Co-op underlying mortgage

If you are a shareholder or doing due diligence, just ask the managing agent. Real Estate Taxes and union employee salaries are typically a bigger factor for maintenance increases.

Or look in the Annual Financial Statement. One of the notes should clearly outline all that info on the mortgage. The majority of Coops have either interest only or "5 like 30" which need to be refinanced every 5 years so if rates go up they can't just "stick with what they've got". In addition, a lot of Coops have been refinancing their mortgages as rates have been going down, each time borrowing as much money as they can with a roughly equivalent monthly payment. This will bite them in the ass as rates climb.

Underlying mortgages tend to be, pro-rata, not a very big deal. I am currently working with an UWS 2-BR buyer, and ... at the three buildings I've gone through the financials of, the target 2-BR's share of the underlying mortgage has been $45K, $58K and $75K, depending on the building. That's not a lot of debt in the context of a $1.5mm-$2mm purchase.

To put it another way, if the 5/1 ARM rate of $75K jumps from 5% to 10%, you'd be paying an additional $250 per month -- which is an 8% increase if the underlying maintenance is, say $3K a month, and a 10% increase if the underlying maintenance is $2500 a month. In a world where rising property taxes are driving 4-5% annual maintenance increases, an 8-10% jump over whatever timeframe you think it would take the 5/1 rate to double to 10% isn't a deal breaker. More likely if we start living in a world where interest rates double, you'll have other things to worry about.

ali r.
{upstairs realty}

I absolutely don't disagree with that logic, however if you have a Coop where the maintenance is on the high side now (most likely due to a high underlying mortgage to begin with) and you have interest rates double as well as property taxes increasing at the same rate they have been, when the market crashes these buildings will go from a tough sell to an "impossible to sell."
A couple of examples from the early 1990s:
1) There was a duplex at 61 West 62nd St made from two 2br/2 ba units combined which couldn't get an opening bid of $150,000 twice at 2 separate auctions. (Most recent similar sale was >$5 million)
2) There was a 2 BR penthouse at 372 5th Ave which was being offered for $1 plus half the profit on the future sale - no one be pulled the trigger.(Most recent similar sale $2 million)
Of course one of the reasons the pro rata share is low now is because prices have skyrocketed. When prices fall, the pro rata share goes up even if absolutely nothing else changes. If we see a large increase in mortgage rates (which I think we will), a large decrease in prices (which I think we will), and even just a moderate increase in the rate of increase in maintenance increases (like you say 8-10% rather than 4-5%), then I think there will be more than a few Coops where units will become unmarketable. I also think media stories about these units will make for a drag on the entire market.

I don't disagree that a building having a large underlying mortgage can be a drag -- I'm thinking of 3 Hanover ten years ago -- but it seems to me that, at least in the markets I work in, that buildings that have scary high maintenance now tend to do so because they're boutique buildings, and you just don't have that many shareholders to shoulder the costs of the full staff. Buyers in those buildings tend to know what they're getting into, and to earn at a rate that they have some margin to cover the increased interest rate problem.

Don't get me wrong, if rates go up from 5% to say, 8%, there's gonna be pain, but it's going to be because financing the purchases is more expensive, and that takes out part of the buyer pool, not because the rich people who have historically been okay with maintenances far above the usual suddenly worry about their building's underlying mortgages. If there's a direct threat to those people's employment or portfolios -- a financial shock along the lines of the Great Recession -- then yes, they'll head for the exits. But they'll do that in buildings with small underlying mortgages too. If the hurricane comes, having shopped carefully for a pretty good umbrella won't really have helped.

There are 2 kinds of buildings with high maintenance - the "high service" buildings which used to be Park Ave/5th Ave/CPW and are now the boutique buildings everywhere, and then there are the over leveraged. There are more than a few buildings in the second category, which have relatively or absolutely high maintenance and little to no services to show for it. Those buildings have little attraction to "rich people wanting boutique services" and over the past decade or so we have seen people buying into them because there was just enough of a discount to allow them to buy in with a lower down payment and a prayer of increased income in future years. Examples are 250 Mercer St, 77 Bleecker St, 148 West 23rd St, 55 Liberty St... I could go on and on.
These are all buildings where owners have had extreme problems selling at any price before, and whereas owners will have issues in low maintenance buildings as well there is a difference between having to take a 40% haircut off the most you ever could have sold for and not being able to sell period (especially if you are in the position of needing to sell because of some life event and you can still sell at a profit - just at a greatly reduced one vs having to walk away entirely).

