Underwriting Manual: Cooperative Ownership

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Standard Exceptions

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Underwriting Manual Subtopic

In General

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Cooperative ownership is a form of apartment ownership arrangement whereby a tenancy in common, corporate business or trust entity acquires title to certain property (an apartment building), and grants to the stockholders of the entity certain rights of occupancy (proprietary leases) to particular apartments located within the building acquired by the entity.

Underwriting Manual Subtopic

Plans For Structuring A Cooperative

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Three distinct plans may be used in structuring a cooperative:

  • The tenancy in common.
  • The business trust form.
  • The corporate form.

Underwriting Manual Subtopic

The Corporate Form

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Of all the above plans, the corporate-proprietary lease is the most commonly employed in the organization of a cooperative apartment.

Under this plan, prospective purchasers of apartment ownership are offered shares of ownership in a corporation. Once acquired, these shares entitle their owners to a proprietary lease of a specific dwelling unit located on the property owned by the corporation.

Underwriting Manual Subtopic

Main Characteristics Of The Corporate Form Plan

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  • The individual cooperative owner does not own title to any real property.
  • The ownership relates only to a stock certificate or shares in a corporation which owns the entire building.
  • The owner's interest in the property is exclusively a leasehold interest.
  • Each tenant has an interest in the corporate entity which owns the building.
  • The tenant's interest under the lease and the tenant's shares of stock in the corporation are legally considered to be personal property.

Underwriting Manual Subtopic

Basic Instruments To Be Examined Relative To A Cooperative Ownership (Corporate Form Plan)

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  • Charter and bylaws of the corporation.
  • Certificate of incorporation and certificate of good standing of the corporation.
  • Declaration of cooperative ownership.
  • Proprietary lease.

Underwriting Manual Subtopic

Title Insurance Of Owner's Interest In A Cooperative Apartment

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Local law must be researched in order to determine whether the owner's interest in a cooperative apartment ownership is an insurable interest in land.

If determined to be insurable, two possible forms of title insurance may be considered:

  • Issuing an ALTA owner's policy and insuring the ownership interest or private apartment interest, or interest of the tenant-stockholder, in the property (the whole building and not the apartment or unit), as this interest is created and defined in a certain recorded document (generally a declaration). Proof of the title to the interest must also be a matter of record.

    The advantage of this method is that it is not necessary to obtain an insurable legal description of the apartment or unit because the physical boundaries of the apartment are not insured. The only legal description to be utilized is the one pertaining to the building owned by the corporation.

    In this connection, the legal description to be used in the title policy must read as follows:

    (Private Apartment Interest) (Ownership Interest) (Interest) No. _____ , as said interest is created and defined by the Declaration dated ____ recorded ____ in (Book), (Volume) ____ , Page ___ , in the premises legally described as: __________ .

    Exceptions are to be shown in connection with all the liens, encumbrances, and defects affecting the land, together with the proper exceptions in regard to the contents of the declaration, assessments of liens, and approval of transactions, if approval of the transaction is established by the declaration.

  • Issuing an ALTA leasehold policy and insuring the proprietary lease. The disadvantage of this method lies in obtaining an insurable legal description of the apartment or unit.

In this connection, it should be noted that:

  • All the rules and provisions pertaining to the issuance of the leasehold policies must be considered and complied with. See Leaseholds (11.04).

  • All the liens, encumbrances, and defects affecting the land, together with the proper exceptions in regard to the contents of the declaration, assessments of liens, and approval of transactions (if any) are to be shown as title exceptions.

  • Satisfactory evidence must be furnished in connection with the assignment and delivery to the tenant stockholder of their corresponding shares of stock.

Underwriting Manual Subtopic

Insuring A Mortgage Of The Lessee's Interest In A Cooperative

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When insuring a mortgage of the lessee's interest, always:

  • Utilize the ALTA leasehold loan policy.
  • Ascertain that the lessee has the right to mortgage the leasehold interest.
  • Obtain an insurable legal description of the apartment or unit.
  • Comply with the requirements shown at section 3.64.6.
  • Obtain, if necessary, the approval or consent required by the provisions of charter, bylaws, declaration, or lease.
  • File a U.C.C. financing statement to perfect the security in the cooperative stock for the loan (if required under state law).

Underwriting Manual Subtopic

Extended Coverage When Insuring A Cooperative

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Because of the extreme complexities surrounding the insurance of a co-op apartment, it is advisable not to offer any kind of extended coverage when insuring a cooperative apartment ownership.

Underwriting Manual Subtopic

Examination Of Documents Related To Cooperative

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Carefully examine the contents of the charter and bylaws of the corporation, the cooperative declaration and any other related documents to ascertain the need to make any requirement or raise any exception as a result of their provisions (consents, approvals, etc.).

Underwriting Manual Subtopic

U.C.C. Search When Insuring A Cooperative

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When insuring a co-op apartment, a search should be made for filings under the Uniform Commercial Code to determine that the stocks or shares in the cooperative corporation have not been assigned as a security for any loan.