Financing a Building-Wide Window-Replacement Project
Nov. 27, 2014 — You're on the board of a 74-unit co-op with 600 windows, which, the shareholders say, need to be replaced. What happens if, when you are finally ready to tackle the project, you discover it's going to cost an estimated half a million dollars? How do you proceed? Here we review the pros and cons of five standard options so the task doesn't feel as daunting.
Raising Maintenance
When you need to raise funds to tackle a major project with a huge sticker price, you may figure the logical solution is to raise maintenance. Although it is a viable option, consider that once you raise maintenance, it's a done deal — whereas the project, however huge in scope, is temporary. If you can avoid raising maintenance, you should.
Assessing the Owners
You can assess shareholders. While this solution may not be immediately welcomed with open arms, there is an upside. Shareholders can add their portion of an assessment to the base price of their apartments when they sell, which will decrease any capital gains tax due upon sale. And depending on the assessment's terms, the co-op can have cash in hand fairly quickly.
The downside is that shareholders have to pony up their assessments, and they may be stretched to do so. So the board really has to be sensitive to the shareholders' willingness and ability to pay any assessment. Smaller ones spread over a longer period of time may prove more popular than one major hit.
Taking a Line of Credit
You can take out a line of credit or tap into an existing one. You'll be able to get immediate financing without an assessment. The downside is that you have to pay it back, either when the underlying mortgage is due or earlier, depending on the loan's terms. And don't forget that the co-op will have to pay interest on the money borrowed, which will raise operating expenses.
Refinancing
You can either refinance the underlying mortgage or take out a second mortgage. That way you've got a fixed-rate loan paying for a long-term fixed asset. Take out a loan large enough to cover your outstanding debt, closing costs, a prepayment penalty, and cost of capital improvements. You should also take out money to replenish the reserve fund, and a little extra for unforeseen expenses.
The Reserve Fund
You can tap into the reserve fund for all or part of the costs. But keep in mind that most co-op lenders require the building to keep a reserve fund equal to at least 10 percent of the annual operating budget. Therefore, you have to keep replenishing it. One way to fill up the reserve fund again is to assess shareholders over a period of a few years, so that their monthly payments are lower than they would be if you assessed them for the full amount over a one-year period. Other common revenue streams are a flip tax and sublet and storage fees.
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