Obtaining Bridge Loans from Shareholders: How to Build the Bridge
March 27, 2014 — When the co-op board at 90 Riverside Drive in Manhattan got ready to refinance its mortgage in 2012, a round of Local Law 11 repairs came due — and once work began, the board found itself with a cash-flow problem when unanticipated repairs and expenses arose. So by the summer 2013, realizing the building needed a bridge loan, the board put out a request to shareholders, offering an interest rate significantly above that being offered by current money-market accounts.
The response to the loan request was stunning: Nearly one-fifth of the shareholders offered to participate — and they offered twice as much money as the co-op requested. "We were over-subscribed for the amount we wanted and had to prorate the offers by 50 percent," says longtime board president Arthur Sachs, a professional financial advisor. "We also had to set a maximum amount per shareholder, so that we could make it available to as many shareholders as possible."
Despite the steep cost of the unforeseen repair work, the shareholders' loans and the reserve fund were enough to pay the bills. When the mortgage refinancing was complete, the board paid off the loans, principal and interest, by the end of October — two months ahead of schedule. The Local Law 11 repair work to the building was finished by the end of January 2014.
Unusual But Doable
"It's [an unusual] situation," says the co-op's property manager, Annette Loscalzo of Argo Real Estate. "I've been in the business 20 years and I've seen co-ops lend money to shareholders to cover an assessment, then charge the shareholders interest. But this building paid interest. If other buildings could do this, I think it would be a wonderful way to tide them over."
For boards considering such a loan arrangement, Sachs advises them to have their lawyer draft the memo to shareholders and the promissory note. That way, the shareholders and the corporation are protected and all legal requirements are met. In this instance, for example, the loans were unsecured and could not be transferred, assigned, sold, or pledged. If the memo and promissory note are properly drafted, Sachs foresees little to no risk unless the co-op board is unable to refinance its mortgage in a timely fashion.
"We had a commitment from the bank for refinancing prior to asking shareholders for a bridge loan," says Sachs. "It can take longer than expected to close on the mortgage loan, and you might end up with a higher interest rate. We closed earlier than the [mortgage] expiration and locked in a lower interest rate."
For those that qualify, it's an idea worth considering. In the current climate of low interest rates, the benefits tend to multiply. "In this latest go-round," says Sachs, "we were able to put a lot more money into the reserve fund because of low interest rates — without any pressure on our operating budget. We got a bigger mortgage for about the same monthly payment."
It's as good a definition as any of a win-win deal.
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