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Refinancing Coop's Underlying Mortgage

Started by multicityresident
22 days ago
Posts: 2078
Member since: Jan 2009
Discussion about
I feel like a few months ago one of the regular posters said their building's underlying mortgage was coming up for re-financing. I am starting a thread here where I hope people will post statistics on the terms their coops are getting these days to the extent anyone is interested. I will do that when our building's comes up for renewal in 2028. To the extent anyone participates, please share fees to Managing Agent and Coop attorneys as part of the discussion of the overall "deal." I am hoping to give buyers (and frankly owners) more transparency on the pros and cons of these mortgages.
Response by 30yrs_RE_20_in_REO
21 days ago
Posts: 9564
Member since: Mar 2009

Don't forget to discuss the difference between self amortizing and "5 like 30" or interest only.

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Response by multicityresident
19 days ago
Posts: 2078
Member since: Jan 2009

Refinance of underlying mortgage at current rates should be the final nail in the coffin for resale market for pre-war boutique coops. It will be interesting to see what happens to my building when our (interest only) comes up for renewal in 2028. Who knows what the world will look like then. While I am hoping for the best, I am preparing for the worst. About then is when some of the most heavily shared apartments will be estate sales. We are prepared to go down with the ship, but that doesn't mean the ship doesn't have potential! I will be lobbying that we just pay it off rather than refinance and let those shareholders who want to finance take out HELOCs with our now more liberal max-financed amounts.

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Response by 30yrs_RE_20_in_REO
19 days ago
Posts: 9564
Member since: Mar 2009

I'd be willing to bet the will be a fair amount of Coops where the value of the building if sold as a whole will be significantly greater than the sum of the share prices.

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Response by etson
18 days ago
Posts: 32
Member since: Aug 2010

If rates are still at current levels, I think an assessment to just pay off the mortgage is by far the most sensible course of action. It sounds like your building is wealthy enough and it would really be a point of differentiation.
We refinanced pretty well 3 years ago (self-amortizing), I think the rate would be over 2.5x what we got then if we had to do it now.

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Response by multicityresident
16 days ago
Posts: 2078
Member since: Jan 2009

@etson - You are correct that the the bulk of shareholders in my building could handle the assessment, and that paying off the mortgage would be an excellent point of differentiation for our building. However, I think our building is a "reverse mortgage" situation where the majority of the shareholders do not plan on leaving the building alive, and they feel they have already given their heirs enough. In other words, I do not believe the majority of shareholders in my building care at all about the future of the building (or anything else). It is cultural, and I have made my peace with it. Nevertheless, it will be interesting to see what attitude the new crop of young trust-funders brings to the issue. I am the only one cheering on their efforts to "Green the building!" The characters in the building are ripe for a novel, a sitcom, or a dramedy. Living this experience is why I love watching "Only Murders in the Building."

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Response by stache
15 days ago
Posts: 1123
Member since: Jun 2017

I wouldn't mind paying off my share of the mortgage, especially if Nvidia keeps going up. My concern is with a zero balance, the board (and First Service) would decide to redo the lobby for example and start the debt cycle all over.

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Response by Aaron2
15 days ago
Posts: 1548
Member since: Mar 2012

I'd be ok w/ our building paying off their mortgage, but the board would have to be clear about their philosophy of expenses / debt going forward: Does this mean that the rebuilt elevators, Local Law scaffolding & inspections, and new boiler are paid for by one-off assessments? Will maintenance go up so they can build a larger reserve fund to pay for the big ticket items? The joy of reduced monthly costs as a result of no underlying mortgage may be significantly reduced by the uncertainty induced by highly variable assessments.

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Response by Rinette
15 days ago
Posts: 379
Member since: Dec 2016

Stache is on target ...

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Response by multicityresident
15 days ago
Posts: 2078
Member since: Jan 2009

I'd rather have them start it over again rather than just keep piling on. When our building refinanced last go around, the board took more equity out of the building, thereby doubling the outstanding principal, and immediately burned through the proceeds of the loan. That board gleefully thought of the proceeds of the loan as free money, without considering how payments to service debt become a permanent part of maintenance that crowds out payments for the human service that enhances the quality of life in the building.

