Coop 101/Building Mortgage

In a webinar some co-op accountants (http://www.czarbeer.com/webinars.html) did, they gave a metric they use when giving financials the first quick once-over. IIRC anything over $50K per apartment is worrisome, assuming a building that's in Manhattan, otherwise typical, and some other caveats.

i would think that you can't do $50K per apartment. there are plenty of buildings that are "heavy" on studio side, so that number needs to be adjusted. the same adjustment needs to be made the other way if there are mostly classic 6/7s.

NWT good link, thanks.

Not sure how it applies to "micro" buildings.

My building of 1 and 1 1/2 bedroom units has pro rata underlying debt of up to $63k per apartment. Haven't run into any issues (and the mortgage company was trying to get us to borrow more).

Right, it wouldn't. The assumed/typical/ordinary building they referred to wouldn't be small, or very large, or all studios, or with very high or low sales prices per apartment. Just the usual co-op.

The underlying-mortgage-per-average-apartment is just one metric they use, and not in isolation. It could represent a small/NBD/huge LTV, depending on the building.

Is there a motivation to pay down a building mortgage or is it always interest rate only?

They're not always interest-only, but the ones I see tend to be.

What seems to happen is that when shareholders balance their share of mortgage principal against their share of what it'd cost to pay it off, they emphasize the latter.

E.g., my share of my co-op's mortgage is $19,500, which is a trivial loan-to-value.

That mortgage (7%, 15 years, due 2013) is $113 of my maintenance. Having it fully-amortizing over the 15 years would've been $187 of my maintenance. Big deal. But 15 years ago, if the board had said "Our maintenance will be $74 more, to pay the mortgage off" the shareholders would've been hysterical.

That $74 is somehow seen as real money, while the $19,500 isn't. Or maybe paying $74 extra per month now so that shareholders 15 years later could pay $187 less, didn't appeal.

Fortunately, as with most co-ops, it doesn't matter much one way or the other.

forgive me if this is covered in the webinar, which I haven't yet watched, but I would think you'd want to take the building's location into account as well.

A mortgage is a lien against property. Property consists of a building -- which over time runs through its usable life, and land, which *never* depreciates.

While the value of NYC land is surprisingly consistent over time, I would still argue that a plot of land on Fifth Avenue is generally going to worth more than a plot of land on First, and if I were comparing buying into those two locations, I would look at not just my share of the underlying mortgage but also my share of the underlying land asset.

ali r.
DG Neary Realty

They didn't get into valuation at all; just some benchmarks when looking at financials, and location would be one of the many variables to keep in mind.

E.g., if 998 Fifth hadn't had a doctor's office to sell in order to pay for their $6,000,000 in facade work, they'd could've borrowed instead. That $333,000 per unit wouldn't matter much whether as debt or as an upcoming assessment. In another building that much per unit could represent the whole value, and you'd have that urban legend where an apartment was given away to anyone who could pay the maintenance.

By the same token, another metric is cash per unit. For a not-unusual co-op, they like to see $2K as a minimum, $5K as healthy, and $10K as extraordinary. Those would all shift with the context.

I misremembered the $50K benchmark. They said $35K-$40K in Manhattan and $25K-$35K outside. Another CPA might see it differently.

Very short-sighted. If you have an interest-only mortgage and keep it that way through a few maturity dates, your 6% rate will mean you pay the entirety of the principal amount in interest over 17 years and still have the principal left.

I agree. Over 15 years we'll have paid $1,312,500 in interest. When we re-fi the $1,250,000 next year, the rate will be maybe 5%, but maybe for only five years, and no telling what it'll be in 2018.

In 1998, $187K for amortizing versus $113 for interest-only was seen as much more significant than the prospect of being debt-free in 2013.

I'd rather be assessed the $19,500 next year and just be done with it, rather than re-fi, but that won't fly.

Oops, $187, not $187K, for monthly interest on my $19.5K.

I do underlying co-op mortgages and I have a bank with a fixed rate mortgage. Something to seriously consider in view of the fact that interest rates can skyrocket.

Ellen Silverman
E.S. Funding Co.
Mortgage Broker
www.esfunding.instantlender.com

I'm also of the camp who would prefer to just be assessed for my share of the underlying mortgage and be done with it. However, my neighbors take the (likely correct) view that buyers don't value the impact of high vs. low maintenance properly, and as such, they won't recoup that value when they sell. As such, the can gets kicked.

Hmm, lots of as suches there.

But succinct.

I got appraised last year. If the maintenance had been that $74 more, the appraiser would've reduced the apartment's so-called value by only $1850. A buyer probably wouldn't see it that way.

monthlies have a significant effect on valuations and the ability to sell. It can function as a barrier to a sale. When I see a place with a cc of $2860 maybe I'll take a look. After 3 grand it gives me reason to pause. In reality it's a psychological effect but at the same time, a real deterrent.

NWT/Falco et al.: what do you think of this situation? I know of a co-op with very high/sqft mtce - around $3/sqft. But it's nearing the end of its current mtge term (with aggressive principal payments) at over 8%. It's due for a refi next year. So by my calculations, mtce will be halved next year. But the market does not take this into consideration, as far as I can tell, when I look at apartment comps. Is this an opportunity for a buyer in this building? I am not in the market, but I'm wondering if I should point some friends in this direction (yes, they want to buy blablabla rent v. buy arguments all known).

I murdered a man. Just sheared his head clean off. In know legal or illegal yada yada yada. Is it moral to steal his wallet?

apeicide

The real question, would it be wrong to use his comb?
Everyone knows you take the wallet.

10023
I would seem like very interesting information but the seller must know and be pricing it in.

W67: by saying murder, you're implying that it's illegal. If you've just killed him, it depends. Guillotine by accident <> murder. If his wallet fell out of his pants, and you have it with every intention of not keeping it, yeah it's legal. Morals, don't ask me.

