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Looking into the finances of my co-op in NY and I have a question about whether the financial conduct of our board over the last 25+ years is 'typical'. According to the annual financial statements, the board has taken out 2 ten year mortgages and each time, they have transferred the money (a little less than $1MM) to the cash/reserve fund and have slowly spent it over the ten year life span of the mortgage so that when they refinance and get a new mortgage, the 'cash/reserve' fund gets replenished with more money.
They are not paying down the underlying mortgage (currently they are only paying the interest of a 10-year mortgage) and the mortgage debt has increased with each new 10 year mortgage.
Is this normal for a co-op board to do so? Does this raise any red flags?
Thank you!
Thank you Steven, that is insightful. Is it just me or doesn't it seem like a co-op is just a scam/ponzi scheme?
If this is typical for a co-op...what happens in the long term if they just keep borrowing more money? Like what about it in 30-50 years? How is this sustainable?
This is a very good question, and I honestly don't know the answer. I don't think anyone thought that far ahead when the majority of co-ops were formed in the early 1980's.
Another looming issue facing co-op boards is the expiration of the Proprietary Lease. Check the first or second page of your PL. There should be a hard expiration date, which was required when the PLs were first approved.
If the expiration date is less than 30 years from today, new purchasers will find it increasingly more difficult to obtain 30 year mortgages. Why, because when the PL expires, the Co-op corporation will cease to exist and the shares in the corporation (i.e. the mortgage collateral) will have zero value. Banks are reluctant to underwrite mortgages where the collateral can be worthless. ;-)
For boards that haven't done so already, you should have a discussion with your board attorney to find out what they recommend. There are a number of ways to avoid this which is why your attorney needs to be consulted.
I wish Habitat would do an article on this so more co-ops aren't caught unaware.
Thank you for the insight. Another good article would also be about co-ops who have paid off their mortgages - if this exists?
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What you describe is how most co-ops refinance their mortgages every 10 years. Each time, if extra cash is taken out to replenish the reserve fund, the principal amount needing to be refinanced increases.
I recommend that instead of a new 10-year interest-only mortgage, you look into a 10/30 mortgage. The mortgage term is still 10 years, but a little bit of the principal is also paid back as if it was a 30-year self-amortizing mortgage.
Ask your lender to calculate how much you have to repay each month so that the principal remaining at the end of 10 years will be the same as in the beginning. Remember that the more cash you take out, the more you have to repay, and the larger the monthly payments.
I hope this helps.
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