IN doing a refinance, you should sit down and start soul searching:

1. Do you need to dilute your current equity for, e.g., capital investment and you are going to request above and beyond your current mortgage in order to perform that work?

2. What capital improvements do you plan to perform and what is the budget to do the work? Do you have an engineering study to help you with that budget? Are some of these capital improvement covered under programs for reduction of energy that may be finance with low interest loans?

3. Do you currently have a penalty on your ballon if you were to take advange of lower interest rates? What is the amount of that penalty? Run numbers to find out if it makes sense to do the refinance before or wait a 6-12 months more.

4. What would the current bank do for you NOW in terms of refinancing before? Interest rates? Forgiving the penalty? etc. Start talking with them. Talk is cheap and helps to get training when the real negotiations start!!!

5. Do you want another ballon or fixed interest self-amortizing mortgage with some sort of credit line associated to the mortgage for the life of the mortgage (not just for the first 5 years of the mortgage)?

5. Contact other banks and let them know you are shopping for a new mortgage? I would do knocking doors first by going to directly to the different banks, i.e., NCB, Amalgamated, etc. Then, go to a broker if this is not effective. Speak to your management: he/she may know some contacts in the banks and reputable brokers.

6. Can you lock the interest rate forward for the next 6 months, 1 year or 18 months? We did this and lock a fantastic rate. However, we could only lock 6 months.

8. Speak with your independent accountant so that numbers can be run of the different offers and comparisons may be established. If in your "green board" you have someone with financial background have the person be the contact for banks or management on this topic and have the person develop an Excel spreadsheet to compare apples to apples as far as bank costs go.

9. The spreadsheet should have all the costs defined. Some banks will quote one thing and not the other; thus, by establishing a comparison, you will see your costs - Example: All banks charge you for environmental studies, engineering, etc. different costs. Your bank probably will skip those costs costs because they already had those studies done. So, you may have a savings there, but not in other areas.

Finally, bank are there to make money just like brokers; thus, they are not your true friends. Brokers will try to negotiate for you the best deal because you are paying the commission. So, commission costs are important. Therefore, your job is to push the deal to the edge of the table and get the best terms for your mortage.

Good luck!

AdC

Couple of points:
It is great you ask, many just jump in blindly and regret decisions later..

1. First: BE CLEAR ABOUT THE REASONS YOU WANT TO REFINANCE - What are your goals? do you want long term debt, or no? Self amortasizing, or not? is your aim just to keep payments low, or pay it off? Do you want cash out?, etc.. see below..

2. FIND A GOOD LOAN OFFICER AT A TRUSTWORTHY BANK OR BROKER - you will probably want NCB or M&T or the like, many brokers/bankers can be recommended.

3. GET QUALIFIED - Submit app and all required docs

4. DECIDE ON THE TERMS OF YOUR LOAN - you should be presented with several options to review.

5. YOUR BUILDING WILL BE APPRAISED - An environmental report may also be requested.

6. YOUR FINANCIAL SITUATION VERIFIED

7. A TITLE SEARCH WILL BE PERFORMED

8. CHANGE YOUR MORTGAGEE CLAUSE ON YOUR LIABILITY INSURANCES

9. CLOSE THE LOAN
10. FUNDING THE LOAN
11. CONGRATULATIONS!

Before a co-op approaches a financial institution about refinancing, it should carefully assess its current financial position and accurately determine what the real refinancing needs are. In instances where the co-op may be seeking additional money in order to make capital improvements or to comply with Local Law 10 or 11 requirements, it is not uncommon for a co-op to end up borrowing too little in the name of frugality.

As the board, you can contact half a dozen banks or lending institutions and request proposals for your needs. Or you can hire a financial consultant to do the research and bring the best deal or two to the board for a decision. You must certainly look around, though--on any given month, it can be a different institution that's offering the best deal. I also strongly recommend you involve your accountants and lawyers in the process. They are professionals who can open doors that had not been explored. Only if your managing agent is competent enough for the task, should he be entrusted with this.

Co-ops should work with their accountants to accurately forecast their needs for capital, as well as the building's expenses five, ten and up to 15 years ahead, this way, the co-op will borrow the appropriate amount of money and not fall short, sending them back to the bank a couple of years later for another round of financing [when interest rates may not be so favorable.]

Tax write-offs aside, and despite the fact refinancing will affect you directly as a shareholder, your co-op board does not have to put their refinancing plan to a vote amongst the shareholders--unless it is expressly written in the cooperative's bylaws. Given that shareholders often cannot agree on a color for the lobby walls, it's sometimes best to leave certain financial decisions to the board alone.

Most economists and experts in the market believe mortgage interest rates will eventually begin to creep upward. How quickly that will happen is uncertain. However, interest rates have the ability to go up very quickly in the right market conditions. What effect would that have for a co-op and its shareholders? Like the long-term course of rates themselves, this is also the subject of debate.


The following is a link to a good past COOPERATOR article:
http://cooperator.com/articles/636/1/Need-You-Know-More/Page1.html
Hope this helps.

~AR

I agree with the other feedback AR + ADC.

But most importantly, what is your program to retire the debt overall? Yes, retire the debt. If you don’t have a long term program, e.g.: twenty to twenty five years, all this work to “refinance” is a waste of time and energy. Why leave a debt burden legacy for future generations much as the government does these days.

Your board needs an independent financial planner, I don’t mean your attorney, your bank or your accountant or accounting firm. You really need a true financial planner.

You need a strategy.

Interest expense is non-performing. Having a tax deduction for residents is useless.

