I don't have any experience with Co-ops. During our webinars last week, we got asked these questions and want to make sure I'm answering them correctly.

It's my understanding that Co-Ops are like Time Shares. You (the owner) don't have a true ownership in the building, but rather in time in a unit. If I were to borrower money from a bank to purchase shares in a Co-op, does the bank have a "covered loan"?

Question 1. How do you determinate adequacy of coverage for an individual co-op unit that a bank takes as collateral for their loan? The coverage on the General Form policy is for the entire co-op building.
Question 2. Regarding loans secured by co-op’s – Do we need to require proof that the building has sufficient coverage when we are taking the co-op unit (shares) as collateral? We have been requiring the $250,000 coverage for the entire building up until June 1, and we have not experienced a lapse or underinsured situation with any of our co-op properties. However, we are a bit unsure what to do now that these properties require $500,000 of coverage. Is there some way the individual units can purchase their own insurance? If so, how would you calculate the required amount? Do we not require flood at all for individual co-op units? I’ve heard mixed opinions.


Here's my answer (so far): According to page GR 7 of the June 2014 Flood Insurance Manual, shareholders/tenants of cooperative buildings cannot purchase building coverage for their units. They are only able to purchase contents coverage using a Dwelling policy. 10% of this contents coverage may be applied to improvements at the time of loss.

If your loan is secured by the building in a SHFA, then it’s a covered loan. Since the entity that owns the cooperative purchases the insurance on the building, it is recommended that a bank that is secured by the building contact the entity to ensure they increased their coverage from $250,000 to $500,000 if required.

If your loan is not secured by the building, but only by shares. Then it is not a covered loan and flood insurance requirements do not apply.

anyone?

I would have to go do some research to refresh my memory (haven't made a loan on a co-op since I stopped working in NYC.) But, this was a major issue in Hurricane Sandy that hit the northeast. Many affected buildings were co-ops.

http://www.fema.gov/national-flood-insurance-program/standard-flood-insurance-policy-forms

General policy form is used for co-op buildings. I know we did not differentiate back in my "NYC" days (other than RCBAP for condo, etc.)

Thanks Kathleen. I found Coop coverage in the Flood Insurance Manual (page GR-7), I'm just not familiar with them - never seen a loan on one. I would think that the individual unit borrowers would not be giving a lien on the building, so the loan would not be a "covered loan". The individuals have shares in the corporation, but no building to offer.

If the corporation that owned the Coop units were to borrower money, then a lender might have a "covered loan".

That's really my hesitation in answering these 2 questions. Do you think I answered correctly?

Timeshare buildings come in two forms. Either in a condominium form of ownership or not. If they are in the condominium form of ownership, then they are eligible for a RCBAP, otherwise KB is correct, they fall into the general policy form.

Unless you are making a loan to the underlying timeshare building owner (or unit(s) owner in the case of a condo) and the loan is secured by the actual building(s)/unit(s) (which is usually the entity that is selling the individual timeshares and in charge of the overall upkeep of the project), you are most likely dealing with someone that is buying the right to stay in the timeshare for a period of a week or two a year. In those cases these rights to temporary occupancy are not secured by the actual building, so no insurance would be required.

I think it is basically the same with co-ops.

I would want to make sure the building was insured and that my borrower had contents insurance. The loan is secured via UCC-1, assignment of lease, etc. The bank needs to be able to step in in a foreclosure situation. These properties are frequently encountered in the flood prone northeast.

http://www.bankingmyway.com/real-estate/mortgages/buying-co-op-understanding-share-loans

KB, I agree, but you have jumped from regulatory requirements to basic safety and soundness standards.

Well, true, but it is hard to differentiate since flood is safety and soundness.

And the co-ops in big cities are not time shares. They are primary or secondary residences.

The big problem:

http://www.nytimes.com/2013/05/02/nyregi...?pagewanted=all

Yes, but that still does not negate the fact that a unit owner in a cooperative building still does not receive a real estate interest in a unit. They only receive a share of stock in a corporation with the right to occupy a particular unit.

Under the regulations, flood insurance would not be required.

The only loan that would require flood insurance would be a loan to the cooperative corporation if that loan was actually secured by the cooperative building.

But of course, logic and safety and soundness concerns regarding adequate flood insurance might dictate otherwise.

Agreed. But I cannot ignore the safety and soundness and would want to know that there was a policy on the building before agreeing to finance units in the building.

Yeah, like a $500,000 policy and a 140 unit co-op is really going to do you or the owners much good

Agreed. But sometimes it is the principle. Every penny helps in a disaster.

And when I respond to a bank's question, I give the specific answer as well as the big picture "contextual " "consider this" answer.

Thanks to you two. I agree with the regulatory and S&S answers. Do you agree with my answer in the first post?

Yes.

Thanks!

Can someone please confirm if a bank is taking a security interest in a timeshare, if a flood determination would be needed?

Learned a lot from this post! Thanks. Now have a commercial flood question, 8 buildings of rental units in flood zone taken as collateral and all have separate policies. However the underwriters and attorney also wrote in the banks requirements that all "Borrowers personal property, including but not limited to inventory, goods, machinery equipment, material, appliances, furniture, fixtures, general intangibles" So to be safe, do I get a value of appliances from each unit from the current owner to insure those? Checking but it doesn't look like any units in these buildings are furnished but looking to get values for common area furniture if any. Most fixtures I feel are attached and would be included in the building policies. Can't find that there is a pool or other shared amenities. what else am I missing that should be checked out? Thanks for any suggestions.