Jeffrey P. Roude, Partner
The Lay of the Land
A lot of boards want to know how they can fund projects, whether they are Local Law 11 facade work or interior lobby and hallway revamping. Because most co-ops have refinanced their mortgages over the last few years, many are now looking at the line of credit that was issued at the time of the refinancing. The line specifies how much the borrower can draw down at one time, and the bills have to be submitted to the lending institution, which then says, “Okay, we’ll release X amount of dollars to start funding the project.”
What’s good about a line of credit is that you draw down the money on an as-needed basis, so the interest will start only when you draw it down. The downside of that is that a credit line is usually at a variable rate. Consequently, as the interest rates start rising, which they have recently, the cost of the debt service also increases. That presents a problem of how to pay for the increased mortgage interest every month.
When buildings have to fund projects using a line of credit, we’ve prepared a detailed cash-flow analysis based on current cash, indicating when the payments are going to be needed for each project, and how and when the borrowings have to come from the line of credit. We’ve been advising boards to create a capital assessment over a one- to five-year period, depending on the cash-flow needs of the corporation and the ability of the shareholders to pay back the assessment.
In many instances, the co-op doesn’t have enough money in the short term to fund the projects, which either means that the assessment has to be done more quickly over a shorter period of time, or you have to go back to the lending institution and ask for an increase of the line of credit. Sometimes, an additional mortgage running coterminous with your first mortgage can help pay for this.
Another idea is to give a 5- to 10-percent discount to anybody who’s willing to pay the assessment upfront, which provides a big influx of cash at the beginning. Many shareholders take advantage of that.
After the project is over, the assessment keeps running, and that inflow of money is used to pay down the line of credit every month. As you do that, the cost of the interest decreases, too. The goal is to try to pay it all within a certain time period and get back to where you were through the assessment.
If you don’t have an assessment and you draw down on a line of credit, the interest costs will continue to be constant, based on the interest rate over the remaining life of the line of credit, which runs coterminous with the first mortgage. So when the first mortgage matures, you’ll have to roll the line of credit debt into the new mortgage. The other plus to that is with a capital assessment, the shareholder gets an increase in their basis and the cost of their apartment. So when they sell it, they might have less of a capital gain.