Jonathan Leaf. The first of a new biweekly column on board finances. in Legal/Financial on October 21, 2014
That loan carried an interest rate of 7.38%. Since that's almost 130% higher than the new rate, the co-op gladly took on a $2.3 million prepayment penalty to refinance and get the super-low rates available in May and June of 2013.
Strike While the Rate Is Hot
FirstService's on-site property manager, Michael Urena, notes that while the co-op had been keeping an eye on borrowing costs for several years and had engaged a formal inquiry into the state of the loan market in the final week of 2010 that its board only initiated a sensitivity review on April 10 last year. By June 28, though, it had approved and signed the new deal.
That paid off. In fact, a subsequent analysis concluded that if the board had waited one more month, it would have paid an extra two million dollars over the life of its new loan.
During the two-and-a-half months between the start of a detailed review of the co-op's situation and its alternatives and the mortgage's signing, much work had to be done. This included an environmental study, a financial analysis and an investigation into all the building's present and future needs.
This was accomplished with bank analysts asking many of the same questions as the teams own auditors and evaluators, often only days or weeks apart. The financial assessment was made with the thought in mind that rates could potentially rise in the near term by 25 to 200 basis points (.25% to 2%) and that they might go up to 8% at the end of the loan in 2023.
The FirstService financial team told the board on May 6 that rates were so low that in an absolute best-case scenario it thought the co-op could receive a rate of just 3.17%. At the same time, it recommended the 23-year amortization schedule and proposed more than 20 alternative scenarios for the board to consider. The 23-year amortization schedule would leave the co-op with a final payment for its next mortgage in 2023 of only $13.2 million. Yet its already considerable cash reserves would immediately grow by more than $6 million.
With the rates very low, FirstService impressed the board with the importance of timely action.
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