Refinancing: Have Lawyer from the Get-Go

Racht & Taffae
Theresa Racht, Partner

Historically low rates, capital needs, and maturing mortgages led many co-ops to refinance their underlying mortgages this past year. A few areas came to light where involving general counsel at the beginning of the refinance process could save the co-op money, and affect the timing of locking the interest rate (requiring closing to occur within 30 days of rate lock). Those areas are:

Prepayment premiums. Beyond obtaining an estimated calculation, existing loan documents must be reviewed to determine (i) if you have a prepayment window with no penalty on the horizon, and (ii) if there are any additional costs or timing concerns connected with the particular premium due, such as with a defeasance calculation.

Commercial leases. If a co-op has any commercial leases of any kind, lenders require that tenant estoppel certificates confirming certain lease information be delivered at closing. In some cases, a non-disturbance and subordination agreement will have to be negotiated with the tenant. Additional time is needed for these documents to be reviewed, negotiated, and revised by counsel for the tenant, the co-op, and lender.

Requesting payoff and/or assignment from existing lender. While most loans require giving the existing lender only 30 days’ notice of intent to refinance, general counsel will need to review the existing loan to determine the specific requirements. Some loans permit refinancing only on the first or last day of the month, some require more than 30 days’ notice, while others have a specific form the notice to refinance must take.

Legal Lesson

Involving general counsel from the earliest discussions about refinancing the existing mortgage allows counsel to troubleshoot the process. It also assures that everyone is fully informed of cost and timing issues affecting: signing a commitment; locking the interest rate; and closing 30 days later. If this isn’t worked out properly, the co-op can find itself (a) obligated to close a month before the prepayment premium expires, (b) unable to close because the existing lender won’t provide a payoff letter or assignment before the rate lock expires, or (c) losing a low rate because a major commercial tenant needs more time to deliver an estoppel certificate or non-disturbance agreement.