New York's Cooperative and Condominium Community

Habitat Magazine Insider Guide




Problem Solved: Borrowing Enough to Cover Future Projects

Westchester County

Underlying mortgage, co-op boards, line of credit, National Cooperative Bank, Hudson House.

The co-op board at Hudson House in Westchester County refinanced its underlying mortgage the right way.

July 12, 2022

As part of our ongoing Problem Solved series, Habitat spoke with Harley Seligman, senior vice president at National Cooperative Bank.

A unique situation. The building I wanted to speak about today is in Westchester County, it’s called Hudson House. The building sits on 10 acres of property and has about 80 units. Not only were they poised to do a lot of capital improvement work, mainly exterior facade work, they also had two different scenarios with neighbors and the county that were a little unique. They own a large parking lot, which they lease to a neighboring country club, and they also have an easement to allow cars to park for the train station that's directly across the street. So those two things just had to be a little bit more hashed out between our lawyers and the co-op’s management company and their lawyers.

Turn to the pros. We rely a lot on the co-op’s attorneys to walk us through these situations from a legal standpoint, and kind of help our attorneys get comfortable. So then our attorneys can advise me and my bank as to what we're actually getting when we take a first lien on the property. If there's anything that gets in the way — be it a lease with somebody else or a lease with the town — we need to make sure of that.

The co-op’s management company, the Ferrara Management Group, did a great job here, really held our hands. We appreciated that. I think the takeaway from this is that it really pays to have professionals in your corner when you're doing this type of financing. It's the biggest decision a board will make during its tenure, and having those professionals in place is a big part of that.

Digging deeper. These unique circumstances didn't have any effect on the rate, the terms of the loan or anything like that. Did it complicate things? Sure. There's a little more legal work that needs to be done, a little more investigating. But we’re a not-for-profit, and we're comfortable with that.

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Smart moves. The board took out a couple million extra dollars above their existing loan, which allowed them to do several things. One is to complete all the work that they were anticipating in the near term. But it also allowed them to avoid what, I think, is the biggest mistake co-ops make, which is not borrowing enough money. A lot of co-ops will think about two or three projects coming up in the next year or two, and they forget that, typically, most loans in this space are 10-year loans. 

This co-op did another thing that was clever. They also took a line of credit, which kind of sits in their back pocket. We call it a rainy day fund. We try to encourage co-op borrowers to take lines of credit simultaneously with the existing first mortgages because it saves them closing costs. But also it's one of these things that people don't realize they need it until they need it. And then it's too late. 

Because they took new money, meaning the difference between the old loan and the new loan, they were able to purchase NCB stock to exempt themselves from the mortgage recording tax. By becoming a member of the cooperative that is National Cooperative Bank, you're exempt from that tax. 

Perfect timing. They refinanced this loan at the end of last summer, at the lowest of the low points in terms of interest rates. Today, rates are increasing as rapidly as I've ever seen them increase. This co-op got an excellent rate, and so they decided to pay the prepayment penalty on their existing loan in order to take advantage of that low rate. But over the next 10 years, the low rate will more than make up for that.

When it comes to financing decisions, boards should think about their partners — not just the banker, but the manager and your attorney as well. Ask for advice — and read Habitat magazine. Turning to the knowledge that's out there is really helpful.

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