Co-ops Ease Financial Strain by Refinancing Mortgages with Extended Amortization Periods

With today’s rising interest rates, refinancing an underlying mortgage has never been more expensive. But for those whose mortgages are coming due, refinancing is not actually a choice. Donald Einsidler, the president of Einsidler Management, worked with two co-ops that managed to pull off their refinancing. Their strategy? Extending the mortgage’s amortization schedule.

Working the numbers. Co-ops typically have balloon mortgages that come due in 10 years. These can be interest-only or amortized, and if they’re amortized, the co-op has paid part of the principal during the 10-year period. The first co-op had a $12 million balloon loan, had paid down some $2 million of it and had about two years left before it came due. The board refinanced the balloon, borrowing slightly over $14 million, and increased the amortization period from 30 to 40 years. It was a win-win. “This enabled the co-op to put a significant amount of money into reserves for capital projects while paying the same or less principal and interest than before on an annual basis,” Einsidler says. 

Timing is everything. Refinancing a mortgage before it expires does come with prepayment penalties. “But I explained to the board that its penalties had gone down because of the shorter time they had left on their loans, so it could make sense to refinance based on the lower interest rates at the time,” Einsidler says. When rates started to rise, the board decided to get moving. “Even so, by the time we were in a position to really lock things in, interest rates had risen by a point or more,” he explains. “The building got a 4.5% rate, and the board members were a little upset that they didn’t get something under 4%. But now they look like heroes.”

Planning ahead. Einsidler manages several properties with 10-year loans that are coming due next year, and with interest rates continuing to rise, he is trying to prepare them for the worst-case scenario. “They could go from 3% or 4% to as high as 8%, so it’s not going to be pretty,” he says. “Even if they extend their amortization period, it’s probably going to involve high interest and premiums.” 

To ease the shock, boards need to budget accordingly. “You have to plan for the increased debt service,” Einsidler says. Since paying mortgage premiums is one of the fixed parts of every building’s budget, boards may have to reduce or cut other expenses, like concierge service or capital projects, to offset the rising costs — and inform shareholders early. “Buildings need not wait until 90 days before the loan comes due to let people know,” he adds. “I mean, you have to give everybody a heads-up.”

A challenging environment. While the co-op that refinanced early and increased its amortization is paying the same premiums as before, that may be harder for buildings now. “As things stand, it’s a much higher interest rate environment, so I don’t know if that scenario is going to exist going forward,” Einsidler says. “Even co-ops that have paid down their loans in the last eight or nine years will probably face a significant debt increase if they’re also coming off a 3% or 4% interest rate.”

Still, buildings that currently have loans with higher interest rates and manage to extend their amortization periods might be able to ease the pain. And those that have several years before their mortgage is due should keep a close watch on interest rates and run the numbers. “The takeaway here is that if a deal makes sense by refinancing early, don’t wait until the loan comes due,” he says. “You always want to get ahead of things.”