Co-op Board Gets Round of Applause for a Timely Refi

The clock was ticking at the 66-unit co-op in Flatbush, Brooklyn. The 10-year term on the co-op’s underlying mortgage was about to expire, and the board had a 60-day window to refinance the mortgage without paying a punishing prepayment penalty. The lender on the original mortgage, Dime Community Bank, is no longer making loans to co-ops, so a new lender had to be found. Time to get busy.

“Another thing the board had to decide was what type of loan we wanted,” says Daniel Mazzone, who joined the board shortly after he moved into the co-op two years ago. The board got in touch with a mortgage broker and with its management company, Choice New York, which offers mortgage brokering services. The outside broker came back with options, without specifying the lender; Choice New York came back with three options offered by National Cooperative Bank (NCB).

They were: a 10-year fixed rate with a 30-year amortization; a 10-year fixed rate with a 40-year amortization; and 10-year, interest-only loan. The last option was seductive because it would lower monthly payments.

“But when you look at the long-term health of the building,” Mazzone says, “a more conservative loan that requires you to pay off some of the principal made more sense. If we did an interest-only loan, future boards would be locked into similar loans.”

And when board treasurer Miguel Marcelle and Thomas Sussewell, chief operating officer at Choice New York, produced spreadsheets of the long-term costs of the various loan options, the interest-only loan looked even less attractive.

“The actual long-term cost was highest with the interest-only loan,” Mazzone says, because, as Marcelle and Sussewell explained, the interest-only loan had a higher interest rate. “Choice New York was very up-front that we would be dealing with NCB," Mazzone adds, "and that was OK with us because we had a comparison, and their offerings were very competitive.”

There was another consideration: the health of the physical plant. “We don’t have a set time table, but we know we’ve got some large projects coming,” Mazzone says. “We’re going to need to work on the roof in the next 10 years, for instance. We saw this as a chance to put some money in our reserve fund.”

As the board was about to learn, the coronavirus pandemic has made lenders wary about their borrowers’ ability to make payments if they’re hit with a loss of maintenance income from shareholders or rental income from struggling commercial tenants. To protect themselves, most lenders are demanding that borrowers set aside money to buffer any future shortfalls.

“Even though we have low arrears and high rate of owner occupancy, the bank was nervous,” Mazzone says. “Their requirements were more stringent.” In addition to aggressively collecting arrears from an investor who owns five apartments, the board had to put money into an escrow account to cover future costs, including the looming cost of a software upgrade to the two elevators. The total was $66,250, which will be released back to the co-op after 60 days if there are no withdrawals from the account.

When the negotiations ended last October, the co-op board closed on a $4.5 million mortgage with a 10-year term, a 30-year amortization and a sparkling 3.18% interest rate. The loan will provide a $200,000 line of credit, and it will inject $1 million into the reserve fund to cover future capital projects.

“This is a great achievement for the co-op during the pandemic, with so much uncertainty around,” Sussewell says. “They saw this as an opportunity, and I give them a lot of credit for that. They should be very happy with this loan.”

The shareholders appear to be. The annual meeting in December, conducted virtually via Zoom, drew a large turnout. “When we spelled out the terms of the loan,” Mazzone says, “there was literally a round of applause. The board is proud of where we landed.” 

PRINCIPAL PLAYERS – LENDER: National Cooperative Bank. PROPERTY MANAGER: Choice New York.