You Can Borrow, Too!

For years, our condominium has used assessments to pay for major repairs and capital improvements. However, because of shareholder complaints, our board never levies assessments that are big enough to do the whole job. Consequently, we end up putting “Band-Aids” on problems instead of solving them. I hear of co-op buildings getting new mortgages to make improvements all the time. Can’t our condo building get a mortgage so we can afford to do things the right way?

My answer is “no” … and “yes!”

“No” your condominium cannot get a mortgage loan. That’s because the legal structure of a condominium is fundamentally different from that of a cooperative. In a cooperative, an apartment corporation owns the entire building and acts as landlord to all of the residents. Each resident receives a certain number of shares in the apartment corporation and a (proprietary) lease which entitles him or her to occupy their apartment. Since the apartment corporation owns all of the real estate, it has something to mortgage. In a condominium, every shareholder owns (and receives title to) an individual unit. There even is a separate tax “lot” assigned to each apartment. In addition, each shareholder receives an undivided, pro rata ownership interest in the common elements of the association (the lobby, basement areas, grounds, etc.). Since each shareholder owns a piece of the real estate, each has something to mortgage…and many shareholders in condominiums do just that. However, in virtually all cases, the condominium association itself does not own any real estate. Consequently, it has nothing to mortgage. So much for the “no” part of my answer.

Condominiums always have had a very valuable asset to offer as security for loans…their right to set and collect the monthly carrying charges from all shareholders. If the carrying charges are set at a level sufficient to pay all of the operating expenses of the condominium plus the debt service on a loan, most lenders would accept that right as collateral. Unfortunately, until 1997, New York State law prohibited condominium boards from entering into such transactions. However, since the law changed, financing has been readily available for condominium repair and improvement projects. That’s the “yes” part.

Unlike cooperative underlying mortgage loans, which are based principally on the value of the real estate used as collateral, loans to condominium associations are based almost solely on the cash flow generated by the association’s shareholders. Therefore, the terms of condominium loans are somewhat different. The amount of a condominium loan will be determined largely by the cost of the project being planned, as well as the lender’s evaluation of whether all of the work can be completed within a relatively short period of time (one to three years). Depending on the nature and timing of your work, some lenders may hold back some or all of your loan until you actually need the money. The term of the loan usually will not be longer than five or ten years, and loan payments will be structured to repay the loan plus interest over that period of time. Current interest rates are in the range of six percent, so a $500,000 loan would have total monthly payments of about $5,600 (if repaid over ten years). That equates to an average of just $56 per month in a 100-unit building.

Other lenders will structure a loan in two pieces: a one-to-three-year credit line at a floating rate, followed by a five-to-ten-year fixed-rate loan. The interest rate on the credit line will be something like the prime rate plus 1.50 percent (3.25 percent + 1.50 percent = 4.75 percent today), with interest only paid monthly on the balance outstanding during the previous month. If a condominium is planning a lot of work, or one very large project, this format can save them a lot of interest.

The process for securing a condominium loan is pretty much like the process for obtaining any other loan. The lender will want to see, among other documentation, several years of financial statements, an operating budget for the current year, a shareholder list with monthly charges and arrears, a description of the work to be funded and related cost estimates, several years of apartment resale information, and a list of property personnel with wages. The entire process, from start to finish, will take 60 to 90 days.

So, while your condominium cannot get a mortgage loan like your cooperative neighbors, it can get a very good substitute to fund all of your building’s capital improvement needs. Good luck!