It’s a Great Time for Co-ops to Refinance, If…

Prior to the pandemic shutdown last March, Donald Einsidler, president of Einsidler Management, was busy helping five different co-ops navigate the refinancing of their underlying mortgages at interest rates just above the tantalizing number of 3%. Then came the state’s stay-at-home order. “Rates spiked up to points where it wouldn’t have made sense to go through with the loans,” Einsidler says.

Fortunately, because he had secured lender commitments on four of the five loans, Einsidler felt no urgency, and he advised his boards to “just hang out” and hope that the rates would come down over time. And that’s exactly what happened. Refinancing rates once again dipped to attractive lows, and all of the loans eventually closed at rates low enough to allow the co-ops to maintain their same monthly payment even after taking out some cash.

However, low interest rates and the arrival of new lenders in this market should not lead co-op boards to assume that loans are sailing through the underwriting process. To the contrary, brokers say, co-ops should be prepared to undergo closer financial scrutiny than they experienced before the pandemic hit.

“If you have any borderline issues, you’re going to get a lot more scrutiny,” says Patrick Niland, the president of First Funding of New York, a mortgage brokerage. Those issues include a high percentage of shareholders in arrears, a history of long-time arrearages, and dependence on a commercial tenant’s rent for a major part of the co-op’s income.

“It’s a huge kind of bag of issues that are popping up,” says Harley Seligman, a senior vice president at National Cooperative Bank, where interest rates on co-op mortgages now range from about 2.7% to 5%, depending on the loan amount and type of building. “It could be that the (commercial) unit is vacant, it could be that we don’t have confidence that it won’t be vacant in six months, or the tenant has stopped paying their (rent). Take a SoHo co-op with a high-end designer store on the ground floor paying a huge amount – will that even exist in a year?”

Niland adds that the lenders he works with are being similarly cautious about commercial tenants. “It’s all about cash flow,” he says. “I had a building that had a Dunkin’ Donuts, a Starbucks, a drug store and a local grocer on the ground floor. All of them were operating, they never shut down. A couple lenders just said no – it was retail space and they were not interested.”

A co-op board dealing with lost commercial income might try to improve its odds of qualifying for a loan by increasing all shareholders’ maintenance to cover the shortfall, says Marc Schneider, a managing partner at the law firm Schneider Buchel. Lenders want to see that the shareholders can cover it for some period of time, he adds, and that delinquencies aren’t rising. 

Whereas before the pandemic “a few wandering ducks” who were in arrears didn’t really hurt, Niland notes, now all those ducks need to be in line. The lifespan of those ducks also matters. “I just did a loan on a building in Woodside, Queens, that has two units that have been in arrears for a long time,” Niland says. “They’ve taken the people to court and won a judgment, and they’re now moving to collect, like, $50,000. The lender looked at that and said, ‘This has gone on for a long time.’ Now the lender is holding an escrow account until those situations are resolved.”

Some lenders are requiring co-ops to put up what they call a “COVID-19 debt service reserve,” which is typically three to six months of mortgage payments, according to Nicoletta Pagnotta, a senior vice president at Meridian Capital Group. “They just want to keep an eye on what’s going on,” Pagnotta says. “If nothing happens over a certain period, that money would be released back to the co-op.”

Still, the co-op has to come up with the money before the loan goes through – one more hurdle to refinancing the underlying mortgage, and one more barometer of lenders’ wariness in these uncertain economic times.