Make Your Co-op Approved for Lending

The Low-Down

As a board, you might think you have nothing to do with the financing of apartments by individual shareholders or their buyers, but the truth is that the co-op is the first area that a bank examines before it approves for lending. Is it considered a safe prospect for a bank and a buyer? Imagine a situation where there’s a potential buyer who wants to close. If the buyer doesn’t get the financing approved, the deal is off. The board gets a panicked shareholder call saying, “You have to do something.”

The Weigh-In

What the board needs to do is to be certain that the building is qualified as “approved for lending.” The main lenders review the financial status of your building annually. They check to see if you’ve got a balanced budget; whether you are adding money to reserves for capital improvements; whether you have adequate fidelity insurance; whether you have shareholders seriously in arrears (and what you are doing about it); whether your proprietary lease is set to expire before the end of the projected loan term; and whether there is litigation against the co-op. With litigation, for example, banks need to have assurances that the assets and insurance of the corporation are sufficient to cover any potential judgment that might be entered. If you are having litigation brought against you for somebody slipping and falling in front of the building, for example, it behooves you to be sure to get updated defense attorney letters stating where that litigation stands. It should be in some form that’s been approved by your attorney, and it should be handed out to any lenders or mortgage brokers who ask, in qualifying the building for approval.

My advice to boards is that you need to be proactive to what a bank needs to approve you for lending. That means that, on an annual basis, you should make sure all the information and documentation needed by a bank to approve the co-op for lending is in order. Sometimes, they ask for additional information. Do not simply turn it over to them. You should immediately send the request to your attorney for approval. You need to be careful in what you say. If your lease is expiring before your underlying mortgage, then you need to do an extension of that lease as soon as possible.

Make sure that your fidelity insurance matches your cash reserves, whether they’re in securities or in bank accounts, and also a two- to three-month operating cash flow. For example, if you’ve had a million-dollar fidelity insurance policy in place for the last several years, it may have been perfectly adequate. What if, during 2016, you refinanced your mortgage and took out an additional $2 million, which is sitting in the bank? You happen to sell a couple of units that the co-op owned, adding all those net proceeds.

Now, you have cash in the bank and your reserve account of $3 million, and you may have an operating cash flow of half-a-million for a three-month period. You really need fidelity insurance of $3.5 million, not $1 million. If you only have $1 million, the banks are going to have a problem with this, and they are not going to approve you for lending. It is an easy fix and it’s  something you the board should review every year.

The Outcome

Review the questionnaire used by banks whenever somebody applies for a loan to get up-to-date information on the finances and the owner-occupancy numbers of a building. You need to be sure the information that is provided by the managing agent is not only accurate but does not conflict with the information in your financial reports, your budget, or anything else.

The Take-Away

The ultimate goal is to be proactive. Be sure that, as you enter each calendar year, you have everything in place for your building to be automatically “approved for lending.”