Recognition Letters Before Commitment Letters

Uh...what is a 'recognition letter?" I've sold two places, bought one, taken out a mortgage, and taken a HLOC in the last two years. I never heard of this. What are you supposed to do with a "recognition letter?"

co-op board signs this recognizing that bank owns shares.

You mean the coop tells the bank that if the bank issues a mortgage it will be okay with the coop for the bank to hold the shares?

It's the Aztec agreement, giving the bank's lien priority over the co-op's.

these days, I would not take it as a sign of anything except that the banks are running around like chickens with their heads cut off.

It just sounds like one of the things that someone in the back office gets done before passing the application packet along to whomever looks at it next. If it is an Aztec agreement, I wouldn't be reading into this ministerial thing one way or the other.

I do corporate finance for an investment bank. Every so often, someone feels they need a letter. A highly confident letter. A valuation letter. An indication of interest. Everything is meaningless. Nothing is a definitive agreement unless it is a definitive agreement. And we aren't parties to definitive agreements, only principals are. But, if they want a letter to feel better, we'll write one and happily receive a check.

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I believe the recognition letter does require the coop to accept the bank's lien on the shares and "recognizes" the bank's ability to assume the proprietary lease. However, and 30yr may know more, my understanding is that a bank does not have priority with respect to any lien for coop common charges. This is important in the current environment where condo associations are seeing thier common charge liens wiped out during foreclosure. Coops have to be patient but come out ahead of banks at any final sheriff sale if they've done their paper work properly.

And as for letters being meaningless, tell that to the former partners of Arthur Anderson. They probably would like to get a couple of letters sent to the Enron Board back.

Above was intended to start out by noting that recognition letters, as I understand it, entitle banks to acquire shares and assume proprietary lease....but do NOT give banks priority over the coop's lien for unpaid common charges....one of the biggest advantages (to other members of the coop) of the coop form of ownership as opposed to the condominium form and one of the reasons banks are more skittish about coop loans. Yes 30yr?

mjsalisb, you're correct. I googled too quickly. "Recognition agreement" and aztec will turn up what it is, from better sources than the one I grabbed at.

The recognition agreement (it's called an "Aztech" because that's the standard form it's on, just like we in the industry informally call a lease a "Blumberg") is a document that anyone taking a mortgage loan on a co-op is going to need to move three copies of. (Kylewest, go back and look at your closing package).

Basically, it gets the co-op to recognize that you as new shareholder XX have pledged your shares as collateral to mortgage lender ZZ, and acknowledges that if lender ZZ doesn't get their mortgage payments, they have a right to take possession of those shares, and that the co-op is okay with that.

So, Gold Star to Columbia County.

I don't see anything weird with the Aztechs moving before the commitment letter. Once the Aztechs are done, you can't switch lenders without doing new Aztechs -- which is another three weeks and another $100 or so bucks -- but really, you shouldn't be taking your decision about which lender to use that close to the wire anyway.

Be aware that once you're IN the co-op, if you want to refinance, you'll have to do a new set of Aztechs. This is why co-op owners can't refinance without their building "knowing."

ali r.
{downtown broker}

My guess is the lender and or broker contacted the bank attorney at the time of your application. The bank attorney and lender do not always work in conjunction. Many times the bank attorney sends out the recognition agreements prior to the commitment being issued. If the bank declines the loan you simply destroy the recognition agreements.