LENDERS & BROKERS ON MORTGAGES, P.2

 

In fact, bankers want to make sure there are no surprises of any kind, such as unresolved lawsuits, liens on the property or looming capital improvements.

In the Field

Semet is not a banker who's chained to his desk. He frequently visits co-ops to see what shape they're in. "I'm looking for evidence of water damage, graffiti, trash, poor maintenance," he says. "I want to make sure there aren't any issues that are going to show up on the environmental or engineering report. Once I'm satisfied that the co-op is healthy, I issue an application, known as a letter of intent," a five- to 10-page document that spells out the conditions under which the bank will offer the loan, including the interest and the amortization rates and the duration.

If satisfied with the bank's letter of intent, your co-op pays a "good faith" deposit equal to one percent of the loan amount. This money is used to finance the next critical step: the physical evaluation of the building. The bank arranges for a real estate appraisal and for environmental and engineering reports. The cost is usually about $15,000, with any funds going toward closing costs.

"There's been an increased attention paid to the reporting, especially leaks and the environmental aspects," says Semet. "It has become a bigger issue recently because co-ops have borrowed money and then realized they had to borrow more after they'd made a deal because they found out things."

Once he has all the reports in hand, Semet makes a presentation to the bank's approval authority. Once this authority, which varies from one lending institution to the next, gives its approval, Semet issues a "commitment" to make the loan.

Though this commitment is a legally binding document, some hurdles remain. The co-op's lawyer should read the commitment closely, and he or she may advise you to try to negotiate on some of the terms, such as how to handle insurance proceeds. Once these details are hammered out, the board must decide when it wants to lock in its interest rate — and how soon you wants to close the deal.

Depending, again, on your level of preparation, the closing can take an hour or drag on all day. You must produce title insurance, notify the previous lender and meet the terms of prepaying the previous mortgage. A board representative must be on hand to sign documents. "If there's an imminent threat to the viability of the building, fix it before the closing," Semet advises.

Once the closing is complete, the co-op has a new lease on life — until the next time it decides to renegotiate its mortgage. And there will almost certainly be a next time. "Some co-ops want a self-liquidating mortgage because they dream of living debt-free," says Gartenstein of NCB. "What they're missing is that buildings need constant maintenance and repair. The thought that you can retire your debt in, say, 15 years and live forever debt-free is an illusion."

More Money, No Sweat

The 35-unit co-op in the historic Park & Tilford Building, at 100 W. 72nd Street in Manhattan, recently followed Semet's tenets to a T — and rom M&T got a $1.1 million mortgage.

"First the board had to set parameters," says Robert Cohen, the sponsor representative on the seven-member board, who also serves as the building's managing agent. "We knew we could get a low interest rate, but the main thing the board wanted was not to increase expenses servicing our debt."

A committee was formed and three board members shopped at three banks. Cohen went to M&T, which was then the co-op's lender. After discussions with Semet, Cohen reported back to the committee, which relayed his findings to the full board. M&T offered an attractive package, which it would sell to Fannie Mae.

Last summer, shortly before the credit crunch hit, Park & Tilford obtained for a 15-year, partially amortizing, $1.1 million loan that met all the board's objectives: It refinanced the prior mortgage, gave the co-op money for capital improvements and kept maintenance payments steady.

"It's usually easier if you refinance with your existing lender," Cohen says, "because they have your files and they know the building. And while interest rates are important, we looked at the whole picture." Though the refinancing was hugely important to the co-op, it proved to be almost laughably easy, thanks to the co-op's solid financial history and the small size of the loan relative to the value of the building.

Keep all this in mind, and it can work this easily for your co-op, too.

 

Adapted from Habitat March 2009. For the complete article and more, join our Archive >>

Photo by Carol Ott