Why does a co-op maintain its mortgage? (et al.)

Firstly, nearly all co-op building loans are balloon loans, meaning that they are 5, 7, 10, or 15 year loans amortized like 30-year loans. E.g., the co-op takes out a 10-year million-dollar balloon loan. Ten years from now, $850,000 is due to the mortgage company, at which point the co-op either pays the balance due or refinances into a new mortgage. Almost all building mortgage refinances you hear about are of this type. Most of the time, assessing everyone to pay the balance of the mortgage payable at the end of the balloon loan is not practical/feasible.

For larger buildings, a reasonable amount of tax-deductible debt at low-interest rates can help significantly with cash flow, with keeping maintenance reasonable, and with maintaining healthy reserves. Maintaining a mortgage is generally cheaper than a line of credit arrangement.

In smaller buildings, debt can be crippling and very hard to escape. There are few lenders who do sub-$500k loans, and each refinance can cost $30,000 or more in fees. That's a lot to divide among a small number of units. The interest rates are also not great - around 6 - 7% right now. And, as mentioned above, the pool of financial products is limited to loan periods of usually no more than 10 or max 15 years for a smaller buildings. In a smaller building, coming up with the cash to pay down debt often means raising maintenance to a point where apartments would be nearly unsellable. So the debt revolves not so much out of preference but out of necessity.

In general, a co-op with plans to pay off its underlying mortgage is a good thing. How much relief will be felt obviously depends on the size of the mortgage.

I know you're looking to buy in the low-end of the market, but please please please please be careful of buying a low-priced unit with high maintenance that is the result of oppressive underlying debt. Chances are that without highly unusual circumstances, the maintenance is unlikely to go down and very likely to go up.

Lad, thank you for your insights. I don't expect to find a co-op that either has or intends to pay down its mortgage. I was just wondering what the feasibility of it was, and if it should at all factor into my decision. What I take away from your analysis is that it would indeed be a fine thing to find a debt free building, but that it's rare, and not likely to happen if the number of units is small, nor necessarily in my best interest. But is it never in the building's interest to refinance to structure where payment is a steadily moving gradation of interest vs. principle as for individuals?

I'm still trying to figure out the typical co-op "mentality," if there is one. Obviously these people tend to be more conscious of collective financial obligations out of necessity, but is it just a few people on the board who do the research and give a brief periodical summary of their recommendations for a nominal shareholder approval vote, or do people often challenge these things? I'm curious though about how often defaults happen, which is my major impetus in asking, and what signs to look out for aside from a high monthly. Is there a general rule or ratio of cost:maintenance to aim for?

Don't get me wrong - I'm not looking to move into a building and question fundamental assumptions at board meetings that will rile people up - I just want to be more clear about what is and is not typically expected for a co-op, and what certain signs mean, because the purchase is my first and I can make an informed decision and avoid potential corrupt or reckless cooperatives. One can read a hundred articles comparing the advantages, but it isn't quite the same on paper as when one is actually living it, and I welcome the experienced feedback.

Thanks again.

Having a co-op mortgage is one of the major differences between co-ops and condos (as well as amongst co-ops, which have varying amounts of debt load). As a quick background, many co-ops have building mortgages because they used mortgages at the time of being converted to finance the conversion back in the 70s and 80s. Most of them have effectively rolled their mortgages as they've come to maturity because it is always hard to get the shareholders to agree to make a big one-off payment. Plus there are other tangible benefits e.g. tax deductions etc.

Another difference to watch out for is that some co-ops (including mine) own commercial units and get a steady stream of income. This obviously provides an offset against the financial expenses.

It is really important to review the financials of a co-op. It is not just enough to look at the historical common charges and simply assume it will continue at the same rate because those are driven by the underlying financials of the co-op. The way I factored in the co-op mortgage was to take my share of the co-op and multiply it by the principal amount and added this number to my cost base. This helped normalize it with condos and co-ops that do not have mortgages.

So just to take some illustrative numbers, say you've agreed to purchase a 1,000 sf co-op for $1M. The co-op has a $10M mortgage on it and you are 1 of 100 identical units. Your share of the co-op mortgage liability is $100,000 so you can add that to the purchase price and that will help you better compare with a condo that does not have a mortgage. There are obviously other facets of the co-op vs. condo differences that can explain costs, but this is a fairly simple way to normalize this factor quite accurately and quickly.

for most coops, simple is that, they want to hold on to a mortgage forever. in fact, the more money an entity owes, the better not to pay it off. one obvious example is the US government

more coops won't be able to pay off their mortgages no matter what, so it's natural to keep a mortgage floating forever. and if worst comes worst, the city will bail them out. in ny history, there were only handful of coops went bankrupt, and that was too long ago and may not let happen again