Find the Perfect Financing Fit

Finding an underlying mortgage that meets the cooperative's needs is one of the most important challenges board members will ever face. And finding the right mortgage broker is often the key to finding the right mortgage.

"You want to do this with the right mortgage broker who has the abilities and relationships to put you into a loan program that’s best suited to you," says Jeffrey Goldstein, a New York real estate lawyer who works extensively with co-ops. "It's about having the right connections, knowing the right people in order to get the best deal."

This is especially true when a co-op sets out to refinance its underlying mortgage. Rather than paying off their mortgages, co-ops typically refinance their mortgage every decade or so, to take advantage of changing interest rates, to raise money for major capital improvements, or both.

But there are hurdles. One of the most daunting is the yield-maintenance penalty, commonly known as the prepayment penalty, which is written into most underlying mortgages by the lender to ensure that the holder of the loan receives the full yield of interest payments if the borrower decides to refinance before the end of the yield-maintenance period.

There are creative ways to clear such hurdles – and save money while you’re at it. Steve Geller, the managing director at Meridian Capital Group mortgage brokerage, works with an array of lenders to create bespoke mortgages. "We financed almost $36 billion last year," Geller says. "We take that volume and the voice it gives us with the lending community and turn it into tailored products for each co-op. When we ask a lender to tailor a product, we aren't going to do just one or two loans. We are going to add it to our menu going forward."

Geller offers the following tools for boards to consider:

• To soften the sting of the prepayment penalty, negotiate sliding-scale prepayment penalties that decrease over time, making it easier to refinance mortgages if better deals become available – or if the co-op needs a sudden capital infusion.

• Take the loan in phases, reducing the interest-rate burden. Meridian recently helped a New York co-op take out a $32 million loan to fund reconstruction work. To reduce the co-op's interest payments, the broker arranged for the lender to provide $15 million at the loan's closing, another $8.5 million nine months later, and $8.5 million nine months after that. That allowed the co-op to save the interest on half of the loan for for nine months, and the interest on a quarter of the loan for 18 months. Since construction takes time, the money became available when it was needed – and the co-op saved serious money.

• Interest-only mortgages are less expensive than amortized mortgages because the co-op doesn't pay down the principal. Some boards worry about having to refinance the entire amount of the loan at the end of its term. For those co-ops that want to pay down some of the principal, it’s possible to negotiate interest-only loans that allow the co-op to pay off up to 10 percent of the principal per year, without a penalty. Geller calls it “the best of both worlds.”

While brokers are important, boards should also consult their co-op management team, says mortgage broker Patrick Niland, president of First Funding of New York. He recommends talking to the board's attorney, accountant, and managing agent before refinancing.

“It’s not something [boards] should do lightly,” Niland says, “nor should they do it alone.”