You can see the original size and date in ACRIS by selecting "Mortgages and Instruments" under Select Document Class. The real sin of mortgages is coops don't like to pay them off, thinking they benefit future shareholders at the expense of existing ones- problem is that if you dont pay them off (like with operating surpluses), the interest adds up and over a generation you pay for the principal in interest and still have the principal remaining.

To put it another way, if the market drops 40% because each and every apartment drops 40% in value it's one (highly unlikely) thing. But if the market "drops 40%" because some units drop 20%, some units drop 40%, some units drop 60% and some units drop 80% (much more likely) which units drop which percentage and the reasons why are going to be significant and I'm willing to bet having maintenance outside of the expected range based on what type of property it is will be one if them.

I think current shareholders would be more receptive to paying down underlying mortgages if the market properly accounted for them. I would imagine only a small fraction of co-op buyers know their pro rata share of the underlying mortgage. Since people take the view that "$50k is inconsequential in a $2MM purchase" there's no incentive to do anything about that $50k, and instead boards choose to kick the can indefinitely.

I don't think most shareholders, or even board members, are aware of how much it costs to refinance an underlying mortgage either. It's not your typical residential loan -- the fees are substantial. Moreover, it's a fairly niche product, so the lack of competition doesn't work in the building's advantage either.

As a fan of transparency, I wish StreetEasy co-op listings would include the pro rata share of the underlying mortgage, but obviously that would go over like a lead balloon and will never happen.

Yep ive never understood why this isn't reflected in the price more often. Eg our building at 135 Henry St, Brooklyn Heights has NO underlying mortgage and the current owners have always maintained we like it that way.

Unfortunately city taxes.....that's another problem and seem to be getting out of hand in that they now equate to 50% of our annual budget for running our 6 apartment building.......

The vast majority of buyers have little to no idea of how to adjust prices for abnormally high or low maintenance payments. To some, they let their bank figure out how it affects the size of their mortgage.

I would think that below-market maintenance payments have less an impact on price and therefore do not get enough credit. Above-market maintenance is probably over-weighted as a factor as it is a bigger concern to most buyers as it potentially impacts the size of a purchase mortgage and implies poor management especially if it is due to an abnormally large underlying mortgage. You could adjust your value estimate to account for the pro rata share of the underlying mortgage or you might take the difference in maintenance payments and capitalize it to make a value adjustment. But that's not how most market participants look at it.

Safest method is to only consider buildings with reasonable debt levels, no extraordinary events to be foreseen, and monthly maintenance payments that are in a narrow range to market averages. Anything other than that seems risky as most buyers are not savvy enough to avoid overpaying.

There was a conversation in my office recently about the future viability of Coops all together. I was surprised to hear someone say that there are brokers who are no longer showing Coops to buyers at all. 30 years ago when the market was 95% Coops you had no choice, and if someone wanted a condominium and that was pretty much the only variable they could make a choice on and had to pick from whatever three Condominiums were available in the area they were looking in. But today, with 50% of the market being Condos, things have changed. And while I don't think coops are going to disappear anytime soon, I do think we may see a widening gap in prices. One of the reasons we saw Coop conversions for so long was financing - Banks knew and understood cooperative ownership and we're willing to finance it, but Condominiums were a newer thing. If anything were to happen where Banks were to retrench on giving loans on coops but still make it easy to get condominium loans it could represent the death knell for prices of Coop units.
So where am I going with all this and what does it have to do with underlying mortgages? Well, firstly, as the market retracts units in buildings with "too high" maintenance tend to get hit harder price wise. Secondly, banks have used a "pro rata share" calculation in the past as an underwriting criterion, where they compare the unit's pro rata share of the building's underlying mortgage to the sales price and if it is higher than X% they will deny the loan. The irony of this is that the better deal you get on a unit, the less likely you are to be approved for a mortgage.
My point is if prices in general fall significantly (which I think they are going to), and prices in high maintenance/high underlying mortgage buildings fall even further (which I think they're going to), and both buyers and Banks start shying away from these buildings in a large way (which I think they're going to), it could make sales in such buildings close to disappear. Of courseif that happens it will also drive prices down to next to nothing. Sales will be closer to what we used to see in "fixture fee sales" of rental lofts under the Loft Law than Real Estate transactions.

Remember when banks charged a higher interest rate for coop units over condos? And banks outside of NYC would not do coop unit financing at all. I do not see the number of coop conversions increasing but nor do I see them decreasing much. The biggest problem with coops is that conversion to e.g. condo is 1) near impossible due to needing to pay off the underlying mortgage and 2) existing lien holders would not give their approval. So once a coop, always a coop it seems.

