Our board president is very dedicated, but also very impulsive. He often rushes into things without much preparation or discussion. As a result, we have made some costly mistakes. The president now wants to refinance our building’s underlying mortgage, and I’m afraid that we’re headed for another mishap. Can you give me some guidelines to follow so we don’t end up in a financial ditch?
Refinancing an underlying mortgage loan is the most important decision that a board can make during its tenure. It affects not only the monthly maintenance but also the market value of every shareholder’s apartment. It is a decision that should be based on thorough and careful analysis, not impulse.
There are six essential steps to the process:
Know your facts.
Loan officers quickly lose interest in buildings whose representatives don’t have important information at their fingertips. Before calling any bank, assemble and review all of your co-op’s records. Then put together several sets of the following:
A basic fact sheet, containing the co-op’s address, block and lot numbers, lot dimensions, number of units, number of floors, number and type of elevators, type of heating system and fuel, and conversion date.
1. The offering plan and all amendments.
2. An up-to-date maintenance roll showing each apartment, shareholder’s name, current monthly maintenance charge, and payment status.
3. A list of sponsor, investor, and sublet apartments showing the rents collected from each tenant. A comparison of rents collected to maintenance charges is particularly important.
4. Financial statements from the most recent three years.
5. A list of all apartment resales (with prices and sale dates) for the most recent three years.
6. Information regarding existing debt (current balance, lender, monthly payment, interest rate, due date, and prepayment terms).
7. Copies of recent bank statements, including your reserve fund.
Know what you want.
No board should begin shopping for a new underlying mortgage loan until its members have spoken with their professional advisors, including attorney, accountant, and managing agent. Your attorney will advise whether or not the existing loan allows you to refinance at this time, and ensure that your co-op’s interests are protected throughout the process. Your accountant can help to develop a financial plan and a post-refinancing budget. Your managing agent knows the building’s physical condition and can advise on the potential cost of repairs. All this information is essential to determining how much to borrow and how the new loan should be structured.
Cooperative underlying mortgage loans come in a variety of forms. The most common is a 10-year loan with a fixed rate of interest and amortization (principal repayment) on a 30-year schedule. This type of loan has a balance at the end of 10 years (sometimes called a “balloon”) that must be paid or refinanced. A popular variant of this loan format is a 10-year loan with no amortization (sometimes referred to as “interest only”).
In addition to these two formats, there are 5-year loans with renewal options, and fixed-rate loans for 15, 20, 25, or 30 years. There also are second mortgage loans and credit lines that can provide additional funding for capital improvements and other needs in future years. Credit lines can be revolving (borrow and repay at will) or not, and secured (by a mortgage) or not.
Learn the market.
The financial markets are complex and constantly changing. Even those who work in them every day disagree about the cause of current conditions and direction of future trends. However, it is possible to develop a general sense of whether interest rates are rising, falling, or staying the same by reading the financial press, listening to business programs on the radio and television, and searching the internet. You might invite your accountant to facilitate a board discussion of these and related issues.
Since the cooperative form of housing ownership is heavily concentrated in the greater New York metropolitan area, virtually all lenders are located there as well. However, not every lender in this region makes underlying mortgage loans. Furthermore, not every cooperative lender makes every type or size of loan. Therefore, you might want to consider the services of a reputable mortgage broker to help you find the right lender for your new loan. Most (though not all) lenders set the interest rate for underlying mortgage loans according to a formula that includes an “index” and a “spread.” The most common index is the 10-year U.S. Treasury rate, which can be found in any daily financial publication or financial web site. The spread is most often expressed in “basis points,” where 100 basis points equal one percent.
Understand what a loan officer does.
Loan officers are busy, just like the rest of us. They appreciate a courteous manner, straightforward questions, honest answers, and all of the facts. They will be happy to give you a loan if (a) it makes financial sense and (b) it meets their bank’s criteria. Your loan may be too big for one lender and too small for another. You may want a format that a particular lender does not offer. Or you could be rejected because your building has too few units, too many sponsor units, or no elevator; is in poor physical condition; has environmental contamination; or possesses insufficient history as a cooperative. Lastly, loan officers generally do not approve loans; they recommend them to their loan committee. This committee makes the final decision, sometimes changing the terms initially offered by the loan officer.
Select a point person for your transaction.
Given the importance of refinancing the underlying mortgage loan, you may want to involve several board members (or experienced shareholders) in the effort. However, channel all communications with the outside world through one person. This is the only way to guarantee accurate transmission of information about your cooperative and consistent interpretation of lender feedback.
Be very responsive.
Whenever a loan officer requests additional information, a decision, or some action, don’t delay. Make sure that your point person has enough authority to make basic decisions, or establish a method to obtain same-day responses for such issues. Requiring full-board input on every question is a sure way to sideline your loan application.
Don’t forget that the financial markets can change faster than the weather. If they move enough in the wrong direction, your favorable loan terms can evaporate overnight. This advice applies even after you’ve received your commitment letter. So, stay focused until your new loan closes. Then it’s a champagne toast for everyone.