Questions About Financing for 4-8 Unit CoopsToday

1. 4/7 units in my building have refinanced in the past two years (one twice), and one has sold. The big banks (BoA, Citi, Wells, Wachovia) have all loaned in the building without issue.
2. No rate/point premium were charged for any of our refinances or the one new purchase.
3. For the one new purchase and the one refinance where the appraised value required the refinancer to put up more cash, 80% LTV was fine.
4. As I understand it, yes, 4 can be different than 8. I have heard that 5 is often a dividing line, but have no specific experience.

For points #1-3, I will caveat that my building has no sponsor involvement/unsold shares, no units in arrears, is 100% owner occupied, and has pretty good reserves.

I expect the answers could change if you have a sponsor in the picture, anyone in arrears, and/or anything less than 100% (or 100% - 1 unit) owner-occupancy.

lad:

1. thank you for your informative response
2. the real issue is heightened risk
3. in a very small Coop, one non-payer can create tremendous problems
4. the existence and size of an underlying mortgage should be a factor for lenders
5. the reason: foreclosure of an underlying mortgage terminates all owner propr. leases
6. does your Coop have one

rb345, we do have an underlying mortgage of approximately $335k (pro rata $30k-$60k per unit) that was refinanced last year. We had shareholders refinance both before and after the new mortgage. Value of the whole building is probably $5.5 - 6 million.

It's true that one non-paying shareholder would wreak havoc on the budget, as small buildings tend to run things pretty tight, but I can't imagine the other shareholders allowing the entire building to go into foreclosure. Maintenance on each unit is $750 - $1,500. We have existing reserves that could fund the largest two units skipping out entirely on maintenance for two years, and if it came down it, the five remaining units could make up a $3,000/month shortfall until the units were foreclosed.

It just seems like it would take some kind of very crazy event for the underlying mortgage to fall into foreclosure, assuming you have all owner-occupied units that were purchased with at least 20% down. But, to your point, even one sponsor unit (esp. if rent controlled and/or deficient on maintenance) can be a big red flag in a building this small.

lad:

1. the risk of underlying mortgage foreclosure would appear to be very real
in at least some small Coops, especially 4-5 unit ones.

2. your Coop sounds particularfy solvent, so that may be why its shareholders
can borrow without penalties or premiums

3. in addition, if unit prices are very high relative to monthly maintenance,,
say 500:1 or higher, as they are in much of Brownstone Brooklyn, lenders may
be counting on individual unit lenders to step in and pay the maintenance of
defaulting shareholders in order to protect their liens on the stock certi-
ficates and leases of their unit borrowers

4. another question: when your Coop re-fied, were its individual owners asked by
the new lender to provide financial information about themselves

rb345:

1. I believe that building financing is even harder to obtain for 4-5 unit co-ops, so they may not have underying mortgages.

2. Our co-op actually went through a period where reserves were as low as $13k (1.5 months of operating expenses), and it did not impact financing. (The current solvency came from two one-time 13th month assessments to rebuild some reserves, borrowing some additional money at the mortgage refinance, and the sale of roof rights). The buyer who purchased at the time the reserves were $13k was advised by her lawyer to "run," but she did not because the unit was reasonably priced and the building accepts guarantors.

3. Very possible, don't know.

4. Our co-op refinanced with the same lender (NCB, which is the only reasonable game in town for small buildings). The individual owners were not asked to provide any financial information.

lad:

1. two things you should look into
2. converting to condo: can be done by sending Attorney General change in status letter
3. paying off underlying mortgage and filing condo plans with dept of buildings
4. converting into a Tenancy-in-Common structure
5. I dont know if you can do it: in San Francisco a lot of 2-4s went TIC
6. it is substantively a corporate condominium: TIC shares trade like deeds, and owners
are taxed like partners

Thank you again for your help