Years ago, the risk in coop financing was at least partially due to the lack of recorded liens and the uncertainty of what could happen in the event of any defaults by the coop corporation. The courts seem to have cleared up a few of these issues so the risk of e.g. forced conversion to rental seems low.

Traditional luxury pre-war coops e.g. Fifth and Park Aves, will survive but rich people seem less and less interested in living in bubbles so who knows how New Yorkers will live 50 years from now. Few things in life last forever.

And if the gap in monthly carrying costs gets worse - e.g. interest rates spike resulting in significantly higher underlying mortgage payments - many marginal coops projects may will suffer greatly. Coops already suffer in comparison to condos in many ways to many buyers.

I am only aware of one Coop which converted to a condominium - 30 West 90th St. They did it pretty much for the reasons I stated above making sales impossible. After that there seemed to be tons of interest in other buildings doing it but as far as I know no one else actually pulled the trigger.
https://cooperator.com/article/co-op-to-condo-conversion/full
I would be willing to bet is that it is a large enough undertaking that a coop would really have to be in trouble to want to engage in it. However, if in the next downturn things get bad enough that co-ops become unsellable I think you will see talk of it happening again and maybe people will actually start pulling the trigger on it - out of necessity. And as I said before I think a lot of it will have to do with banks willingness or unwillingness to finance Coop shares.
Also as I mentioned before is that if interest rates do spike significantly I think that there will be more than a few coops which find themselves in trouble because as interest rates came down they decided to take out larger and larger underlying mortgages rather than raise maintenance or do assessments because they thought it was "free money" and had their managing agents and attorneys encouraging them to refinance so they could collect fees.

Survey question: At what point would you consider a coop "overleveraged?" e.g., LTV greater than 10%? Or do you not pay attention to overall LTV for the coop and just look at the apartment's pro-rata share of the mortgage in relation to the price of the apartment?

Post script to that last post: I believe the coop's overall LTV will be different than the individual apartment's pro-rate share of mortgage as percentage of apartment price due to different valuation method for overall building. Coop's appear to be appraised using rental income approach rather than aggregate of all apartment sales, which makes sense, but my question is the extent to which anyone looks at overall LTV for the building. I think this is important and have my own preferences, but I am trying to get a sense of others' views on this issue or industry norms.

I think you're equating "assessed value" for property tax calculation purposes with market value -- as evidenced by the public debates over the topic recently, that's an assumption fraught with risk.

I think applying the pro rata share to your apartment's market value (based on sales comps, etc. or whatever you think reflects the proceeds you'd get on selling the unit to an arms-length 3rd party) is the most sensible thing to do. The reason being, imagine the Co-Op Board decided to pay off the mortgage entirely and billed each shareholder an assessment to do so -- what $ amount would you be on the hook for? Well, it's your pro rata share of the mortgage.

Thanks ToRenoOrNotToReno - That is the way I had been looking at it until I actually read the appraisal for the underlying mortgage for our building. I continue to learn enormous amounts in new role as an active manager of our building, and here is why I ask the question:

I had been wondering if the sum total of our building might be higher than an aggregation of its individual apartments (30yrs had planted that very good question in my mind a few months ago) for a variety of reasons. The appraisal gives both numbers (FMV of the entire entity based on perceived best use as well as "Sell Out Value" based on aggregation of individual sale price of each apartment as can best be estimated at that particular moment in time. Imagine my horror (but not surprise) to learn that the FMV is drastically lower than the "Sell Out Price."

We are currently at an overall LTV of 9% on the FMV of our building and we are having a debate as to whether to do an assessment to pay off the mortgage. There is a great divide in our building.

Some (and unfortunately some strong voices on the board who are holdovers from last year's coup - we weren't able to turn over all of the seats) prefer "to live off of other people's money" and argue that the trajectory of the building is sustainable as it always has been - "You overestimate the intelligence of buyers. Besides, rich people love this building!!" I will call that contingent the "Other Peoples' Money Contingent" or "OPM."

Others in the building prefer to pay for their lifestyle as they live it with money they already have (I'll call that contingent the "Pay As You Go Contingent" or "PAYG." They believe that buyers are smarter than that, and that our building will not be able to compete with larger buildings if we continue the path we have been on (interest only mortgage proceeds entirely spent within one year, and now there is pressure to dip into the LOC as the building is essentially living "paycheck to paycheck").

