REFINANCING IN TOUGH ECONOMIC TIMES, PART 1

Small or large, keeping a property afloat during increasingly perilous times is a challenge that often leads a co-op to one solution: refinancing its underlying mortgage. But before making the deal and getting that urgently needed infusion of cash, there are strategic reasons behind the decision. Here are three stories, three boards, and three strategies.

Trust But Verify: Hampton Court

A 315-unit complex of four elegant buildings with a central courtyard, Hampton Court in Kew Gardens, Queens, was built in 1937 as a tony rental property. It went co-op 50 years later with little fanfare and great hopes. Unbeknownst to the first board of directors, however, the sponsor was playing games with their money. Funds earmarked for capital repairs and maintenance were instead being applied to another property, then under construction. When the sponsor went under in 1989, he took the extra money with him, and the co-op spent the next decade struggling.

The board then made long-deferred capital repairs a priority. Yet although those were costly, the co-op was being hurt more by high daily operating expenses and a dwindling reserve fund. By 2005, recalls the complex's manager, Steve Greenbaum, director of management at Mark Greenberg Real Estate, "They were in really dire financial straits. Their J-51 [New York City tax-abatement] had expired so their taxes were going to rise. They already had a monthly assessment and maintenance increase, and their reserve funds were at a critical low" — $250,000, which was $100,000 below the minimum required by the mortgage-holder, the National Cooperative Bank (NCB).

But then a new slate of directors was elected in 2005 with a mandate to get the financial house in order. "The new board wanted to get a handle on expenses," says Greenbaum. "They were very active and aggressive."

They questioned everything — and found black holes into which the co-op's money had been disappearing. The superintendent was working on outside jobs and subcontracting his duties to others, who would charge the complex. Building supplies were running at $25,000 over average prices. The staff members were demanding overtime for tasks that the board thought were within their job descriptions. And the site manager was letting it all go on.

After the board complained to Greenbaum, he brought in a new site manager, whom he personally supervised, and the seven-person board researched supply costs, sought out energy-saving measures, and contacted the Realty Advisory Board and the union to get a handle on how to handle the staff issues.

"At first, we were told we were micro-managing," recalls Michael Soccio (at right), the current president. "We just wanted to figure how to bring costs down and bring us onto a more level playing field with other co-ops on the market."

Indeed: Soccio says the directors were especially worried about their co-op's relatively high maintenance and low reserves and how that would affect its resales and its standing with the lender. (The bank required $350,000 in reserves, $100,000 more than Hampton Court had on hand.) "It wasn't appealing to buyers; we wanted to eliminate the 10 percent assessment that was in place just to build up reserves, and we wanted to have a cushion in case something did happen."

Greenbaum suggested that they consider refinancing. "You can always make money in a refinancing," he says. The trick is to know how much to request. Although Soccio, a nurse, had no professional financial experience, he became "very hands-on in the process," Greenbaum recalls. When the manager — working with Ed Pecker, the co-op's accountant, and Steve Geller, a mortgage broker at Meridian Capital Group — found opportunities, he would bring them back to the board for review.

But Soccio says the board, burned by its previous experiences with the sponsor, manager, super and staff members, questioned everything.