COOP mortgages

$26K as your share isn't much as these things go. That's what, a few million for the whole thing?

Many co-ops' underlying mortgages are interest-only. I'd even say most. Terms are shorter, too, so coming due in five years is no big deal.

Right, if comparing to a condo or another co-op, factor in the share of the mortgage. You could also throw in the share of the reserves, if big enough to bother with.

Thanks. I think 26K sounds steep. depending on what it sells for, it will be around 4 pct of the cost.

If it sounds steep to you, then it's steep.

We'd see numbers all over the place if we took a survey. When I bought, the underlying was 6% of the price. Now the underlying is 25% bigger, but the apartment's worth maybe 300% more, so about 2%.

It's a good sign that you're paying attention to that mortgage. Most people don't seem to, except to the extent it throws maintenance out of whack. You never see an ad saying "And your share of the co-op's mortgage is only $x!"

Rates in five years have to be significantly higher. Don't know what they were when the building took out their loan but it is another factor to consider.

Maybe. Ours was 8.18% from 1993-1998, then 7% from 1998-2013. Less than 8% will seem cheap.

NWT - I take your point, thanks. what do you consider to be a large coop mortgage?

Depends on the size of the building. Once the mortgage starts to increase the maintenance past what's considered normal for similar buildings, you could say it's too large. It should push the building's prices down in a corresponding way, but what seems to actually happen is that they're skewed either too much or not enough.

30yrs had a great analysis of this fairly recently, but can't find it now.

NWT: is post 11 here what you were referring to?
http://www.streeteasy.com/nyc/talk/discussion/13679-maintenance

Yes, thanks.

What happens in a worst case scenario if these short term non-amortizing mortgages can't get refinanced into new mortgages when they come due? The owners all have to pay up their fair share? and, what if all the owners can't? Do you risk losing your investment in your apartment in a co-op?

If the co-op can't refinance, then yes, the co-op has to use its cash plus assessments to pay it off. A shareholder who can't ante up would be in the same position of one who can't pay the maintenance: the co-op can force a sale, the proceeds of which would go first to pay off the arrears, then to the lender holding the shareholder's co-op loan, and anything left after that to the shareholder.

Same story in a condo that has to come up with a lot of cash. The condo can't borrow, so it has to assess the owners. Any who can't pay get a lien slapped on their unit. In the condo case, though, the unit-owner's lender has first dibs on the sale proceeds.

Forgot to say, that's why when considering buying a co-op, you need to look at your share of the underlying mortgage and be aware of the possibility (albeit remote) of having to cough it up. That's also one of the reasons why a co-op requires a buyer to have a given amount of liquid assets other than what they're paying for the place.

E.g., in the 1990's 740 Park had to pay for enormously expensive facade work. Rather than borrow the money, and pay all those fees, the co-op just assessed the shareholders. It averaged several hundred thousand bucks per apartment, but that was chump change for a shareholder in that building.

Thanks NWT. And, what's considered a reasonable share of the coop's mtg for a larger 1 bedrm? Also, if a bldg has a very low reserve acct (100-500K) for a 200 unit bldg but has a 1MM line of credit should this be a concern?

Too many factors to say what's reasonable, and we all have different discomfort thresholds. One way to look at it, though, is the effect on maintenance.

Let's ignore the $1M line of credit. That's for emergencies, and even if the co-op draws on it, it's diddley-squat in a 200-unit building.

If the co-op has a $5M mortgage at 7%, and if your apartment has the average number of shares in the co-op, then your share of the mortgage interest would be $1750 per year. That's $145 more maintenance per month than the same apartment in a co-op without a mortgage. No big deal. Your apartment's $25K share of the mortgage would be reflected to some extent in what you paid for it and in what you can sell it for.

Point is, there're very few co-ops with mortgages big enough, pro-rata, to be a real concern. Most converted at least 20 years ago, and what might have been a big mortgage then isn't now. One reason for a big mortgage now might be a co-op that converted under a ground lease but then later bought the ground. But again, the pro-rata share is reflected in the maintenance and in the price you pay. You can even get a deal because the extremely-high maintenance drives prices down even more than is justified by the share of mortgage. E.g., you can be paying $500 per month in co-op mortgage interest, but save more than that on your own mortgage.