OPM Contingent: "But everybody's doing it; buyers have no choice if they want a building like this."

PAYG Contingent: "Um, have you noticed that the market for 'a building like this' is dying?"

I am looking for some publication that I can give to board members and shareholders at large to educate them (and myself) on this topic so that we can make an informed choice. Any assistance would be much appreciated.

If you've gotten this far, thanks for reading even if you have no insight!

P.S. - In the case of our building, the bank determined that building in its current incarnation is in its best use and thus used "rental building" to determine FMV because the building is a coop (rental building owned and managed by its renters).

And one more thing: We are currently at LTV of 9% with bank's stated maximum LTV of 30%.

OPM Contingent: "We can still borrow so much more! Yippee!! No pressure here."

PAYG Contignent: "Please stop talking. I am having very mean thoughts that I am trying desperately not to say out loud."

@multicityresident, you are not alone. We recently sold our co-op, and purchased a condo. Our co-op's maintenance was unusually high, due to two particularly poor decisions made by prior Boards many years ago. To keep maintenance from going even higher, the recent and current Board always refinanced, with no pay-down; when the rates went down, they borrowed more each time, using the same thought process as you mentioned. And that doesn't include their Line of Credit! When I was on the Board, I was quite vocal about "living within our means", but was always outvoted. Once you get into that hole of continually borrowing more money, it is extremely difficult to get out of it. Especially in older pre-war co-ops, something ALWAYS needs a major fix or modernization, and it's pretty much always expensive (read: boilers and elevators). Don't get me started on pre-war leaks. PAYG is the adult in the room. OPM is the child that screams "I want that new boiler now, but I will NOT pay for it now!"

Among the reasons banks appraise low for underlying mortgages are 1) they realize that odds are each unit owner/shareholder is likely to pile multiples of their pro-rata share in debt on top through their "share loan" (i.e. the "mortgage" on their unit), and 2) even though their mortgage on the building is clearly senior debt, if anyone ever tried to foreclose on a Coop underlying the building would assuredly both declare bankruptcy and ask their government reps to help and there would be all sorts of pressure against the lender.

But at the same time they are willing to lend more than a Coop should really be borrowing because in the end they will always be in first position to get paid.

As far as convincing your building I think you will have a problem because the last time we had a real protracted down market was almost 30 years ago. Look further up in this thread for some examples of buildings which overleveraged and had issues back then.

The "people love this building" excuse sounds like owners in reality television shows like "Bar Rescue" or "Kitchen Nightmares" when the expert tells them their problems and they are in denial.

MCR,
Somehow when we changed systems my CRM lost your info.

Just sent an e-mail through!

An example of what happens when Coop Boards make bad decisions:
https://www.ny1.com/nyc/queens/news/2020/03/06/residents-at-nyc-s-first-racially-integrated-co-op-fear-foreclosure

Just saw @sharksandwich post above, likely delayed due to new poster policy and appreciate the moral support. Spot on re boiler, elevator and leaks in pre-war beauties.
@30yrs - The case you highlight is tragic. I wonder what the terms of the new mortgage are and whether the lender is salivating at the potential foreclosure that has likely just been postponed a bit.

In the event of a coop forclosure, doesn't everybody in the building become R stabilized?

@stache - Interesting question I have no idea, but if true, makes me wonder what bank would lend at this point in time to that particular coop? Hoping somebody (30yrs?) chimes in with an answer.

Back in the early 1990s when there were a substantial number of Coops it was a possibility for there was a lot of debate on that issue as far as I know no one ever came up with a definitive answer.

Reviving this thread for poster who asked about $8.5M mortgage. I have given up with our building. I know how to swim and have a good life boat so I am prepared for the worst, but will be delighted if the building stays afloat in its current incarnation (beautiful full-service boutique building with excellent staff in middling neighborhood - not exactly a "hot commodity.")

Sometimes you just have to put up with the cards dealt to your hand.

I am always good playing whatever cards I am dealt; I do worry about others who might not have understood the risks of the game they sat down to play (e.g., young families who buy into our building not understanding that price of relatively large apartment was very low for reasons beyond just the middling location), but I am slowly retreating from that mindset and adopting the "not my problem" mindset.

Yes, you can find out the underlying mortgage of a co-op building by requesting information from the co-op board or management company. They should be able to provide details such as the remaining balance, term, and rate of the loan, which can help you assess potential impacts on co-op maintenance due to changing interest rates.