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Response by Rinette
15 days ago
Posts: 379
Member since: Dec 2016

Didn't you interview your board before you purchased?

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Response by multicityresident
15 days ago
Posts: 2078
Member since: Jan 2009

@Rinette - Excellent question. I did the best that I could to identify who was on the board of the building because I view that as material information. I was unsuccessful in identifying the board members before entering into a contract for purchase. With that said, now knowing the identity of the board that was in power at the time we purchased (that was also the board that was in power at the time I overthrew them five years later), there were red flags that I recognize now that I would not have recognized in 2014, so the answer to your question is "No, I did not interview the board before we purchased, but even if I had, I still would have recommended the purchase."

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Response by 30yrs_RE_20_in_REO
14 days ago
Posts: 9564
Member since: Mar 2009

Any capital improvement which is paid for by an assessment, the assessment gets added to your tax basis. When paid for by increasing the underlying mortgage it doesn't, even when those payments include amortizing the debt. So there are some pretty good tax advantages of using assessments vs increased debt.

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Response by inonada
14 days ago
Posts: 7559
Member since: Oct 2008

MCR>> there were red flags that I recognize now that I would not have recognized in 2014

What were the red flags?

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Response by inonada
14 days ago
Posts: 7559
Member since: Oct 2008

30yrs>> So there are some pretty good tax advantages of using assessments vs increased debt.

Do any buildings institute a perma-assessment of sorts? I.e., “A $500/mo assessment to update the elevators next year” that turns into “A $500/mo assessment to fix the cascade in two years”. It seems like the tax-efficient way of handling such work without introducing lumpy payments, which can create unexpected cash flow problems for some owners.

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Response by etson
14 days ago
Posts: 32
Member since: Aug 2010

"Do any buildings institute a perma-assessment of sorts? I.e., “A $500/mo assessment to update the elevators next year” that turns into “A $500/mo assessment to fix the cascade in two years”. "

Yes, there are at least two coops in my neighborhood that do something like this.

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Response by multicityresident
14 days ago
Posts: 2078
Member since: Jan 2009

@nada - The flag that was visible but that I would not have recognized as red at the point in time was that they are all royalists.

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Response by Aaron2
14 days ago
Posts: 1548
Member since: Mar 2012

@30yrs: Good point. Though I think this would require boards (and managing agents) to be much more savvy about costs and transparency to shareholders (see mcr's comment about board financial incompetence).

@mcr: I dunno, given some of the current options, maybe a monarchy isn't such a bad form of government...?

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Response by multicityresident
14 days ago
Posts: 2078
Member since: Jan 2009

All depends on the monarch. I personally favor the Benevolent Dictator model of government myself.

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Response by inonada
14 days ago
Posts: 7559
Member since: Oct 2008

To which monarch were they royal???

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Response by multicityresident
14 days ago
Posts: 2078
Member since: Jan 2009

Elizabath - and I am impressed that you understand the difference between a royalist and a monarchist; a nuance I would not expect someone so clearly oriented towards quantitative analysis to catch.

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Response by inonada
14 days ago
Posts: 7559
Member since: Oct 2008

I assure you, I understood no such nuance until you pointed it out for me to look up on the Google machine. Hell, I even mistyped “loyal” into “royal”.

Regarding Elizabeth (the II, I presume): What does it even mean to be a royalist or not when it comes to a constitutional monarch — keep the figureheads costing ~$2/yr to each person vs replace them with enough bureaucrats to serve a similar function? I suppose the red flag for me would be anyone who cared strongly one way or the other on what I perceive to be an issue of minor importance.

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Response by 30yrs_RE_20_in_REO
13 days ago
Posts: 9564
Member since: Mar 2009

There are some, but it can get dicey because only CAPITAL assessments get added to your basis and if some of your assessments go towards operating expenses it could up the whole thing

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Response by inonada
13 days ago
Posts: 7559
Member since: Oct 2008

I guess that’d be a sign of a competent board, one that runs perma-assessments directed towards rolling capital improvements.

