The In-Between Loan

You have to have money to get new money. When Rye Castle didn’t, its manager did.

When short of cash, not many people would think to turn to the guy who manages their building for a loan. But that, in effect, is what some co-ops are doing as they await larger refinancing arrangements.

An interesting example of this phenomenon can be seen in a deal put together for Rye Castle, a high-end, 25-unit co-op in Rye, New York. Managed by Gramatan Management, the co-op ran through much of its cash reserve and its line of credit paying for roof repairs four years ago. Although its debt levels were not noticeably high, the co-op found itself with low levels of cash on hand. Analysis of its financial statements – and its modest levels of cash – made buyers uneasy; as a result, some co-op sales in the building have been scuttled in the last few years.

In response, the co-op board arranged for an early refinancing of its 10-year mortgage – originally set to conclude in February 2017 – despite the co-op’s mortgage contract, which called for pricey repayments under the principle of “yield maintenance.” Although refinancing meant the co-op would need to pay its current lender at least $80,000 in penalties, it also meant it got substantially lower interest costs on its new mortgage. The co-op saw the reduction even though the building expanded its mortgage total, from a loan with $1.037 million in remaining principal to a new one with $1.7 million.

Thanks to those low levels of cash, however, the co-op didn’t have the funds it needed to pay the good faith deposit for the new mortgage. The routine closing costs, such as the lawyers’ fees and title searches, were included in the new loan amount; the bank was reimbursed for these fees at closing. The application fee and the good faith deposit must be paid in cash, and the co-op only had enough money for the application fee, which was $4,000.

Some mortgage brokers will lend buildings these amounts but at a percentage cost that isn’t always cheap. So, as in several other recent cases, Gramatan stepped in and provided the building it manages with a 30- to 45-day loan to help it seal the deal: $25,000, which covered the 1.5 percent deposit on the amount of the mortgage.

As planned, the co-op board won’t use the reduced interest payments under the new mortgage to lower its members’ monthly bills. Instead, it is setting aside roughly $700 per month to build up its reserve fund. Additional money will be immediately stowed away to build up its stock of cash on hand.

Gramatan executive Steven Gutman, who helped to set up the deal, says that a co-op should always have two months’ worth of maintenance in reserve. In this case, that’s between $50,000 and $75,000. The co-op aims to boost this to $100,000, moving its status from cash poor to a far more comfortable position. In this way, it can increase its pool of resources available for unexpected events as well as plan ahead for its next major expense. For the Westchester co-op, this will be replacing its boiler in a few more years.

Gramatan’s return on its loan to the co-op will be based on a five percent annual interest rate, which Gutman points out adds up to roughly $120 in interest. So why did the company go to the trouble to provide the loan?

“We’ve been managing the building since 2006,” he says. “It’s a service we’re glad to be in a financial position to be able to provide to our clients.” He adds, with a laugh: “If all of our 75 clients wanted these loans simultaneously, I don’t know that we’d have the reserves for it.”

The lesson here is that co-ops can sometimes look to their managers for interim loans. But, as Gutman observes, “you don’t ever want your cash reserves to get low. It’s really not a good situation to be in.”

Nonetheless, this sort of out-of-the-box thinking may be catching on. Just look at another example of alternative loans at 90 Riverside Drive. At that co-op, the board turned to shareholders for short-term bridge loans. Under the terms, the loans were unsecured, could not be transferred, assigned, sold, or pledged and were to be paid off following successful mortgage renegotiation. With nearly one-fifth of the shareholders participating, the co-op was able to pay the bills – and after refinancing the mortgage, it paid the loans, principal, and interest, too.