Jennifer V. Hughes in Building Operations on October 29, 2013
Co-op City, the famed 15,000-unit complex in the Bronx, did a shared-savings agreement since it didn't want to incur additional debt and couldn't tack on additional funds through a mortgage refinancing because it had refinanced recently, explains its managing agent, Herbert Freedman of RiverBay Corporation.
At other co-ops, the underlying mortgage precludes taking on additional debt. And finally, many condos and co-ops simply don't have the reserve-fund money to do a project or have gone to residents for assessments one too many times already.
"There is no question that pricing for an underlying mortgage is the lowest form of pricing if the co-op is able to refinance their mortgage," says Barry Korn, managing director of Barrett Capital. "Sometimes those prepayment formulas make prepayment uneconomical and they're stuck."
Adding debt at condos can often require a vote of sixty-six and two-thirds percent of the unit-owners, says David Kuperberg, president of FirstService Residential. That can be a stumbling block. Through a subsidiary, FirstService offers shared savings agreements for potential green projects for the 500 properties it manages in New York. Only four have done so since 2011.
FirstService pays for the gas conversion, but the client pays a set percentage — 90 or 95 percent — of what it was spending on oil for the life of a contract, usually about five years. If consumption or costs rise, then the amount paid out by the building rises. The deal finishes after the term ends. If savings are higher than expected, the condo or co-op can buy its way out of the contract early, but if savings are not as good as projected, FirstService takes the hit, says Kuperberg.
At a 230-unit, luxury condo on the Upper East Side, the board did a shared-savings agreement and also an oil-to-gas conversion. "They had recently done a Local Law 11 project and a window project, and they were tired of assessments," Kuperberg says. He notes that the cost of financing its deals can range from 10 to 20 percent of the project. He likens it to leasing rather than buying a car. "It is almost always cheaper to buy, but there are always reasons why people want to lease as well," he says.
Not everyone is a fan of shared-savings agreements. "It's a wonderful idea if you don't have the ability to borrow money, but I think most co-ops and condos would be able to borrow — and could do so at a lower rate," says Andy Padian, vice president for energy initiatives at Community Preservation Corporation, a nonprofit lender for affordable housing in New York that covers both the rental and co-op / condo markets.
If an underlying mortgage prevents a building from taking on new debt or refinancing, it might even make sense to wait rather than take a deal with a higher interest rate for the life of a contract, according to Padian. "Even if it's five years down the road when their building can refinance the debt, why shouldn't an energy plan be part of the refinancing plan?" he says.
Often, Padian notes, co-ops and condos take the wrong approach with their traditional lender. "People tell their banker, 'I want a green loan,' and the banker doesn't know what to do," he says. "But, if you go in and say, 'I want to replace our boiler because it is past its useful life,' there is not an engineer or a banker who is going to object to that [because a] loan goes bad really fast when a boiler goes bad: When there is no hot water in a building for four months, people stop paying. It's always better for a cash-flowing occupied co-op to plan for this as part of refinancing their debt rather than taking it as a magic-bullet, one-shot deal."
Not every green project is a good candidate for a shared savings deal. "The metrics have to be straightforward," says Korn. "You need to demonstrate that the savings are real."
Co-op and condo board business broken down into bite-sized bits - 2 stories each week. Read now on all digital devices.
A free digital resource for co-op/condo board directors. Published twice a month. Read now on all digital devices.