PRIORITIZING CO-OP / CONDO REPAIRS

As a longtime mortgage broker, I can tell you that the first step is to break the problem down into components.

First things first: Which repairs do you make and in what order? You need to know that before you can plan how to pay for them.

Step one is ask your engineer to prioritize all the work. My guess is that, given the time of year and the relative impact of a failure in each system, the order will be plumbing, then electrical upgrade, then enough repairs to tide your boiler over until next summer, then the rest of the work. Your managing agent can help you develop a detailed budget, lay out a realistic schedule and select qualified contractors to assure that you get on-time completion of high-quality work, at reasonable cost, with minimum disruption.

That's step one. Now comes the financing part. There are several ways to pay for this work.

1) Raise maintenance by an amount sufficient to raise the needed money over some period of time. The disadvantage to this method is that it takes a relatively long time to raise large sums, and it forces you to delay the work until you've collected almost all of the money needed for each project.

Since your existing lender

holds your building as collateral,

it has a vested interest in

preserving that collateral.

Given the urgency of some of your repairs, this method doesn't meet your needs. However, it may be something to implement now as a way to start raising funds for future projects.

2) Levy assessments. Large sums can be raised fairly quickly, but the practice tends to be burdensome to most shareholders. This would probably be the case in your building because your assessments will either be very large or continue for an extended period of time to raise the amount of money necessary to complete all of your work.

Additionally, assessments have no short-term tax benefit since they get added to each shareholder's basis instead of being deductible in the year paid.

3) Borrow the necessary funds. The most obvious source is your existing lender. Since it holds your building as collateral for its loan, it has a vested interest in preserving that collateral. So, you might ask for a second mortgage and/or a credit line to fund some or all of your repairs. However, be prepared for some resistance because, in today's economic environment, not all lenders are comfortable increasing an investment in real estate.

If your existing lender won't give you secondary financing, you can ask it to waive or reduce the prepayment penalty and give you a new underlying mortgage big enough to repay the existing loan and fund your needed repairs.

Many lenders are more amenable to new first mortgage financing because those loans can be sold to Fannie Mae or Freddie Mac, recouping most of the lender's capital.

4) If you can't get a second mortgage, a credit line or a new underlying mortgage, you can ask for permission to get subordinate financing from some other lender. Your lender does not have to grant you this permission, but most lenders will allow some subordinate financing if it is used solely for needed capital improvements. That said, finding another lender that is willing to provide secondary financing (either a second mortgage or a credit line) can be difficult these days.

5) And that brings us back to your existing lender and that onerous prepayment penalty. Sometimes the better, albeit initially more costly, solution is this: Pay a prepayment penalty in order to be able to properly structure financing that supports the long-term financial health of the cooperative. As difficult and painful as paying the penalty may be, try to view it as the price of correcting the fiscal mistakes of previous boards.

Next page: You've gotten the financing. Now what? >>