Underlying Co-Op Debt/Mortgage

How long is the fixed rate and what is the rate? How much percentage increase in your maintenance if the interest rate is 2 percent higher? If it is less than 5 percent, it is a rounding error. At 10 percent, it starts to become tricky. How much the coop have in reserve fund as percentage of yearly budget including taxes? I would think it needs to have at least 25 percent with such a large mortgage.

Or for simpler math what is $150k as percentage of your purchase price? 2 percent of $150k, it is $250 per month. For a 2 bed room $1.5mm apt, it is a manageable increase in maintenance. For a studio share of $150k, run away.

With mortgage rates plummeting too many coops took the easy route and vastly increased their mortgages rather than levying assessments for capital projects. At some point between now and forever interest rates are going to increase by a relatively large amount and I would be willing to bet it will coincide with a problematic Real Estate market so over leveraged buildings will get a double whammy of increased maintenance charges at exactly the time when such increases will cause the most damage.

I second 30yrs point here; I tried to reason with our board to levy assessments rather than increase the mortgage for upcoming capital improvements. One board member explained that they feared that some of the elderly shareholders could not afford the assessments. I pointed out that these same elderly shareholders do not have mortgages on their apartments and could leverage their own shares if they needed cash to come up with necessary assessment rather than mortgaging all of our shares. The board member responded that they did not think that would be fair. Even worse, another board member spouse hinted at personal cash flow problems but walked that back when I reminded said spouse that board members have a duty to act in the best interest of the cooperative rather than their own best self-interest. I love our building and our board, but sometimes the business judgment of volunteer boards can be a bit maddening. Such are the joys of owning shares in a coop.

Indeed. We have the same situation. Otherwise, we would have just paid down the smallish mortgage we have and avoid refi fees which increase the effective interest rate. Problem is a few lower income people can not get more normal mortgage.

From a corporate governance perspective, those who can afford the assessments necessary to maintain their property should not be forced to subsidize those who cannot. Board is in tough position because its duty is to the cooperative and it should not be taking individual shareholder considerations into account in making financial decisions for the cooperative. Sure, nobody is likely to ever sue their coop board over this, but were I a coop board member, I would be very careful before making statements such as the one our board member made to me regarding taking out a mortgage on the building to accommodate those who cannot otherwise come up with the cash. Those of us who are upset regarding the mortgage increase have organized to take over the board in the upcoming election so this does not happen again.

As a post script, I know our board acted in good faith; they just did not think about it, which is why a number of us organized. I think it is tough to tell a shareholder who cannot come up with necessary cash that it might be time to sell/downsize, but I think that at times that is the right thing to do for the cooperative.

It gets compounded by third parties who advise the board to do things which inure to their own interests. Like attorneys who always take hard line stances even when they are contrary to both the law and the Coop's interest in order to drum up legal costs or managing agents who make fees on refinancing or other activities. We are seeing fees for "incidentals" like processing sublet and purchase applications skyrocket, as well as Coop's being charged project management fees on capital projects and then no actual project management being done. And most board members don't have a clue about running a building or are not even aware what fiduciary duty is.

mcr, Some wealthier members of our coop consider ensuring good neighborly relations a part of the board's job. People who wanted to pay down did not want to make too much noise either. Hence, our mortgage will continue. It is a very small percentage of maintenance (below 5%) as the taxes unfortunately continue to take larger and large part of the total maintenance.

300_mercer, yes, that is where we came out as well. As alluded to above, in reality nobody is every going to sue their coop board over the issue because who wants to be the ogre that goes into court and says the board breached its fiduciary duty by accommodating the elderly tenant in 3C?

It's a slippery slope. It starts with saying an assessment would hurt elderly shareholders who are on fixed incomes, and next thing you know they aren't enacting a necessary maintenance increase even though the building is operating in the red supposedly for the same reason when in reality 3 out of 5 board members are selling their units and want to do it quoting lower maintenance.

30yrs - Exactly. That is why we are going to vote them out.

30, Indeed. We do have assessments for capital projects - local law 11 - which are due from the seller on the sale of the unit.

Our building had always done assessments; switching from assessments to borrowing (I/O with no plan for repayment) is a new thing for our particular building and something we want to nip in the bud lest it becomes habit-forming. Now is not the time to leverage the building from our perspective, but coops are a democracy, and others may have a significantly rosier forecast for NYC coop appreciation than we do, so here we are. All part of the cost of living in a building and neighborhood we love.

One last note: Anyone who is interested in this issue should examine their building’s particular by-laws to see if the by-laws even grant the Board of Directors the authority to borrow against the corporation’s assets beyond the underlying mortgage that was present at the inception.

@300_mercer: Hypothetical for you. Let's say you have a staunch Libertarian Republican on your board who is adamant about not raising taxes for social justice goals that said voter does not personally support and feels strongly that this country is for "Americans who can pull their own weght," but then turns around and tells the Board that we must exercise compassion for those shareholders (said board member among them) who can no longer afford the building. The compassion we are being asked to exercise comes in the form of making decisions for shareholders that force all shareholders to subsidize single (or maybe a few) shareholder's desire to stay in a home then no longer afford. You know I very much value your opinion and am sincere in asking how you would handle this situation. It is driving me to drink . . . during the day.

I know you didn't ask me, but I think you should make the set of decisions that insure that soon no one will be able to afford to live in the building - just to keep everyone equal.

Mcr,

Thank you for the kind words.

If I am paying for their maintenance via coop common funds, no way. Even if it means legal cost to the coop to force them to sell. Guessing this is the scenario you are talking about. People who want to exercise compassion can help directly.

Rolling Mortgage financing or increasing it slightly if it has existed for a long time, seems fine. Most people would be ok with it as it is status quo and not worth fighting. Say increasing the principal by more than 25 percent with mortgage payments increasing despite much lower rates; interest still less than 10 percent of maintenance.

However, increasing maintenance by borrowing significantly more than the previous mortgage rather than capital assessments is problematic. We found a solution for this which I am sure other people use as well. Our assessments amounts are different for people who pay upfront and for people who pay over time with financing cost passed on to people who want to pay over time (say 3 years or longer). This way people paying upfront are not subsidizing any one.

Hope that answers your question.

@300 - Helpful, thank you.
@30yrs - Made me laugh out loud twice today, so thank you for that. Regarding nobody’s being able to afford the building, I don’t think we need to take any action to do this; inevitable increases in labor costs and real estate taxes will take care of that all on their own. Frankly I would pull the plug on the whole corporation now were it solely up to me.

Up until the multi-family market absolutely shit the bed a couple of weeks ago there were probably a non-insignificant number of Coops which were worth more being sold as buildings than the sum of their parts. Maybe some still are.

@30yrs - This is precisely why I want to engage your consulting services. I just need some time to work on my fellow board members. :)

It is not responsible for the board to borrow so much loan, they created hardship for all shareholders int he future