A: The Aztec Recognition Agreement (sometimes spelled Aztech) is a three-party contract between the borrower, lender, and coop. It is a form that must be signed by the borrower, lender and the coop.
(The form gets its name from the company that produces it)
It is the document that the bank draws up to give its lien the first priority over the co-op's lien in case the shareholder defaults. Also, the co-op corporation promises to notify the lender if the owner fails to pay maintenance or other fees to the co-op.
The co-op corporation is prohibited from permitting additional financing or canceling the shares/lease without the lender’s permission. This protects the security interest of the lender. The co-op, on the other hand, is given a superior lien on the equity. In the event of a default, a co-op’s lien is automatically prioritized over that of the lender. Only a few lenders will do HELO's in coops since they will be third lien.
Procedures for the lender and co-op to take in the event of a default are also established. The co-op agrees to inform the lender if the shareholders monthly maintenance payments fall into arrears (3 months). This functions as an early warning system of a borrower’s financial difficulty to the lender. In return, the lender agrees to make payments on behalf of the delinquent shareholder/borrower in order to prevent the co-op from foreclosing.
The lender also recognizes the co-op board’s right to review the transfer of shares in the event of a foreclosure.
The terms of the Recognition Agreement must be mutually agreed upon by the co-op and lender before a loan can close. Some co-ops require the use of their own recognition agreement and will not accept the lender’s version.
As part of this agreement the mortgage holder will pay maintenance and repossess the apartment. If shareholders don't pay their maintenance, the mortgage lender will pay after a while.
A co-op foreclosure has to be initiated by the co-op board. Because co-op units are not considered real property, co-op foreclosures do not have to go through the court, and instead will go to auction.
The coop building is safe financially (as opposed to condos with owners in arrears) as long as shareholder/owners have a mortgage. The Aztech protects the coop. For this reason many coops prefer purchaser's to have a mortgage (even a small mortgage) with assets left over rather than an all cash purchase.