New York's Cooperative and Condominium Community

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Should a Co-op Pay Off Its Underlying Mortgage Using Its Reserve Fund?

Patrick B. Niland in Board Operations on March 26, 2013

New York City

Pay Off Underlying Mortgage with Reserve?
March 26, 2013

As we wrote in this article's companion piece, about the pros and cons of loans vs. assessments for condominium capital improvements, the role of debt can trigger highly individualistic emotional and cultural concerns. And as we mentioned there, the strictly financial approach compares the cost of the money being borrowed to the value or benefit derived from the loan. So how can your co-op board determine that in order to find the best approach for your particular building?

A financial rule of thumb dictates that assets with relatively long lives should be financed with long-term debt. Therefore, a boiler or roof that might be expected to last 10 or 20 years theoretically should be purchased with 10- or 20-year debt. However, the circumstances of the individual borrower, as well as the current market conditions, might call for a modified solution.

Cooperatives almost always have some amount of underlying mortgage. Further, that underlying debt rarely gets paid off, instead being refinanced again and again as a permanent part of the cooperative's capital structure. The need for repairs or improvements sometimes precipitates the refinancing of a cooperative's underlying mortgage, but other factors usually influence the final loan structure. 

Cooperative apartment buildings tend to be older than their condominium counterparts and usually need major repairs every 7 to 12 years. So, while a new roof might have an expected lifespan of 20 to 25 years, some other building component(s) may need repair or replacement before that time has elapsed. Also, because underlying mortgages are relatively large, overall budget issues and shareholder maintenance levels frequently dominate the discussion. Then, the current financial market may limit what is feasible. For example, present interest rates for 10-year mortgages are very favorable while those on 15- to 30-year loans are disproportionately high.

Keep Your Reserve Fund in Reserve

For the cooperative thinking about paying off its underlying mortgage with its reserve fund plus an assessment, I say, "Fuggedaboutit!" Draining a reserve fund is never a good idea, but this purpose is especially imprudent. I would suggest that our reader above might ask the treasurer to explain his plan for funding the next building system that needs repair or replacement. If you exhaust your reserve fund and pay off your existing loan, you just might find yourself struggling to collect an assessment in a hurry or secure a new loan from a lender who has little incentive to help you.

Keeping your underlying mortgage at a reasonable level is a wise objective and maintaining an adequate reserve fund at all times is the safe thing to do.


Patrick Niland, a mortgage broker, is the principal of First Funding of New York

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