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Response by multicityresident
13 days ago
Posts: 2078
Member since: Jan 2009

Re: "I suppose the red flag for me would be anyone who cared strongly one way or the other on what I perceive to be an issue of minor importance." EXACTLY.

With respect to ongoing assessments that go into a reserve fund, there are many schools of thought on that. I personally do not like the building maintaining a reserve fund because a board is not competent to manage money. I prefer to be in a building with responsible and thoughtful homeowners who view their apartment exactly as they would a single family home. Home ownership has infrastructure costs that you maintain personal savings for. When HVAC unit goes out in your single family home, you buy a new one, presumably out of money that you have on hand for exactly this type of maintenance. Your apartment should be no different; you should expect and plan for infrastructure assessments on your apartment in exactly the same manner as you would your single family home.

I personally would not want to co-own with anyone who was not of the same mindset, and when looking for apartments, I had identified our building as one that was of this school of thought. It was both a "no reserve fund" and also a "very small underlying mortgage" that looked to be on its way out. Since our purchase, it has evolved and is no longer a "very small mortgage that looked to be on its way out" building, but rather is now a "double-the-size-interest-only mortgage, the expense of which is destined to become a permanent part of the maintenance."

With respect to the future, the path can still be reversed; the building has potential; and, either way, we do enjoy everything about it (except some of the neighbors - but again, it is just like family; we don't dislike them; they are just not people we would choose and vice versa) on a day-to-day basis. I was there for four days last month and enjoyed it immensely, so it is all good. I imagine the passengers on the Titanic were having a lovely time right before the ship went down as well.

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Response by front_porch
13 days ago
Posts: 5207
Member since: Mar 2008

I'm with stache on the idea of an underlying mortgage. Where's the guarantee that the board doesn't start over?

Nada, the Parc Vendome (actually a condo) sort of did this -- I believe when I bought there was a "10% of maintenance" assessment that was used for capital purposes, and I think it was still in place when I sold 15 years later.

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Response by 30yrs_RE_20_in_REO
13 days ago
Posts: 9564
Member since: Mar 2009

A large percentage of boards have close to zero ability to keep their grimy little fingers off of large reserve funds. We have $50 billion in the reserve fund? Let's spend it on a new lobby.

OTOH it's long been a ROT the Coops should have at least 6 months operating expenses in reserve.

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Response by 30yrs_RE_20_in_REO
13 days ago
Posts: 9564
Member since: Mar 2009

But Coops and their shareholders tend to have some garish assholes tendencies. The last Coop I was in, the were noise and other quality of life issues with the restaurant downstairs. First the shareholders fairly unanimously wrote emails along the lines of "there is no expense to great to preserve our quality of life." Then when the (discounted) legal bill of $500k came they cried "it's going to bankrupt the Coop" and engaged in a frivolous lawsuit which drove THAT bill to over $1M followed by another $1M of frivolous spending.

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Response by Rinette
13 days ago
Posts: 379
Member since: Dec 2016

I think some of you are looking for the drama.

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Response by inonada
12 days ago
Posts: 7559
Member since: Oct 2008

MCR>> I personally do not like the building maintaining a reserve fund because a board is not competent to manage money. I prefer to be in a building with responsible and thoughtful homeowners who view their apartment exactly as they would a single family home.

Therein lies the rub. If all the shareholders were thoughtful and responsible with their finances, wouldn’t that lead to a board that were the same?

MCR>> Since our purchase, it has evolved and is no longer a "very small mortgage that looked to be on its way out" building, but rather is now a "double-the-size-interest-only mortgage, the expense of which is destined to become a permanent part of the maintenance."

Exactly. You’ve inadvertently signed up for perma-debt. If it’s tax deductible to you, that’s one thing. But if not, you’ve been signed onto (say) 10yr debt at 6.x% when after-tax on equivalent cash you’ve been able to keep on your personal balance sheet only yields 2.x%.

