PRIORITIZING REPAIRS, P.2

Once you are free of your existing loan, you have myriad ways to fund your needed work.

1) A new fixed-rate underlying mortgage. This has the advantage of tying up all the money you need at today's relatively low interest rates. However, since your capital improvement program will probably stretch over several years, you will be paying now for money that you won't spend right away. Also, even at today's rates, a loan that large probably will be too expensive for your shareholders.

2) A loan large enough to complete the three critical projects (plumbing, electrical, and boiler) over the next three years, with an option to roll that into a larger loan to tackle the next three projects over the following three years. This structure would have a low interest rate and would guarantee funding for all improvements, but it would not burden shareholders with the entire bill up front. While this format does expose the cooperative to some interest rate risk in three years, that risk would be worth it for the flexibility of this structure.

3) A construction-type loan at a floating interest rate that converts to a fixed-rate mortgage as soon as all of the work is completed. This structure matches funding to spending and minimizes interest costs. However, it also maximizes exposure to interest rate risk. That could cause budgetary headaches should interest rates start to increase dramatically before all of the work were completed and refinanced out into the fixed-rate loan.

You have a very difficult situation. The solution will be neither easy nor painless. But with thorough analysis, determination and sound advice from all of the cooperative's professional advisers — accountant, attorney, managing agent and maybe a good mortgage broker, if I may be so bold — you can do it.

Patrick B. Niland, a mortgage broker, is the principal of First Funding of New York.

Adapted from Habitat May 2010. Join our Archive >>