Cohousing-L Mailing List: Answers to detailed loan questions

[Rob Sandelin (floriferous]

> 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?

You sign a contract for your construction loan which specifies the process,
the requirments, etc. So your mortgage transition is already agreed to and
in place before construction actually starts.

Rob Sandelin
Naturalist, Writer
The Environmental Science School
http://www.nonprofitpages.com/nica/SVE.htm
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-----Original Message-----
From: ken [mailto:gebser [at] speakeasy.net] 
Sent: Monday, May 08, 2006 3:39 AM
To: Cohousing-L
Subject: Re: [C-L]_ Perhaps some clairity on why Coops and LLC are nota
mortgable entity


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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--
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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