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How Co-op Boards Can Navigate Today’s Rough Lending Landscape

Bill Morris in Bricks & Bucks on December 21, 2022

New York City

Co-op boards, underlying mortgages, refinancing, interest rates, interest-only loans.
Dec. 21, 2022

“The party’s over,” says David Lipson, director of the mortgage division at Century Management. “By refinancing their underlying mortgage, co-op boards could lower their debt service and pull out significant capital for projects. Now that rates have doubled to around 6%, it has put a dead stop to refinancing.”

Lipson, who has been in the business for more than three decades, remembers the days of double-digit interest rates, so he sees the current environment as difficult but not disastrous. Here are ways for co-op boards to navigate today’s rough lending landscape:

Don’t fixate on the rate. Pat Niland, president of the mortgage brokerage First Funding of New York, stresses that the interest rate is just one of many moving parts in a mortgage loan.

“Quit focusing on interest rates — what I call rate myopia — because they’re going to do what they’re going to do,” Niland says. “Instead, boards should pay attention to how the market has changed. Lenders’ reviews of loan applications have become more stringent. They’re taking a hard look at unsold shares and investor units. They don’t like sublets. They’re making sure insurance includes full building-replacement coverage. Virtually all lenders require a reserve account that’s deposited with them, and some lenders require that it’s at least $1,000 per unit. They’re looking to see if the co-op is being run the way it should be run because they don’t want to lend to a co-op that can get into financial trouble.”

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Pay down the debt. Peter von Simson is the president of New Bedford Management and also serves on the board of his Manhattan co-op. He advises his co-op board clients that while interest-only loans that don’t pay down the debt may be attractive because they help keep monthly maintenance low, they’re rarely a good idea. And they’re especially bad when rates go up. “Some boards thought there was no such thing as too much debt,” von Simson says. “Smart boards realized that one day interest rates are going to go against us. The pain comes when you’re not paying down a debt.”

The villain, as von Simson sees it, is short-sightedness. “As a board member and a fiduciary,” he says, “you’re not just making a decision for today. My job as a property manager and a board member is to make sure I look at the long-term financial health of the building. Decisions you make today will affect the building for the next 20 years.” 

Niland adds that interest-only loans can be useful, under very specific conditions. If, for instance, a co-op with a heavy debt load needs money to pay for urgent capital projects when interest rates are rising, Niland says it might make sense to structure a loan with two or three years of interest-only payments, followed by partial amortization. “That gives the board a window,” he says, “when they can gradually raise maintenance to the point where it can cover the amortization payments.”

Get your house in order. Time will always be money, but it’s worth even more when interest rates are rising. “It’s particularly important now to be prepared,” Niland says. “Before you enter the market, have your attorney look through your existing loan and also find out if there are any arrears, litigation or building violations. You can’t proceed until you solve your problems.”

The accountant, he adds, should review the financials and make sure that maintenance covers operating expenses and debt service, with a little left over. Lenders object when assessments are used to cover operating costs.

“When you’re in a rising-rate environment,” Niland says, “you don’t want any delays in closing the loan. And remember, lenders are getting much tougher. They’re paying attention to everything.”

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