A Mortgage Refi Should Fit Like a Tailor-Made Suit

All co-ops need cash from time to time, and most boards refinance their underlying mortgages to get it. But a co-op refi is not a generic, one-size-fits-all product. It’s more like a bespoke suit, with the interest rate just one of the many variables that distinguish one deal from another. Each deal needs to be tailored to fit each building’s unique needs, based on its size, physical condition, and financial means. 

While the most common structure is a 10-year, fixed-rate loan with a 30-year amortization, refi loans can actually be structured in a multitude of creative ways. That’s why boards should be explicit about their building’s needs when discussing refinancing options with a broker or lender. “If you’ve got a problem, talk to the lender about your problem,” says Patrick B. Niland, the president of First Funding of New York, a mortgage brokerage. Do it, he advises, with a clear understanding of what your co-op needs and how much it’s going to cost. 

“The whole refinancing process really should start with a meeting between the board, accountant, managing agent, legal counsel, and possibly a mortgage broker, if the board so chooses,” Niland says. 

David Lipson, director of the mortgage division of Century Management, says he would discourage a co-op board from moving forward on a refi unless it has done a detailed capital plan, looking ahead at least five years. Lipson doesn’t want the board to end up in a situation where it has borrowed too little – and winds up having to seek another refi in just a few years, potentially facing prepayment penalties and another round of closing costs.

Once the board knows what it needs and wants, it can compare offers among lenders – or hire a broker to do that. “We deal with 30 or 40 lenders,” says Niland. “We know who’s hungry for money and who’s not.” 

Here’s a scenario where a co-op needs a mortgage tailored to its specific needs. The co-op has a 10-year capital plan in place. The board knows how much money it will need to cover those costs over time but would rather not borrow it all up front. 

One way to avoid borrowing all the money at once, which can be more expensive, is to work with a lender that will allow supplementary financing, says Niland. The building could, for example, initially borrow enough to cover the building’s needs for the first five years and then return to the same lender later to borrow the rest.

“There are lenders that allow supplemental financing at any time after the first year, up to the loan-to-value limits on your building,” he says. “You’re underwritten in the same risk profile. And it’s at a fixed rate of interest with the same end date as the first mortgage.” 

Niland prefers that approach to simply putting a line of credit in place to cover the later-year improvements. Credit lines have variable interest rates – “not a good way to finance long-term capital costs,” he says – and some lenders have begun imposing “non-use” fees on credit lines when co-ops don’t tap them. 

A co-op with significant looming costs beyond 10 years might want to consider a 20-year mortgage, instead of the usual 10 or 15, says Steven Geller, a managing director at the Meridian Capital Group. Structuring the loan so that the first three years are interest-only frees funds for capital needs, he says. The loan then converts to a 30-year amortization schedule in years 4 through 10. Then in year 11, it goes back to another three-year interest-only period, again generating funds for improvements. 

“This allows them to lock in a competitive rate for the term, while addressing their capital improvement needs now and down the line,” Geller says. 

Coming tomorrow: two more scenarios where co-ops needed to find a mortgage that fit their unique needs.