Time value of money?
I am sorry, but that is a typical self serving response by people who do not wish to take responsibility and wish to push things off into the future, just look around you today and see how well that opinion has done for people. Only a person with short term goals and little to no foresight would favor an IO loan (either personal or corporate)... Suck up the few extra dollars, add some to it, pay it bi-weekly (regardless of what they say, you can do it)and amortize that debt paying less interest and on a shorter term... that’s value... not paying someone interest and receiving nothing in return...

You are going to pay about 5% interest only I assume? How much is that a year that you are paying to the bank without amortizing any of your debt? now, what could you do with that amount of extra money every year if you were debt free? roof deck, gym, amenities, reserves, lower maintenance, etc...

I apologize if I appear a bit opinionated about this subject, I am opposed to working against your financial stability nd freedom...

Best
~AR

I completely agree with AR. As president of a financially sound building, currently with no mortgage, we have a policy against IO loans for individual shareholders and our board would not consider an IO loan for the building if and when we need one.

At current interest rates, you are certainly going to be paying out more in interest than you will be receiving on your investments, so there is no time value to be found there.

Tell the board they should reconsider and rework that loan for one that amortizes...

And do consider a fully amortized, no ballon payment, loan. That is what we have in our building. It was setup before I bought but it was a nice feature. A fully amortized loand will increase shareholder value

Has anyone found any lenders offering refinancing of underlying mortgages (self-liquidating) under 5% APR for 20-30 years

Not sure what the current rate(s) are but can't believe underlyings are below 5%. Check out Josh Rhine @ Meridian Capital. Don't have the # with me but they are in lower Manahattan.

Now that there has been opinions presented that are against interest only underlying building mortgages, are they any pro opinions?

And for those who gave opinions, what are your compelling arguments for these opinions.

Thanks!!!!

Jay... Here is a hypothetical scenario (there are several I can give.. but this comes to mind first):

The building refinances a 2 Million dollar loan interest only - 30 yr Am with a 1o year balloon.. this means that your monthly payment is $9166.67 for 120 months = $1,100,000.04 in interest that you paid and you still owe 2,000,000… So, in essence, it cost you a million dollars to do nothing other than push a 2 million dollar debt into the future…
NOW…
Refinance 2,000,000 at the same 5.5% with the same 30 year Am, but fully amortizing the loan.. your payment now is 11,355.78 per month (note that it is only about 2K per month difference) .. at the end of the same 10 year period, your remaining debt is about 1.6 million. If you add to the principle or pay it biweekly you can then cut it in half..
Here’s my point… Year ten… Your debt is less, equity is more and the value of your stock is worth more.
Year 20-30 when your debt free, your worth even more. Your way, the only way the stock value would increase is to count on the real estate market index and inflation to boost the value of the edifice… this way, you get the best of both.


~AR

So folks want a balloon mortgage, e.g.; interest only, to then stiff the owners five years hence.

In effect the board is proposing to have five years of freebies (lower monthly maintenance rates) and then when they leave, they want the residents who remain in the building to pay for their less than honest fiscal policies.

Quite frankly, any board that proposes to employ interest only mortgages for “n” years has abrogated its fiscal responsibility.

Co-op must have an axiom, pay as you go. There will always be capital expenditures, so if one pays for past capital expenditures in the future (balloon mortgage) what will finance the capital expenditures in five years? Will it be another balloon mortgage?

Inevitably, the residents in ten years will be faced with a mortgage market that refuses to lend anymore, the building will have at-risk facilities that demand immediate relief via high value capital expenditures with no money to fund the work. Next the building will be deemed uninhabitable….unless of course the residents pay off all outstanding mortgage balances in one fell swoop, by underwriting their pro-rata share of the outstanding co-op debt via personal mortgages.

Yes a very ugly picture, but one that can become a reality in due time.

My view is that any board that floats interest only mortgages has abrogated its fiduciary responsibility and thus should be deposed or sued for breach of fiduciary responsibility.

I’ll bet none of these folks has obtained an engineering study for capital expenditures for the building as required by the AICPA.

Just to give ya a swag….try this for size.

Using the “swag” number $40,000 per unit, this is the estimated capital expenditures most buildings are facing over the next fifteen years for capital expenditures outside unforeseen emergencies. If you can’t believe me, then ya need to do your own homework and tell us all what it is. So, if the co-op has 100 units, the estimated capital expenditures over the next fifteen years is $ 4,000,000; not adjusted for inflation which should bring it closer to $5,000,000.

Sure you can argue whether its $30,000 a unit or $50,000 a unit, but regardless it is a “big number”. So is the assessment program organized to bring these funds into the coffers? Bet not!!

So can ya pay off the balloon mortgage and do required capital improvements? I don’t think so?

But go ahead live cheaply today and stiff future owners.

After reading SK’s comments, I second her/his views.

As the value of the building declines due to delayed or deferred capital improvements and as the credit burden increases, the crossover occurs and the co-op maxes out its credit rating and worthiness.

This is no different sadly than folks maxing their credit cards. Then, there is no more credit and the image of debt overwhelming the individual is truly a tragedy.

What if as SK poses, an emergency occurs and there are no funds. What will you do? The inevitable is that residents receive emergency assessments in thousands of dollars payable in ninety days to extract the co-op from its filthy debt ridden mire. Hundreds won’t hack it, thousands is more like it. It may even be $15,000 or $20,000 a unit due within ninety days. Who has such pocket change?

What does the board say to the irate shareholders then? We didn’t know!!

Very sad indeed!

Amen SK...

They can always hope for a bailout package in 10 years!

~AR

We are within a few years of a ballon mortgage and have started discussing assessments to pay a portion of the outstanding balance down upon it coming due.

I'd suggest that you DO NOT consider a self liquidating mortgage as the prepayment penalty; usally the Yield Maintenance Formula, is a killer if you ever need to refinance.

I'd recommend a 10 year balloon with a 25 or 30 year amortization schedule. You are paying interest on money without gettting any benefit of a reduction of priniciple. The goal is to get rid of the mortgage not have it for life.

Most people think that having a mortgage is a tax deduction. This is crazy. Think about it... You give the bank $100 in interest and the Gov't gives you back $30. Does this make sense? If so send me $100 and I'll give you $30 back. Mortgages are nothing more than Ponzi schemes..

I believe it is better to pay off the mortgage and permanently reduce the maintenances then to carry a mortgage for 50 years and never pay a penny towards the priniciple.

Good Luck...