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Response by stache
12 days ago
Posts: 1123
Member since: Jun 2017

I've always heard a building should keep 1/2M in reserve for emergencies. I also get the impression a reserve is mandated as a condition for some mortgages. Am I crazy?

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Response by multicityresident
12 days ago
Posts: 2078
Member since: Jan 2009

@stache - you are correct, but our mortgage specifies no minimum balance for the reserve, and a $500K LOC that can be paid off immediately when tapped is my preference there rather than having cash sitting in an account. As 30yrs pointed out, it is really hard for some boards to keep themselves feom spending cash on hand for board member pet capital projects.

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Response by multicityresident
12 days ago
Posts: 2078
Member since: Jan 2009

Inonada>>"Therein lies the rub. If all the shareholders were thoughtful and responsible with their finances, wouldn’t that lead to a board that were the same?"

Even if the board were comprised of competent finance people, I wouldn't want them managing a reserve account. A coop is not a for-profit enterprise, and I don't want the coop paying taxes on any gains it makes from properly managing money. In addition, all of us who are shareholders have different portfolios where we might each hold our cash in different vehicles that best suit each of our preferences.

With that said, I did think I was buying into a building with competent finance people on the board after I learned their identities.

Seriously, from the resumes, I would have expected a lot more. I still cannot get over the guy who set the record for the highest sale in the building: He fancied himself an expert in real estate, told the entire building that I did not know what I was talking about when I said that our building was on the precipice of seeing the first round of sales that would reflect a loss of capital, not to mention the fact that he did not know the difference between a coop and condo. Joke ended up on him when he lost over $1M in capital on the eventual sale of his unit.

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Response by 30yrs_RE_20_in_REO
12 days ago
Posts: 9564
Member since: Mar 2009

If I make money it's because I'm a genius. If I lose money it's bad luck

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Response by front_porch
8 days ago
Posts: 5207
Member since: Mar 2008

@mcr, and *you* have some professional status. Imagine how fun it is to talk to clients like your board member who are dismissive of the expertise of "just a real estate broker"

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Response by multicityresident
8 days ago
Posts: 2078
Member since: Jan 2009

@ali - I can imagine. If I had a dime for every time I have tried to have a discussion with arrogant ignorance . . .. I just don't get where that comes from. If somebody presents me with data that suggests that everything I thought was true might not be true, my first reaction is never to dismiss that individual. That does not mean that I might not disagree with the proffered conclusion at the end of the day after doing my own independent research; it is just not where I start, and I remain amazed at how many "credentialed" individuals I have dealt with in any number of contexts who do start there.

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Response by multicityresident
8 days ago
Posts: 2078
Member since: Jan 2009

P.S. to ali - and what makes my head explode for your profession is that the board member in question brought their "top agent" (not) in your field to address the Annual Meeting to bolster their point, and that agent had no problem in propping up the delusions of grandeur that kept sellers from lower their prices at that time to what they ultimately lowered them to 4-5 years later.

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Response by multicityresident
8 days ago
Posts: 2078
Member since: Jan 2009

And P.P.S. - In our post-truth world where form triumphs over substance in the short-term at every turn, how can I fault said co-owner/board member/"credentialed" individual? We all have to rely on those who have more expertise than each of us does in a myriad of areas, and we have no real way of knowing whether our chosen professional is leading us in the right direction. We (society) have trained our professionals to parlay a lucky break into a "genius" reputation (see @30yrs point above), and we are all so specialized that we cannot possibly do our own analysis. We are in the golden age of the confidence-man, but then again, maybe that is just the human condition. I am beginning to believe less and less in the arc of the universe's bending toward justice, and more and more in that arc leading to Armageddon.

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Response by Rinette
8 days ago
Posts: 379
Member since: Dec 2016

clearly I was right, above.

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Response by multicityresident
8 days ago
Posts: 2078
Member since: Jan 2009

@rinette - don't be a bore. Not looking for drama; jist discussion.

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