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What is an Aztech Recognition Agreement (or Aztec form) to buy a coop in NYC?

If you have been involved in a coop deal in New York with a mortgage, you must have heard of the Aztech Recognition Agreement (or Aztec form). Anyone buyer who applied for a co-op apartment with a mortgage is familiar with what is called the Aztech Recognition Agreement (aka Aztec form). The Aztec form has nothing to do with an ancient Mexican civilization and everything to do with buying a co-op in New York. We will break it down for you, explaining what it is and how it works.

It is required by the bank to get a mortgage, and the originals are necessary for the co-op purchase application. Interestingly, most co-op owners and sometimes brokers do not know what it is for; they just put it inside the coop board package without understanding the meaning or implications.

The Aztech Recognition Agreement is a contract between:

1) the purchaser of a co-op apartment
2) the bank providing the mortgage to that buyer
3) the co-op. Corporation

An Aztech form is a contract between those three parties stating that the bank will have a first lien on the buyer’s shares as collateral for the mortgage. The name comes from the Aztech Document Systems company, which dates from 1973. Previously, lenders would negotiate directly with building developers and co-op converters to create custom documents for individual shareholders.

Why is an Aztec form needed?

The goal of the agreement is to protect the co-op in the event of a default. It protects both the bank and the co-op. Any potential buyer who wishes to purchase a co-op apartment in New York does so by buying shares in the corporation. If you are buying with mortgage financing, the Aztec form will be required. The document explains that the co-ops gets priority in terms of payment over the bank. If the buyer defaults on their monthly payments, there will be no changes to the lease without notifying the bank first.

The co-op commits to notify the bank if the case the buyer fails to pay maintenance. Procedures are described in the Aztec form on what to do in the event of a borrower’s default. It works as a warning system of a borrower’s financial difficulty with the bank. The bank agrees to make payments on behalf of the defaulted shareholder; preventing the co-op from foreclosing.

The by-laws and the language of co-op proprietary leases vary regarding the ability of each shareholder to get a mortgage backed by each shareholder’s shares. Some coop proprietary leases allow for it; some require the prior consent of the co-op corporation, and others are completely silent about it. A standardized Aztec document has been developed to increase banks ability to enforce their collateral if it tried to foreclose on a shareholder. Lastly, the co-op corporation is prohibited from permitting additional financing or canceling the shares/lease without the bank’s approval. This protects the security interest of the bank. The co-op is granted a priority lien on the equity. If the owner defaults, a co-op’s lien is prioritized (over that of the lender).

What are the benefits of the Aztec form?

It permits the lender to monitor the shareholder’s timeliness of maintenance payments. This effectively turns the bank into a guarantor of a shareholder’s maintenance fees.

How can I get the Aztech Recognition Agreement?

The banks issue most Aztech Agreements. The terms of which must be mutually agreed upon between the three parties before a loan can close. Once released will be submitted as part of the board package. In return, the security interest of the lender is protected. However, some strict co-ops require the use of their recognition agreement and will not accept the lender’s version.

The co-op will receive payments from the bank on behalf of a defaulting owner.
The bank holds a lien against the shares. In the case of a sale, Ithe bank will be paid the proceeds of the sale after all monthly maintenance is paid. From what is left after the co-op and bank’s loan are repaid in full, the remaining amounts will go to the owner. The lender cannot transfer the shares without the co-op’s approval.

The co-op has a first priority lien on shares and leases. This means in case of shareholder delinquency, a co-op will be paid first (before a bank). Banks may try to get co-op to agree to their own version of the agreement. If this happens, the co-op’s attorney may agree to minor variations but will likely outright reject anything that eliminates the language protecting the co-op from liability if the co-op accidentally forgets to notify the lender of a default.

As a conclusion, at NestApple we think 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.

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Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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