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Advice and Consent

Our board is planning a series of long-overdue repairs to our building. Another board member and I are identifying contractors. Since our reserve fund is depleted, we also are planning to refinance our underlying mortgage to raise the needed funds. Two other board members are working on that. A spirited debate has arisen over which comes first, the contractors or the new loan. I think we need signed contracts for all of our work to know how much to borrow. Other board members worry that, in today’s troubled financial market, we may not be able to get a new loan…or at least not one large enough to pay for all of our repairs. Therefore, they argue that we first should close a new loan so we know how much money we have to spend. Who’s right?


For most co-ops, this is not quite the “chicken or egg” question that it initially seems to be. The typical cooperative usually can support enough new debt to cover almost any major repair. In many cases, the building’s maintenance must go up, which could pose a hardship for certain shareholders. However, the required increase rarely is enough to cause problems for the cooperative as a whole. While I haven’t seen your co-op’s financial statements, other things you’ve told me lead me to believe that your building can carry the planned amount of new debt.

It is true that certain segments of the financial markets have been affected quite severely by the problems reported in newspapers and on television programs. Fortunately, the co-op underlying mortgage segment has been relatively unscathed by those problems. Consequently, the fears of your fellow board members about your building’s ability to borrow are probably unwarranted. That said, your insistence on signed contracts for all work before entering the mortgage market is overkill. A range of bids from several legitimate contractors should be sufficient to help you estimate the likely cost of each planned project. I then would add a contingency to each project’s estimate (5 to 20 percent, depending on the complexity of the work). The resulting total will be close enough for most lenders. Having that number, though, does not mean that you are ready to start searching for a new loan.

Refinancing an underlying mortgage is perhaps the most important decision that a board will make during its tenure. It will affect not only the monthly maintenance, but also the market value of every shareholder’s apartment. Therefore, it is essential that you broaden your focus beyond the work you have planned now to the overall physical and financial health of your cooperative. A successful refinancing puts a cooperative on a sound financial footing that ensures its long-term viability. Attaining that success requires careful planning, thorough preparation, and professional guidance. That’s why I recommend that each board involve all of its co-op’s advisers in this critical process. Don’t have a full team of professional advisers (managing agent, accountant, and attorney)? Now is the time to hire them.

For example, in addition to streamlining your building’s day-to-day operations, your managing agent can help you develop plans and specifications for each project, recommend reputable contractors, help check that all bids are complete, assist in negotiating final prices, coordinate schedules for each trade, and assure that all required approvals and permits have been secured.

Your accountant will keep your books, but he also can assemble all of the financial and tax records that any lender will require, help you prepare a budget reflecting the planned new loan, estimate the amount of any prepayment penalty on your existing loan, and assist in evaluating various new loan options.

Your attorney will help negotiate contracts for each project, check your insurance coverages, review your existing loan documents to make sure that they allow you to refinance, check the public records for building violations and outstanding liens, evaluate loan offers and re-loan applications, and (of course) represent you at the closing.

And these are just some of the many important things that a good team of professional advisers will do for you. By the way, the time to get all of your professional advisers involved is now, at the very start of the refinancing process. The benefit of their input at the beginning, middle, and end of this process is worth much more than whatever they will charge you.

You might have noticed that I did not include a mortgage broker among the professionals that I recommend you hire. While I believe that any loan transaction can be enhanced through the efforts of a seasoned mortgage broker, loans close every day without such assistance. Whether those loans have the lowest interest rates and the best available terms is subject to debate.

However, the more troubled or complex a borrower’s situation, or the more stressed or volatile the market, the greater the value of a professional who deals with such issues every single day. A skilled mortgage broker knows exactly whom to call and how to present your situation in the very best light.

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