By Edward Howe, managing director, National Cooperative Bank
Over the past several years, refinancing has been the name of the game for cooperatives in the New York region.
The low interest rate environment made refinancing a top priority for Boards allowing them to lower the cost of the debt on their buildings. This option was even popular with properties that had prepayment penalties on existing loans.
For these residents, the cost of pre-paying a mortgage was significantly cheaper than maintaining existing finance at the higher interest rate for the term of the loan.
When the Boards run the numbers, it becomes evident that refinancing today is almost always the better option, than maintaining a higher interest rate underlying mortgage.
In addition to co-operatives refinancing underlying mortgages, there has been a substantial uptick in the number of Boards interested in securing lines of credits or second mortgages for their properties.
The popularity of these financing options is growing at a handsome pace, as more communities utilize them for a number of funding needs.
In the first quarter of 2014, 33 properties took advantage of lines of credit totaling $19.1 million. This amounted to 50% of all the transactions, and approximately 20% of the total financing arranged during this period, and there are clear reasons why they’re such prevalent borrowing options.
For co-operatives facing capital improvement needs, ranging from Local Law 11 work to unanticipated repairs, second mortgages and lines of credits are a perfect solution to avoiding special assessments of shareholders.
Boards are able to secure these funds, regardless of any prepayment penalty that exists on the property’s current underlying mortgage. By doing so, they can undertake any planned projects, while also having funds to cover the cost of any emergency situations.
Even more important, these communities are able to do so without the massive upfront cost, that would impact the building’s reserve funds or the residents’ maintenance.
Some uses of lines of credit originated by NCB include heating and energy upgrades, boiler upgrades, hallway improvements, and exterior repairs required from Local Law 11.
A line of credit for a co-op has many advantages instead of special assessing unit owners or tapping into the property’s reserve funds.
By securing funds through a line of credit, the cooperatives are able to fund the anticipated upgrades, but only paid interest on the money actual used, not the entire amount. In the event the cooperative needs to borrow additional funds, it can again draw down on the line of credit and only pay interest on the money actually used.
A line of credit or second mortgage can also be the lifeline for a cooperative faced with an emergency situation.
One community that can attest to this is located at 840 Shore Road in Long Beach, Long Island.
As a result of Superstorm Sandy, the co-operative sustained damage to the lobby, garage and adjoining areas and outside mechanical rooms, as a result of the storm. While the cooperative was able to recoup funds from its flood insurer, it did not cover the cost of the repairs. The Board turned to the Bank to secure a $1.9 million loan to cover all costs and refinance existing debt.
In addition, the property secured a line of credit for any future needs. As a result of this financing, renovations of the lobby have begun and work includes painting the walls and replacing the flooring. The replacement of the burner and all tubing, fixing the elevator to make it functional and repairs to electric breakers that were water damaged, are also now complete.
The co-operative is currently receiving bids to repair the garage wall, the last step in returning the building to its original condition prior to Sandy.
While the reasons may vary, the message is the same: securing the right financing package for your community is critical to ensuring its financial health today and in the future.
Boards should actively engage their lenders to evaluate the building’s current debt and upcoming requirements, and plan accordingly by taking advantage of all of the different financing options available today.