A common business issue in the world of cooperatives is that of the historic low interest rates being offered on underlying mortgages and the impact these can have on the financial health of the cooperative corporation. Our firm represented many cooperative corporations during the last year in the refinancing of their underlying mortgages. In this era where doom and gloom are front-page news, the historic low interest rates have provided our clients with infusions of cash, allowing them to effectively avoid maintenance increases and assessments. The key to a successful refinancing is when the cooperative corporation can maintain the same or lower monthly debt service on its underlying mortgage and pull cash out of the new loan. This can be done when the old loan is at a higher interest rate than the new loan. This is often the case when the old loan was secured at a time when interest rates were much higher than the current environment. The new money is then placed in the cooperative’s reserve fund and can be used to fund important and necessary capital improvements without the need of raising maintenance or assessing the shareholders. We have seen our clients use the money to renovate their lobbies, repair or replace their roofs and windows, convert their boilers, and do Local Law 11 work. One thing this new money should never be used for is to balance the operating budget. These funds are an available asset to the building and should be used to increase the value of the building and enhance its physical state.
The board of your cooperative corporation should carefully review the existing mortgage terms. Even if the term of the mortgage is not yet due and there is a prepayment penalty, the refinancing may still be a viable tool to enhance a building’s financial standing. We had several situations where boards did not think their co-ops were candidates to refinance their underlying mortgages. However, once they reviewed the numbers in greater detail, they realized that the refinancing was in the best interests of the cooperative corporations. Interest rates will not stay this low forever and your board should look into taking advantage of these historic low rates.