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What happens at the end of the Co-op's mortgage?
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Hi,

Sorry if this a dumb question, but I'm currently looking to buy a unit in a building whose mortgage expires in June 2013. They have been paying down principal throughout the life of the mortgage, so there isn't a balloon payment or anything.

Does this mean that the co-op will be mortgage free in 2013, like a person would be, once they paid off their mortgage. I've never seen a co-op without a mortgage, so this sounds strange to me.

Thanks in advance for your help.

Correct, the co-op would be mortgage-free. They might get a credit line in the meantime, to finance any major expenses.

And like a person, they WANT to have a mortgage to take tax deductions. Additionally, if they haven't been saving a massive reserve fund along the way, they'll need to take another mortgage out to finance the many capital replacements that become needed more often than anyone would like. More additionally, they might like to lock in today's low interest rates, rather than wait until rates spike. So they'll like refinance.

One thing you might want to do is a get a copy of a recent independent engineering study (that the building should have done every 5 years). It will outline the estimated useful life of the major capital components of the building. The notes of the annual audited financial statement should also address that, but more superficially and less accurately.

So when in a coop listing you see "Building just paid off mortgage" like it's a good thing is that not necesarily the case?

Also does this affect how much of maintainence is tax deductible? I had sort of figured a portion of maintenance was tax deductive because it was essentially the underlying mortgage but if no mortgage does this mean 0% of maintainanec is tax deductible?

your % of property tax would still be deductible

Dominic: this is a very good thing. Your mtce will decrease by a sig. amount, and your co-op won't have to worry about increasing interest rates as much. If they need to, the co-op might get another loan in the future for capital projects/major repairs. Most co-ops do not pay off their mtges, and this can be a dangerous thing as major repairs become needed and interest rates rise.

@bernie, maintenance is essentially:

* Labor (doorman, porter, supers);
* Building upkeep (big repairs like roof and hallways, everyday stuff like changing lightbulbs in lobby);
* Underlying mortgage, and
* Property taxes.

#3 and #4 are deductible, and usually make maintenance work out to 50 -60% T.D. Without #3 as a factor, villager is right, #4 is still deductible, so it's probably in the range of 20-25% T.D.

I just placed clients in a UWS building that will have its underlying mortgage paid off in 2014; at that point, the building will have to decide whether to lower maintenance, or keep the maintenance as is and use the $$ to add a part-time doorman or a roof deck.

ali r.
DG Neary Realty

Right, it's a good sign when a co-op has the discipline and foresight to pay the mortgage down instead of just paying the interest and refinancing the principal over every ten years, and even adding to it for every major expense.

The co-op in question may not be paying all that much interest in these final years of the mortgage, anyway. By now it's mostly principal. If you ask to see the tax letters for the last several years, you'll see the mortgage-interest-per-share decreasing year by year. (While RE-taxes-per-share, of course, go up....)

And then co-ops are getting so old now, their mortgages are less and less of a factor. E.g., the deductible 54% of my maintenance is 80% RE taxes and only 20% mortgage interest.

In case I wasn't clear, I too think that it's a good thing to pay off the mortgage AND have money saved for capital projects ... the tax-deductibility isn't worth the trap of constant refinancing for higher % deductibile after several years.

But it's my impression that most coops, and cooperators, take the opposite view.

So, Dominic123, you're looking at a well-run building, and that's a good start ... now see what you can find out about their intention and ability to stay mortgage-free.

Lastly, I believe coops don't usually use assessments to fund projects, but that remains an option. I've heard that very high end coops, the ones that require all-cash purchases, also favor lump-sum assessments to fund capital projects.

alanhart, yes, it's just so easy to go interest-only and then, when refinance time rolls around, to figure "well, we're refinancing anyway, so let's throw on the $250K for the new boiler...."

My favorite assessment story was 740 Park, where they had major facade work a while back and just assessed each shareholder for the several hundred thousand bucks apiece. No biggie of them, though.

Great, thanks everyone for your responses. They have been very helpful.

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