When Paying More Makes Sense

Hard hit. We have an older 105-unit building with a very low interest rate, about 3.6%, on a $3.5 million loan from National Cooperative Bank that wasn’t due until 2027. But the building was facing some major capital projects and had another year to go on a substantial four-year assessment when it got hit with mandatory facade and roof repairs that came in well over what the board had budgeted for. Because the assessment wasn’t going to be adequate, the co-op would have to dip into its line of credit, which was going to be somewhere in the 8% interest range.

Softening the blow. The board needed to borrow about $5 million to cover not only the facade and roof project but also future work, including new elevators, waterproofing and hallway renovations. So in looking at the options, we tried to figure out which would be the least burdensome on the shareholders. 

The first was the line of credit, which unfortunately has a floating interest rate and could rise over the next few years, along with imposing another assessment. Or the co-op could refinance right now, locking in an interest rate at 5.55% versus whatever the rate might be in 2027. The NCB loan had a yield maintenance prepayment penalty, but due to the low interest rate and the high rates now, it ended up being only a 1% penalty. So even taking into account that we’re going to have to do a maintenance increase to cover the additional debt service on the loan, the refi is much easier on shareholders. And we’ll be able to accomplish all of our projects within the next two years rather than doing them piecemeal.

Flexibility pays off. At face value, approaching boards with refinancing at higher interest may not seem to make any sense. Why give up a 3.6% rate that you have for another four years and go to a 5.5%?  But when you look at the big picture and what has to be accomplished at the building, it makes a lot of sense. This board was very open to possible options and thinking outside the box. And it worked.