Falco: don't see it in prices, yet. Haven't done much that much sniffing.

falcongold1:

1. in the early 1990's I used $50,000/unit as a dividing line
2. but underlying debt is in substance a form of leverage
3. saves coop buyers cash
4. today, with coop unit values being what they are
5. I would be flexible even at $100,000 to $500,000/unit
6. and evaluate each deal on its own terms
7. for example, at 301 East 63rd, which recently bought out its land lease
8. underlying debt/unit will of necessity be very high
9. but unit costs are reciprocally very low

nyc10023: Hello, are you referring to a co-op building at the edge of the UWS? I'm only asking because you have previously provided valuable "insider" information, which I appreciate. I'm pretty clueless with real estate, but I'm wondering if I can help at all..

rb345, exactly. In the 1980s some developers used that as a strategy, making a new building co-op rather than condo, so as to market at an up-front price advantage.

E.g., http://streeteasy.com/nyc/building/525-east-80-street-new_york was first planned as a co-op, ~$16M equity and a $10M underlying mortgage. The developer (Rose, I think) ended up going condo. It's a tough balance, pulling buyers in with a lower price while pushing away with the higher maintenance.

Leecube: yes, didn't you end up buying there? Is what I am saying accurate? Also, the interest rate on the bldg mtge should be reduced with refi next year.

We just went through this routine at our building's shareholders meeting. There were two camps.

One viewed debt/interest/etc as bad and felt the building should pay off its mortgage. This seems to be the view expressed above.

The other viewed the building mortgage as cheap leverage -- first, because it's tax deductible; second, because the transaction costs of obtaining it are low (as compared to every unit owner taking out a $10K mortgage).

I'm obviously in the second camp. The argument that "it only costs you x/month more to pay off the loan" is an argument that co-op owners should invest their savings in paying down the building mortgage, that costs something like 2% a year after the tax deduction, instead of investing their savings elsewhere. I don't get it; the argument seems emotionally based to me.

In any event, since inflation is usually positive, you can rest assured that most likely the building's LTV and its real debt load will be lower when the mortgage matures, assuming the building doesn't borrow more. I personally think buildings should target a constant LTV over time, which suggests that over the last 10 years they should have been borrowing like there's no tomorrow.

Coop mortgages cost more than individual mortgage as they are considered commercial loans. Currently 1 percent more than individual mortgage taking away the cost disadvantage of multiple loans. In addition, the additional mortgage needed by individual owners can be combined with refi or may not be needed at all.

Regarding mucuk's post,

1) Maybe every unit owner would not take a 10k mortgage if they had to pay for a prospective 10k in sudden costs- they have no choice in the example of an existing mortgage.

2) 2% cost a year after deduction are the costs right now- very few such loans are true long-term fixed rates - most reset or mature, forcing refinancing at higher rates. Not everyone has income to deduct and realize the tax savings.

3) Keeping LTV constant makes sense in corporate finance when the entity has routine wherewithal (cash flow) to service increasing nominal debt and shareholder financing does not matter. Neither is true here. Over a couple of market cycles, the cost of leverage even after tax benefit will be far more than inflation, which destroys value in a corporate entity that throws off no cash.

>Regarding mucuk's post,

I thought if you use that word then you lose your position in the U.S. Senate. and any possibility to run for president.

http://www.youtube.com/watch?v=9G7gq7GQ71c

Look, ya gotta admit it's a pretty thin argument, and mostly based on feelings.

I imagine that there are some non-taxpayers in Manhattan co-ops but I'd assume it's less than 47%. Meanwhile I'd bet it's exactly those guys who would prefer that you not raise the maint to pay down principal. For either group, if they don't like the debt, they can hedge it away by buying bonds and harvest the tax differential.

The argument that, for a medium sized co-op, it'd be cheaper for everyone to borrow $10k than for the building to borrow $1m doesn't really make much sense.

The rest of the arguments are reasons why debt is bad.

Anyhoo, it doesn't really matter - one can easily adjust the value of a co-op for the underlying leverage by referring to the financial statements during due diligence. But having an IO mortgage doesn't come across to me as board malpractice or a sign of a bad building.

My co-op just re-fi'd its mortgage. Four months ago, up above, I guessed we'd be paying 5% now, down from 7% for the last 15 years.

We ended up getting 3.4%, 10 years, interest-only, and borrowed another $250K for a total $1.5M.

So, $51K in interest per year instead of $87K. The $36K difference will go into reserves. That way we won't get spoiled with lower maintenance and will have more of a cushion when we have to re-fi again in 2023 at whatever rate.

NWT: can i ask what bank you refi'd with? we are up at the end of this year and those terms seem decent..

New York Commercial Bank, http://www.newyorkcommercialbank.com

nwt, why you guys love to get spoiled with unlimited loans instead of paying it off and enjoy a lower maintenance ???

Agreed, it'd make more sense to pay it off over the ten years or even all at once, instead of doing interest-only. Closing costs every ten or 15 year add up to money down the drain.

It doesn't matter much overall, though. My share of the principal is $23,400, so interest-only is $66 of my maintenance versus $255 if we were paying it off.

Of course, the $66 is forever, and will jack up to much more in 2023, while the $255 would be for 10 years and done.

The reason behind the resistance to paying it off might be this: They figure they'll have sold during the ten years, and an extra $189 in maintenance would reduce the shares' value now by more than the $23,400 extra the shares would be worth in 10 years.

Despite being commercial loans, because Coops can borrow at extremely low
loan:value ratios, their financing should be cheaper than that of unit owners.

An underlying loan of under 20% of loan:value ratio is definitely safer than
buying bonds from an insolvent issuer, e.g., Illinois or California.