Bill Morris in Legal/Financial on March 11, 2014
The board of the 106-unit building decided to heed the advice of long-term treasurer Euval Barrekette and turn to shareholders for short-term "bridge" loans that would ensure a healthy cash flow until the mortgage negotiations were complete. (With the newly refinanced mortgage, the cooperative would pick up extra funds for various needs.)
"Sometimes our cash flow has appeared to be tight just prior to refinancing our mortgage," says Arthur Sachs, a financial advisor who moved into the building the year after the conversion and has been board president for the past 10 years. "We want to pay our bills, and shareholders have been more than willing to lend funds at an attractive interest rate to provide interim financing."
Gauging Residents' Interest
So the nine-member board took the same unusual step it had taken twice before. It sent a memo to all shareholders outlining the need and terms for interim financing, along with a promissory note signed by Sachs. The shareholders' loans to the co-op were to be unsecured, and they could not be transferred, assigned, sold, or pledged. The interest rate was "significantly" above money markets' current rock-bottom rates, according to Sachs, which made lending money attractive to those who were sitting on cash. The loans were to be paid off as soon as the co-op secured the funds from the renegotiated mortgage.
"It's better for the shareholders than earning nothing in a money market account," says Sachs. Besides Local Law 11 repairs, other expenses contributed to the board's need for a cash infusion, he adds. "We had to do an incredible amount of masonry repair work, and we spent a lot more money than we'd budgeted," he explains. "We also converted from No. 6 to No. 4 oil, and we're in the process of installing a new burner on our backup boiler. We'll probably convert to gas eventually. And we're going to redo the roof as soon as the weather warms up."
Condominium associations don't have mortgages for their common areas and physical plant, of course, but the same principle applies in general. Do note that this unorthodox arrangement is not suitable for all buildings: It assumes that a sufficient number of shareholders or unit-owners have liquid money they're willing and able to lend. Many buildings simply don't fit the bill.
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