All need to wake up and find a way, albeit very long term to eliminate “all” debt. Yes, I can make this assertion, as we retired the original $7,700,000 debt for our five hundred unit coop without ever refinancing.

Do you have assessment?

My suggestion without even seeing your finances or books is to make the assessment equal to two months of your monthly maintenance each year. Incredulous, then look at your AICPA mandated schedule of forecasted capital expenditures. You do produce one? Older buildings will need the two times, younger buildings then one time.

To avoid this introspection is to fail in your fiduciary responsibilities.

Along the way, I assume that you are brilliant financial planners and you "do" raise the monthly maintenance each and every year by 3 to 4%. And, I assume all are honest fiduciaries and thus don’t run for the board on a popularity slate, e.g.; we didn’t raise maintenance. There is nothing but chicanery in not raising maintenance every year, yes, every year.

You are in an ideal position to explore a new option : co-op to condo conversion.

There are many benefits and advantages for your co-op especially if you are near the point of refinancing.

At the Cooperator Expo, I atended a seminar held by a conversion company by the name of ROA Hutton, LLC. They have a website www.roahutton.com

Cooperator corporate presentations are self serving and suspect.

Sure convert to condo, but with eyes open.

But if you have a mortgage, then the shareholders need to “eat” the mortgage burden to convert.

So someone has a coop loan.
For argument sake let’s say there is $100,000 outstanding on the principal.

Then let’s say this is a 400 unit coop.
Then let’s say there is an $8,000,000 outstanding principal on the coop’s mortgage.
This means, on average, each unit needs to assume $20,000 of the unpaid principal.

Now be very honest.
Have capital improvements been performed as defined by an outside professional engineering firm or have the prior boards deferred needed expenditure?
If expenditures have been nil or deferred, then in converting you will need to obtain an additional influx of capital to provide the basis for funding all the ignored capital improvements.
Let’s say that $10,000,000 in capital improvements have been placed on the back burner for future generations to fund, but the past is now.
On average, each unit will need to underwrite $25,000 for these unfunded capital improvements.

Then, let’s not forget the converter’s fees; these will be somewhere between $2,000 to $3,000 (I would say regardless of the firm) per unit. Not much but still a sum that needs to be funded.

Then there’s costs to the coop corporation for attorney fees (new bylaws, etc.), bank closing costs to retire the mortgage sooner than anticipated (if this is the case), engineering study, etc. Let’s use $1,000 per unit average.

Finally, some closing costs for the shareholders, including title insurance, etc. Let’s use $1,000.

OK, let’s recap.

$ 100,000 unpaid shareholder loan principal.
20,000 outstanding portion of coop corporate loan
25,000 unfunded capital expenditures
2,000 converter fee
1,000 coop corporate costs
1,000 closing costs
---------------
$ 149,000 cost to convert average shareholder
---------------

Yes, the shareholder can typically take a condo mortgage to fund the above amount in total. But, we need to very honest and open as to the full burden of costs.

Yes, a condo mortgage is typically a bit less, about .25% than a coop loan.

Yes, many banks will make a forecast of the “new condo” value of the unit and thus the higher assessment (by the bank) will allow for a higher mortgage principal.

Yes, the shareholder can “roll” all the costs into a new mortgage.

Yes, condo’s command higher prices.

- - - - - - - - - -

Yes, there are reverse mortgages for those over 62, but do please remember that if you elect to follow the path of converting from c0cop to condo, you are promoting a conversion and not mortgages, not reverse mortgages, etc.

Yes, typically for a small number of shareholders there are tax implications, e.g.: the conversion transaction is not tax free. Many converters seem to gloss over this issue

- - - - - -

Not trying to dissuade you from converting. Just trying to make you aware of the full burden that all face.

Ted,NJ

There is also reserve mortgages available for co-ops for Sr. citizens. This is not just an exclusive type of tapping into equity for condos and single housing.

Finally, I know it was for argument sake, but it is important to clarify that the underlying mortgage will have to be divided by shares. In some cases, co-op ownership is a first step type of ownership; therefore, many shareholders may not be in position to absorb the burden of a very large mortgage. Therefore, they will either have to sell or else...


AdC

My point in showing the full financial burden attendant to a conversion of a coop to condo wherein the coop has an underlying mortgage is that some folks will not be able to absorb the higher “mortgage principal” demanded by the need to retire the coop‘s mortgage and perhaps fund neglected capital expenditures.

A bank, worth its salt, will not write mortgages for a building in disrepair. And, let’s not forget, a condo/HOA and virtually nil borrowing power. All that an HOA can pledge is its future income stream.

While the owner’s reap a substantial number of benefits, the HOA is somewhat more constrained in its actions.

Yes, only condo owners (e.g.: deeded property owners) can avail themselves of a reverse mortgage, a selling point for conversion. The AARP offers some very good and very simple literature.

Yes, 100%, the shares dictate the apportionment of all costs, save the shareholder’s own fees incurred in a conversion, e.g. title insurance, mortgage appraisal, filing fees, attorney fees and any bank fees while rolling a coop loan to a condo mortgage.



.

The AARP booklet that details reverse mortgages (Home Made Money)is available via a telephone call to ARRP at:

1-800-209-8005

In our process, we have suggested that all who have an interest in reverse mortgages call AARP for the booklet. This is in lieu of obtaining a supply and then distributing the booklets; which in our mind crosses the line and then becomes "promoting reverse mortgages".

This was my first clarification point, i.e., rerverse mortgages are not just exclusive rights of condos.

AdC

Sorry, I really reversed "reserve".