LONG TERM VS. SHORT-TERM

It is true for most other co-ops seeking loans of less than $1 million. For those that need more than $1 million, 30-year self-liquidating loans are still available. However, I don't recommend such a long-term loan for any of my clients. Why?

First, I don't believe that anyone can predict, with any degree of certainty, what will happen over the next 30 years. Therefore, why would anyone want to lock his building into a capital structure for such a long period when changes in the building's financial needs are virtually guaranteed? Remember, most co-op buildings in the greater New York City area are old enough to require major repairs and/or preventive maintenance every seven to twelve years. If a building has a long-term underlying mortgage, where will the funding for those repairs come from?

• Increased maintenance? Possibly, but substantial maintenance increases are unpopular with shareholders and are a very slow way to raise money.

• Assessments are only slightly better as a funding vehicle because they, too, can be politically unpopular, less advantageous from an income tax standpoint and take a long time to collect.

• Credit lines can provide emergency funding, but I don't know of any lender that will commit to a credit line for more than 10 years, let alone 30. Plus, credit lines are variable-rate debt -- a poor way to fund capital improvements and a potential budget-buster in times of rising interest rates.

• Second mortgages are a good solution, but only if you can find the rare lender who will give you one.

The second reason I don't recommend 30-year loans is cost. In today's financial market, the interest rate on a 30-year self-liquidating loan is almost two percent higher than the rate on a more typical co-op underlying mortgage, which is a 10-year loan with 30-year amortization. For each $1 million of new debt, this rate differential represents almost $130,000 in extra debt service over each 10-year period. That's an awful lot of money that could be put to much better use in the typical co-op building's budget.

Despite the higher cost, some co-op residents argue that a 30-year self-liquidating loan will allow them to "build equity" and that, eventually, their apartment value will "skyrocket" because their building will be debt-free. Whether the value of individual apartments in a building with a long-term loan will increase dramatically over time will depend much more on the apartment itself, the physical and financial condition of the coop building as a whole and the then-current state of the real estate and financial markets.

Loans Don't Meet You Halfway

Further, since the mid-point in a 30-year self-liquidating loan occurs during the 21st year, shareholders must remain in the building for a long time to accumulate any appreciable equity due to loan amortization. If they don't, most of that equity build-up will accrue to the people who purchase apartments from the folks to whom current shareholders sell.

Consequently, this argument falls flat for the typical New York area co-op resident who moves, on average, every seven years.

The third reason I discourage long-term loans is the prevailing wisdom of co-op shareholders  themselves. In more than 20 years of helping boards arrange new financing, I have closed just two 30-year loans, and each was caused by special circumstances. All of the other boards felt a long-term loan was not in the best financial interest of their shareholders.

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