Procrastination Never Pays

It may be tempting for boards whose mortgage is coming due to put off refinancing until the last minute. But it’s never too early to start looking at your options. We have a co-op whose underlying mortgage was set to mature in February 2023 but did not begin that process until November 2022, which was very late in the game. Unfortunately, this building does not have stellar financials, and it was up against a tightening lending market and rising interest rates, and its existing lender had a minimum mortgage amount, which the co-op fell below. 

No time to waste. We had to put the mortgage out to market and also get an extension from the existing lender because we didn’t have enough time to secure and close a new mortgage. We were able to get a six-month extension, and through a broker we got a new mortgage deal with First Republic Bank. But the co-op had not received a commitment before First Republic went belly up in May. So then we had an extension with the current lender that was expiring in mid-June, which gave us six weeks to get a new mortgage. This is really not a very reasonable timeframe in the world of building financing.

Dashed hopes. Then JPMorgan Chase took over First Republic, and the hope was that we’d be able to proceed with the existing terms. But Chase, which isn’t in the co-op lending market, wasn’t interested in the deal. We went back and forth, but toward the end of May, Chase said, “Nope, we’re not going to lend.” This meant that the building would be in default on its existing mortgage, and the bank could take over the property, and shareholders would lose their apartments.

A temporary reprieve. The board was able to get Chase to agree to a one-year loan with no prepayment penalty. That is generally unheard of in co-op underlying financing, and so are one-year mortgages. The co-op was able to escape in the short run. But much of the $50,000 cost of securing this mortgage—legal fees, broker fees—will be incurred within a year. The co-op, which has around 50 units, also had to impose a $200,000 assessment to pay the closing costs with Chase and make sure it had enough money to pay the property taxes that were coming due in July. So it was a very hefty assessment with very short notice.

The takeaway. Start the mortgage process early. Even if you’re not looking to prepay a mortgage, start thinking a year or two prior to your refinancing about what capital projects you might want to bundle into it and work to get the best terms possible at the lowest cost. Even more important, you need to have sound financials. The co-op has a year to refinance, but now we’ve got a break-even budget for 2023, and the objective is to have a break-even operating budget on a year-over-year basis.