Refinancing in These Tough Economic Times: How Three Co-ops Did It, Part 2

"We finally did get to the bottom of what was going on and I said, 'We're going to pay one way or another.' It became very clear to me," Perez says, "that we needed to do the work and solve the problems or it was going to degenerate and cost us way more in the future."

The entire seven-person board spent many hours debating two questions: Does the co-op pay a prepayment penalty on the existing underlying mortgage and get out of it before its 20-year expiration date, or does it take out a second mortgage and raise maintenance to pay for that? The board examined its goals — to give the owners a better quality of life (meaning more money in their pockets and a leak-free, structurally sound building) and a greater resale value on their units — and that led to the answer. "We're a very beautiful, 1927, neo-Byzantine, prewar, elevator, doorman building," says Perez. "We had to look at the value we'd be adding, to see if it would be a good return for the money."

"This board was struggling with competing ideas," notes Patrick Niland, of the mortgage brokerage First Funding, who was referred to the board by its accountant. "One idea was not to raise maintenance and the other was to raise enough money to do the capital improvements they felt needed to be done. Those were irreconcilable ideas in the sense there was a lot of work to do. But they couldn't afford all of it. They were looking for a way to maximize the work they had to do and minimize the negative effects of increasing maintenance. And I think we came pretty close."

One faction on the board didn't want to see the building go deeper into debt on a long-term basis, feeling it would be unfair to saddle future owners with a loan from which the current residents got the immediate benefit. "We agreed it wouldn't be right," explains Perez (at right).

Nonetheless, notes Niland, "Since interest rates were low, they wanted to lock in the rates for as long as they could." The board did take out a 15-year loan, with a more rapid amortization than usual as a concession made to the faction that wanted no long-term debt.

"This [kind of choice] happens a lot on buildings that keep refinancing; over time, they build up significant debt loads for the building," Niland continues. "The argument to counter that is yes, but overall value is going up. What happens if it doesn't? And is it fair to owners down the line? There were some pretty astute people on the board who said, 'To maintain the fiscal integrity of the building we need to have more amortization to get rid of this debt.' I was quite impressed with their thinking. They clearly had done their homework. They were struggling to make the best deal; they locked in the rate at 15 years, borrowed as much money as they could but had a shorter amortization period than the traditional 25 years. They really wanted to get the debt down more quickly. They actually thought long-term."

The directors spent a lot of time talking, asking questions of Niland, of each other and of Robert Alper, vice president of Brooklyn's Advanced Management Services, their manager. "Bob had spent some time researching this before we went with Pat," says Craig Winer, a board member who worked closely with Perez. "So he helped us evaluate our options and gave us a second source to see what was out there."

The co-op paid a prepayment penalty of just under $500,000, and took out a new loan of $3.45 million, with a $500,000 credit line from NCB.

"This was a very involved board that took [its] responsibilities very seriously," observes Niland. "Many don't do that. They want to get the lowest payment they can get. This board really cares about tomorrow."

Read Part 1

Adapted from Habitat November 2008. For the complete article and more, join our Archive >>