When Repair Refinancing Splits a Board: Get the Loan First, or the Contractor?
Sept. 9, 2009 — A reader writes: "Our board is planning a series of long-overdue repairs to our building. Another board member and I are identifying contractors. Since our reserve fund is depleted, we also plan to refinance our underlying mortgage to raise the needed funds. … A debate has arisen over which comes first, the contractors or the new loan. I think we need signed contracts for all of our work to know how much to borrow. Other board members worry that, in today's financial market, we may not be able to get a new loan or one large enough to pay for our repairs. They argue we first should close a new loan so we know how much money we have to spend. Who's right?"
For most co-ops, this is not quite the "chicken or egg" question it initially seems to be. The typical cooperative usually can support enough new debt to cover almost any major repair. In many cases, the building's maintenance must go up, which could pose a hardship for certain shareholders. However, the required increase rarely is enough to cause problems for the cooperative as a whole.
It is true that certain segments of the financial markets have been severely problem-plagued. Fortunately, the co-op underlying-mortgage segment has been relatively unscathed. Consequently, the fears of your fellow board members about your building's ability to borrow are probably unwarranted.
That said, your insistence on signed contracts for all work before entering the mortgage market is overkill. A range of bids from several legitimate contractors should be sufficient to help you estimate the likely cost of each planned project. I then would add a contingency to each project's estimate (5 to 20 percent, depending on the complexity of the work). The resulting total will be close enough for most lenders.
The Pro Shop
Having that number, though, does not mean that you are ready to start searching for a new loan. Refinancing an underlying mortgage affects not only the monthly maintenance, but also the market value of every apartment. Therefore, it is essential that you broaden your focus beyond the work you have planned now to the overall physical and financial health of your cooperative. That's why I recommend that each board involve all of its co-op's advisers — managing agent, accountant and attorney — in this critical process.
For example, your managing agent can help you
- develop plans and specifications for each project,
- recommend reputable contractors,
- help check that all bids are complete,
- assist in negotiating final prices,
- coordinate schedules for each trade and
- assure that all required approvals and permits have been secured.
Your accountant can
- assemble all of the financial and tax records that any lender will require,
- help you prepare a budget reflecting the planned new loan,
- estimate the amount of any prepayment penalty on your existing loan and
- assist in evaluating various new loan options.
Your attorney will
- help negotiate contracts for each project,
- check your insurance coverage,
- review your existing loan documents to make sure that they allow you to refinance,
- check the public records for building violations and outstanding liens,
- evaluate loan offers and re-loan applications and, of course,
- represent you at the closing.
The time to get all of your professional advisers involved is now, at the very start of the refinancing process. The benefit of their input at the beginning, middle and end is worth much more than whatever they will charge you.
see also
You might have noticed I did not include a mortgage broker among the professionals that I recommend you hire. While I believe that any loan transaction can be enhanced through the efforts of a seasoned mortgage broker, loans close every day without such assistance. Whether those loans have the lowest interest rates and the best available terms is subject to debate.
However, the more troubled or complex a borrower's situation, or the more stressed or volatile the market, the greater the value of a professional who deals with such issues daily. A skilled mortgage broker knows exactly whom to call and how to present your situation in the best light.
Patrick B. Niland, a mortgage broker, is the principal of First Funding of New York.
Adapted from Habitat September 2009. For the complete article and more, join our Archive >>