Refinancing Your Cooperative In Today's Lending Environment

In today's low interest rate environment, refinancing is the top agenda item for many cooperatives. However, while the current interest rates would seem to guarantee a "win-win" situation, a savvy board must take into account more than just low rates when making the decision to refinance. As board members, you need to consider the existing terms of the property's underlying mortgage and closely analyze your co-op's financial security, current monthly costs, and projected capital improvements as you seek the optimal refinancing option.

First and foremost, your board needs to review the terms of your current mortgage. The existing loan may not allow the co-op to refinance and/or prepay its mortgage. If the mortgage terms do permit prepayment, you must then determine if expensive prepayment penalties on the front-end still make refinancing a cost-effective solution. If, after completing careful due-diligence, your board decides that prepayment is a viable option, you can now comfortably explore the different refinancing packages available to you.

Review the Underlying Mortgage

If your co-op has an existing underlying mortgage scheduled to mature in the coming months, you're in a strong position to take advantage of the current interest rate environment, particularly since market analysts are projecting that rates may not be this low for another 40 years. In this scenario, banks like National Cooperative Bank may be able to provide a loan package to your cooperative that locks in today's desirable interest rate, but schedules the loan to close up to four months later so it can mature, and your co-op can avoid any prepayment penalty. This term is called "forward commitment" or "early rate lock."

NCB recently worked with the Park City Estates Cooperative on 98th Street in Rego Park, Queens to craft a loan package that would closely meet the community's refinancing objectives. In August 2002, the bank offered the property a loan package that satisfied their goals. The five building, 1,049 unit-cooperative was interested in refinancing to benefit from the advantageous low interest rate environment and also access sufficient funds to underwrite necessary capital improvements.

Unfortunately, its first mortgage was not pre-payable until December 2002. But thanks to the efforts of a loan officer, the property was able to lock in a thrifty 5.55 percent rate on a 10-year, $24.5 million fixed-rate mortgage, while also opening an additional $3 million line of credit to fund the improvement projects. The bank scheduled the closing for December 2002, when the prepayment penalty would lift on its existing $13 million loan, which was pegged at 7.9 percent.

Size Doesn't Matter

Although Park City Estates is a large co-op, this advantageous loan arrangement can also be created for boards of smaller properties that find themselves in a similar situation. Accessing the current low interest rates yields an immediate improvement to a cooperative's cash flow and allows the co-op to adequately prepare for tomorrow's contingencies - seen and unforeseen. This money management technique works regardless of a co-op's refinancing need: impending loan maturity, or looming capital improvement expenses. The size of your co-op is simply not an issue. Every board needs to be proactive, analyzing exactly where your cooperative stands financially today and where you would like to be in the future. Astute refinancing can facilitate the achievement of this financial goal.

Money for a Rainy Day

Given the mature average age of the housing stock in New York City, many buildings across the metropolitan area will, in the not too distant future, need to embark on multi-million-dollar capital improvement projects to ensure the continued health of the building's infrastructure and the financial strength of the property. To avoid draining a cooperative's reserve funds, a board will often seek to refinance the existing mortgage as a means to enhance cash flow and yield additional funding without increasing total debt. Since a hike in maintenance fees is never a popular option, refinancing - especially in this historically low interest rate environment - has become an attractive alternative, avoiding the necessity of a special assessment.

This emerging trend is clearly illustrated by one Brooklyn co-op's situation. The 50-unit property originally financed a $1.5 million first mortgage in 1996. The loan was a fixed rate at 8.32 percent, with an additional floating rate line of credit. Having waited while interest rates dropped significantly over the last two years, the board decided in the fall of 2002 that the time had come to take advantage of current financial options available. As a result, the co-op was able to refinance its existing debt, closing on a $2 million mortgage at a fixed rate of 5.75 percent and a $250,000 line of credit. The loan package, which they acquired through NCB, allowed the cooperative to retire the property's existing debt of $1.4 million, the combined original loan and line of credit from 1996.

The remaining funds also permitted the board to move ahead with much needed capital improvement projects including façade upgrades and roof repairs. The line of credit will remain untouched, providing the board with a dedicated source of funds to pay for any unanticipated improvements or meet any emergencies prior to the loan's maturity. As a result, the members were able to lower their monthly costs and fund necessary capital improvements, to ensure the continued livelihood and financial soundness of their homes.

The benefits of the current robust lending environment have included significantly improved financial packages for boards to choose from, lowered maintenance fees, a decrease in overall debt, and enhancement of the quality of their properties. This trend is expected to continue throughout the year as co-op boards make short- and long-term plans to ensure the continued financial health of their buildings.

Edward Howe III is managing director of National Cooperative Bank, a cooperatively-owned financial institution headquartered in Washington, D.C.

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3 Comments

  • Perhaps we alsp could apply to NCB in hopes of refinancing our debt so that many of the improvements that are necessary, I(elevators, Gym, etc.) could be financed this way and enhance the building's value without additional assessments. I know that we had a refinancing penalty. How long is it before the penalty goes away?????
  • I want to refinance a co-op for about $110,000, its worth $175,000. I want to lowest rate in order to get low monthly payments. Ina Watters
  • I want to refinance a co-op for 50,000, its worth $ 225,000. I want to lowest rate in order to get low monthly payments. Mrs.Bari