The Basics:
Negative Pledge Loans are unique to the New York City cooperative apartment market. They came about in response to the fact that many co-op boards impose restrictions on buyers ability to finance the apartment.

A so-called "25% building," for example, requires that buyers pay a minimum of 25% of the purchase price in cash—allowing them to finance up to 75% of the purchase price. A "50% building," on the other hand, dictates that buyers need to pay at least 50% of the purchase price in cash, allowing a maximum of 50% to be financed.

Negative Pledge Financing Allows:

1. Buyers who have the monthly income but may not have enough cash on-hand for a high down-payment to enter the co-op market.
2. Buyers to take advantage of the tax benefits that might be gained from a larger loan, i.e., smaller interest payments mean smaller tax deductions on the property.
3. Buyers to use their cash on-hand to make investments with higher returns, instead of using it for a high down-payment.

The Details:
The "recognized" loan, or the loan amount disclosed to the co-op board via recognition agreement, is secured by the purchaser’s shares with a UCC1 filed by the appropriate party. The "unrecognized" loan, or the portion of the mortgage that is not disclosed via recognition agreement to the co-op board is still secured by the UCC1 filed with the recognized loan. This allows for the interest paid to the lender to be treated as a tax-deductible expense under IRS code. The loans can be similar (both 30 year fixed) or a blend (a 5/1 interest only ARM and a 15 year fixed) of products. This allows maximum flexibility.

1. Amount of Financing
   The lender will need to know the amount of financing the Cooperative Board allows.
2. Letters of Commitment
   Once approved, the lender will send the borrower two commitment letters: one for the "recognized" loan and the other for the "unrecognized" loan.
3. The Closing Will Have Two Stages
   Typically the first stage is the "unrecognized" portion of the loan which is not disclosed to the Cooperative Board. The second stage is the "recognized" portion. In the second stage, the stock and lease are exchanged and the balance of the funds are delivered to the seller.

The Benefits:

• Negative Pledge loans, in some cases, can allow borrowers to finance up to 80% of the purchase price of a co-op, regardless of Cooperative Board guidelines.
• The interest rates available for negative pledge financing are competitive with other co-op loans, and some have interest-only options that make payments 100% tax-deductible.*
• The "unrecognized" loan does not require any additional collateral. A strong financial profile, substantial post-closing assets, earning power and cash flow help to secure the "unrecognized" loan.