfolio loans are often very
> diversified in order to spread risk and return. One of the largest local
> banks in Washington State, Washington Mutual, limits their portfolio loans
> to $500,000 each, and it takes the personal approval of the Exec Vice
> President of the company. 
> 
> So the bottom line of all this: banks are usually unable to take on coop
> loans, and even coop loan speciality banks have upper limit amount
> restrictions. Last I heard, the National Coop Bank only will lend up to $3.5
> million dollars. Since most cohousing projects are much more costly than
> that, it requires finding other funding sources. LLC's are used as ownership
> entities for construction loans and the contract for the construction loan
> requires the loan to resolve into individual mortgages. 
> 
> What you philosophically want to do as a coop is support a cooperative
> ownership model that is inline with your cooperative  ideals as a community.
> Unfortunately, in the State of Washington, and many western states, local
> lenders are not willing to loan coops the kind of capital a 30 or more unit
> housing project needs. There are many smaller coops, the largest I know of
> personally here is 12 units, which came in under $2 million dollars. 
> 
> 
> Rob Sandelin
> Naturalist, Writer
> The Environmental Science School
> http://www.nonprofitpages.com/nica/SVE.htm
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> 

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As a statistic, the US Unemployment Rate is like saying that no one is
drowning because the flood waters have risen only five inches today.


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