I love this. Here's another scenario. It's 1985 and you're inherited two identical vacant five-story rowhouses, next door to one another. Each one has a $500K mortgage. You don't want to be a landlord. A quick look at the market tells you they're worth more when sold as co-ops or condos than if sold as rental property or single-family. One of the mortgages is assumable and has a prepayment penalty, and the other one hasn't, so you decide to co-op one house and condo the other. Conversion expenses are the same either way, so we'll ignore them.

You sell the co-op's ten apartments for $100K apiece and walk away with $1M. The co-op assumes the mortgage, at $50K per apartment.

You sell the condo's ten apartments for $150K apiece, pay off the $500K mortgage, and walk away with the same $1M as for the co-op. You're now out of the picture.

It costs $5K per month to run each building and pay RE taxes.

The condo has no underlying mortgage, so each of the 10 owners pays $500 per month.

The co-op has the underlying mortgage, so each of the 10 owners pays $800 per month.

In theory, then, it's a wash. The condo owners had to borrow an extra $50K to buy, so each pays an extra $300 per month to their bank. The co-op shareholders paid $50K less, nominally, but each is also on the hook for that $50K and is paying the same $300 interest per month.

In reality, of course, the condo premium might've been more or less than that $50K. I picked 1985 as the year because sponsors were doing both co-ops and condos then, before the market and arcane tax issues swung to condos being most favorable to sponsors.

This is all very interesting and something I haven't considered while looking at coops. We are very interested in a one BR coop in Park Slope. The building has 58 (11 sponsor owned) units - roughly half one BR, the other half two. The underlying mortgage is $1,576,000 - balloon, due 2013. The reserve fund is $260,000. Current maintenance on the one BR = $960 / 40 % deductible. Any thoughts?

the outstanding mortgage seems high for a 58 unit building unless the smallest units are 800 sq ft and largest 1200 sq ft or so. the maintenance is high, but tax deductability is low. does this building have 24/7 doorman, live-in super, 7 day a week porter service and a handyman? if not, something's fishy going on.

SJT- you should see if they are working on refinancing the building? does the building have a line of credit? if not they should consider this when refinancing (i' m not sure they may face some issues when refinancing because of the number of sponsor owned units. lending requirements have changed not sure what it is for the actual co-op corp.

The mortgage pattern since it went co-op in 1981 looks pretty standard. Unusually, the co-op is paying down a bit of principal every month, which takes some discipline. They refinanced $1.2M in 2003 at 5.145%, then borrowed another $500K in 2006, probably for some major work.

Some of the recent sales have been by the co-op itself, so it may have had a defaulting sponsor at some point, leaving it with the sponsor's shares, and has been selling off the apartments as tenants vacate. That'll be detailed in the financials.

Thanks for the info. The units are fairly equivalent throughout - the one BR are in the 650 - 700 sq ft range, the 2 BR are 1100-1200 sg ft. Part time door man. Live in super. Bike and air conditioner storage in basement (no extra charge). No other "extras". Prices in the last year - mid - high 400K for 1 BR, low 600K for 2 BR. Maintenance about $950 / $1200 respectively. No assessments. Roof currently being repaired. Exclusions are listed as "?".

sjtmd, here's your scenario:

Purchase $450K
Mortgage 5.25% 30 Yr fixed
Maintenance $960 with 40% tax deductable
Income Tax Bracket 28%

you will be paying $2950 per month before tax benefit and $2400-$2420 after.

if you're looking to stay for 5+ years, what would a similar unit rent for? if less than $2K, i wouldn't touch it?
if you're planning to stay for less than, or just about 5 years, then you have to look at rentals around $2200 for similar unit.

because the roof is currently being repaired, i would look into the board minutes to see if there will be an assessment for that. some buildings didn't do their Local Law 11 on time, brick repointing, and are doing it now. is this building in the same situation? if yes, there will either be a maintenance increase or a large assessment.

when was the last time the maintenance was increased? if more than 3 yrs ago, consider that the maintenance will go up at least 7% in the next year or so and apply that to the calculation.

as far as the maintenance, it seems a little high given that there is no full time doorman and does not seem to be a large staff involved.

i have a related question:
what is the effect of a co-op's underlying mortgage on obtaining a mortgage for one of its units?
i am interested in a single unit in a 4 unit co-op that has 60K left on its mortgage and little to no reserves. will this decrease my chances of being able to get my own mortgage? and if so, why?