Sewing Up a Mortgage Refi

As noted yesterday, when co-op boards set out to refinance their underlying mortgage, they should not go shopping for an off-the-rack product. Rather, they should go shopping for a bespoke mortgage that’s tailored to their needs and their means. Here are two more scenarios of co-op boards with special needs: 

A co-op needs to borrow a substantial sum for immediate capital needs. But some shareholders are already struggling, and the board is wary of sticking shareholders with a sharp increase in maintenance. 

One way to handle this scenario is to structure the loan so that the first three years are interest-only, says David Lipson, director of the mortgage division at Century Management. That will give the board time to phase in the maintenance increases gradually, putting the extra money in the reserve fund until the interest-only period ends. The loan then turns into a 30-year amortization over the remaining seven years. 

But some argue that boards should not avoid borrowing what the co-op needs out of concern for the finances of individual shareholders. “Co-ops are not social-service agencies,” says Patrick Niland, president of the mortgage brokerage First Funding of New York. “Boards have to live up to their fiduciary responsibility to all the other shareholders. And refinancing is the most important decision they will make, as it affects the value of every single shareholder’s apartment.” 

The building needs a new roof, but the board is wary of looking too far beyond that because it wants to borrow a minimal amount. It’s hoping to get another 10 years out of the boiler, but that, of course, could go either way.

Boards often debate “ad nauseam” how much to borrow, says Lipson. Some want to borrow just enough to cover their closing costs on a refi, and then cover future capital costs by using reserves and assessments. That may work just fine for high-end buildings with lots of resources. But in reality, Lipson says, “these buildings are so under-leveraged that borrowing more money is not really a concern.”

Often, half of a co-op board’s members want a refi that’s interest-only because they’re going to move out in two years and don’t want to have to pay toward the principal, says Steven Geller, a managing director at the Meridian Capital Group. “And the other half wants to be mortgage-free,” he adds. “But a co-op is never mortgage-free because something always needs to be done.” So co-op boards can add debt to life’s other certainties, death and taxes. 

Geller advises that one way to alleviate concerns about over-borrowing is to borrow on the higher side of estimated costs with a lender that will allow for early pay-downs without penalty. In other words, the loan is structured so that, if you end up not needing all the cash, you can pay down the principal ahead of schedule and will not be charged a prepayment penalty. 

Alternatively, says Niland, boards might get a line of credit when they refinance – but with a lender that also allows supplemental financing. That way, “if the boiler does blow in the middle of February, they can use the credit line to immediately get another one in,” he says. “But then they can go back to the lender to get secondary financing to pay off the credit line, replacing it with fixed-rate debt.”