What's the Best Way For Your Building To Raise Needed Cash?

The most common form of prepayment penalty is a “yield maintenance” penalty, which is designed to do exactly what its name implies. It requires that a borrower who wishes to pay off a mortgage before the maturity date must pay the interest the lender would have earned had the borrower not prepaid. Therefore, the lender maintains its yield. (Less onerous – and less common – prepayment penalties are based on a percentage of the outstanding balance of the loan, a percentage that declines over the life of the loan.)

Time to crunch the numbers. In some cases, paying the prepayment penalty will outweigh the benefits of a new mortgage. However, that’s not always the case. Sometimes the savings from refinancing are so great that they recoup both the closing costs of the re-fi plus the prepayment penalty within just a few years.

If you decide refinancing is not for your co-op, there are other ways to raise money for needed capital improvements or other expenses. You might consider a line of credit, which operates much like an overdraft privilege on your personal checking account. A bank agrees to lend your co-op up to a certain maximum amount, to be drawn down as you need the funds. A line of credit is an ideal way to cope with unforeseen emergency needs. You pay interest monthly, at a floating rate, on whatever balance was outstanding during the previous month. This arrangement usually has a predetermined lifespan, say five or 10 years, after which the outstanding balance must be repaid.

A second mortgage is similar to your first mortgage, though usually smaller. Second mortgages typically have a fixed interest rate and the same maturity as your first mortgage. They’re better for financing permanent additions to your building’s physical plant – a new roof, or new windows – because the debt rate is fixed, and it’s imprudent to expose the corporation to variable-rate debt on a long-term basis.

Of course there’s always Old Reliable: an assessment. Many boards find assessments to be unpopular with shareholders, while others prefer their pay-as-you-go nature. Assessments deprive shareholders of the ongoing tax benefits generated by paying loan interest, and they have been known to depress the market value of apartments under certain circumstances. Weigh this option carefully.

You could also raise the monthly maintenance. Aside from the uproar this frequently causes, you’ll need a very large increase or a very long time to raise the money for a major capital improvement. Like an assessment, this is a political hot potato best handled with great caution.

Lastly, some co-ops have met their cash needs by borrowing from one or more well heeled shareholders, who are delighted to withdraw from a money market fund and lend to the co-op at a more favorable rate. It has been known to be a win-win – for the shareholder and for the co-op board, which doesn’t have to pay a visit to the bank.