Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
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). Any buyer who applies for a co-op apartment with a mortgage is introduced to the Aztech Recognition Agreement (aka Aztec). 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.
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. It states 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.
The goal of the agreement is to protect the co-op in the event of a default. 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 have 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 form describes what to do in the event of a borrower’s default. It works as a warning system of a borrower’s financial difficulty. 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 proprietary leases vary regarding the ability of each shareholder to get a mortgage-backed by each shareholder’s shares. A standardized Aztec document increases the bank’s ability to enforce its collateral if it tried to foreclose on a shareholder. Lastly, the co-op cannot allow additional financing or cancel the shares/lease without the bank’s approval. The building is therefore granted a priority lien on the equity.
It permits the lender to monitor the shareholder’s timeliness of maintenance payments. It turns the bank into a guarantor of a shareholder’s maintenance fees.
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, it becomes 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 gets paid the proceeds of the sale. 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 priority lien on shares and leases. In the 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 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.
In conclusion, at NestApple, we think the coop building is safe financially (as opposed to condos with owners in arrears) as long as shareholders/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.