and related issues

DEVELOPER ROLE - "COOPERATIVE SERVICE AGENT": In a cooperative the developer functions as a risk-taking consultant, is referred to as the Cooperative Service Agent ("CSA") and is paid a negotiated fee. The duties and fees of the CSA are addressed in a "Cooperative Agency Agreement" or similar document. Typically the CSA's responsibilities include developing the project including providing needed predevelopment capital, identifying and supervising the development team, organizing the cooperative, marketing, arranging financing, overseeing construction, providing required guarantees, and overseeing occupancy and early management. Some CSAs continue as management agents.

OWNERSHIP: In most cooperatives, construction begins with the cooperative corporation as mortgagor. The only owners of the cooperative are the residents who have purchased memberships during the presale period. Unsold memberships are owned by the cooperative and the responsibilities therefor are guaranteed by a third-party (see "Consumer Protection" below).

FINANCING AND PRESALE: The vast majority of senior housing cooperatives are financed using construction and permanent financing guaranteed by HUD under Section 213* of the National Housing Act.. HUD can insure the construction and permanent loan ("Insured Advances") or the permanent loan only ("Insurance Upon Completion"). Most lenders require a substantial percentage of units to be sold prior to closing the loan. HUD may permit closing with 50% sold but routinely requires 90%. This decision is made on a case-by-case basis at the applicable HUD State Office. (Qualified presales are fully executed purchase agreements with down payments paid from bona fide, creditworthy purchasers.)

Under the Insurance Upon Completion approach, a conventional construction lender may make the construction loan (presumably with a lower pre-sale requirement than HUD's), with a mortgage-insurance commitment from HUD and a HUD-insured lender's commitment to provide the take-out financing. (Where a HUD-insured permanent will be used no construction may commence until HUD has issued its firm commitment for mortgage insurance.)

CONSUMER PROTECTION: At the construction loan closing, or as otherwise agreed, the cooperative purchases the land. With the construction loan and equity supplied from purchasers' down payments, construction proceeds.

Because the only owners of the project are private consumers, HUD and most lenders require that consumers' interests be protected through a variety of means:

  1. Negotiated presale requirement
  2. 100% bond on the general contractor (or 15%-25% letter of credit)
  3. Equity associated with unsold units at time of closing must be guaranteed by a creditworthy party or otherwise subordinated
  4. Monthly charges for all unsold units at time of closing must be guaranteed by a creditworthy party
  5. A 2% working capital letter of credit must be posted at commencement of construction, the unused proceeds of which will fund the Operating Reserve
  6. Prescribed annual deposits must be made by the cooperative to Operating and Replacement Reserves

GENERAL CONTRACTOR: Subject to the bonding requirements above, general contractors may receive a "lump-sum" rather than "cost-certified" contract, as encouragement to participate in guarantees associated with unsold units. Under a lump-sum contract the general contractor is guaranteed payment of the total contract, regardless of actual cost. As further quid pro quo for this lump-sum arrangement, general contractors often agree to absorb any unexpected cost increases (not including owner's upgrades) such as unforeseen site conditions, strikes, acts of God, etc. This precedent of the general contractor undertaking risk on behalf of the cooperative, and receipt of the lump-sum contract in return, was developed by HUD in its underwriting instructions as a means of protecting consumers in the absence of any other creditworthy party.

MANAGEMENT AGENTS: Most cooperatives retain the services of professional management agents. Organizations that commonly manage senior cooperatives are geriatric health-care providers and cooperative service agents.

* Section 213 provides full-faith-and-credit guarantees of 40-year, fully amortizing, fixed-rate, nonrecourse construction and permanent loans. Davis Bacon wage rates apply.

Prepared by:
Terry W. McKinley
Cooperative Housing Resources
2813 South 9th Street, Minneapolis, MN 55406
612-333-8684 ~ Fax: 612-333-3685