A Co-op’s Shareholders Bankroll Capital Projects

It’s the same old story – a building is hit with several expensive capital projects at once and needs to refinance the mortgage to cover the costs. But at 152 W. 58th St. in Manhattan’s Midtown West neighborhood, the co-op board came up with a new twist on the standard solution: securing a loan financed directly by shareholders rather than a bank.

In 2019, the board at the 33-unit, nine-story prewar building was facing a $300,000 boiler replacement and chimney realignment as well as some $300,000 in mandated Local Law 11 facade repairs. “Our reserves didn’t cover that, and we didn’t want to deplete what we had,” says Carl Tait, the co-op board’s president. “So we started looking at conventional mortgages, but then we saw that in addition to paying interest, the closing costs would be through the roof, in excess of $30,000. On top of that, it would take a while for us to even get the loan.” 

Time to think outside the box. “We thought, ‘Wait a minute, couldn’t we just borrow from our shareholders and get them to act as microbanks?’” recalls Tait, a software engineer who has lived at the building since 1997. The initial plan was to take out a 10-year loan at 4% interest, with the co-op making monthly interest and principal payments back to shareholders, which would be funded through a building-wide assessment. “We did 10 years because that’s kind of a classic length for a short-term mortgage,” Tait explains. “We got our lawyer to draft the offer and send out a formal letter to everyone.”

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The shareholders, though, didn’t bite. “Nobody wanted to tie up their money that long, so we had to make the loan more appealing,” Tait says. “The people in our building are reasonably well off, but they’re certainly not rolling in money, and we also have a lot of senior citizens who are living on their retirement funds.” The board came up with a Plan B, shortening the loan period to five years, also at 4% interest. This time, it was an offer that at least some shareholders couldn’t refuse.

Six people stepped up, offering to lend between $50,000 to $200,000 each. “The money went into the reserve fund and the projects are being paid from that,” says Tait, adding that the loan repayments began one month after the money was received in October 2019. To keep the co-op’s financial records in order, the payments are being made through electronic transfers, he adds. “It’s not only easy that way, but the payments show up in our monthly reports as debt services, so everything is clear with our accounting.”

The deal is a win/win for the co-op, which is now wrapping up the boiler replacement and will be starting the facade work, which is now out for bids, this spring. “You're not throwing away money by getting an external loan and paying all that interest to a bank,” Tait says. “And in five years the loan will be fully amortized and gone, so it was appealing from a lot of standpoints. I call this a mortgage, but I use that term carefully. The building is not pledged, and the loan is not secured by anything except the shareholders’ faith. For us, that was a good way to do things. It makes us a real co-op, because we’re cooperating to get the work done.”

PRINCIPAL PLAYERS – ENGINEER: New York Engineering Associates. BOILER CONTRACTOR: Abilene Inc. PROPERTY MANAGER: AJ Clarke Real Estate. ATTORNEY: Holland & Knight.