New York's Cooperative and Condominium Community
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How do you choose between assessing and borrowing?
We’re working with a 300-unit condo that needs about $7 million for facade work. To pay for the repairs, it has two choices — borrow money from a bank or simply assess the unit-owners. At the moment interest rates for loans are increasing, so banks would probably offer between a 10- to 15- year loan at about 4.5 or 5%. That means the condo would be looking at a monthly mortgage installment of about $72,500 — which represents a one-third increase of its operating budget — that would be then spread among the 300 unit-owners. If the condo decided not to do the loan and do an assessment, the unit-owners would have to pay $23,300 each.
It’s complicated. If the board does go ahead with assessments instead of borrowing, it could offer different payment plans. But there could be trip-ups when it comes to accounting. One unit-owner might be paying the whole amount upfront, another wants to pay it in two installments, and someone else wants to spread out the payments over, say, the whole assessment period. So you have to calculate interest according to what option people are using. If somebody splits the $23,300 into two payments over two years, the board would have to add interest to the second payment. When the board collects that first half of $11,650 from the unit-owner upfront, it’s not borrowing that money from the bank. But they are borrowing the remaining half and are paying the interest on that amount for the second year. If the board didn’t charge the unit-owner the interest, then the condo association itself would have to pay it, which would only add to the accounting challenges.
Sales pitch. There could also be complications if the condo board chooses not to offer payment options and imposes an assessment, because over the course of that 10- or 15-year loan, there will most likely be people who sell their units. In that case, there are two options available to the board. One would be that if people sell their units, they have to pay the principal on their portion of the loan that’s still owed at that time. Then the board has to make sure that when it collects that money, it turns around and pays the bank right away. The unit-owner is no longer paying interest on that portion, and if the board doesn’t pay the principal to the bank, the board will be charged interest on that amount.
Refinance repercussions. In that case, the condo would in effect be prepaying on the loan. What I have seen is that banks will normally allow prepayment without penalties only if the money is generated internally, meaning from your unit-owners. If the board goes out and looks for better terms from a different bank and decides to refinance, then there would be some prepayment penalties because banks don't want you to go somewhere else and pay them off. But there wouldn't be penalties if a unit-owner sold and you took that money and prepaid part of your loan down.
Smart approach. My bottom-line advice to boards is to give as few payment options as possible to the unit-owners. Try to let the loan go with the unit, meaning that if somebody is selling they can negotiate with the buyer about the loan payoff amount through the sale price and let the new unit-owner pay the increased common charges. Because the one thing you have to remember is that once you have a term loan, the amount that the association pays every month will not change. Even if units are sold and the association collects the principal and pays down that portion of the loan, their monthly installment — in this case, $72,500 — will not go down. If you pay down the loan, it will reduce the number of installments and you would definitely save on interest. If an association is in a financial position where it’s able to do that and continue to pay the $72,500, paying the loan down is definitely an option. But if it would cause financial hardship, it may be better not to.
Learn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments
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