Mortgage Refinancing
Randall A, Pentiuk, Esq

A large number of cooperatives are contemplating refinancing their existing mortgages. Several reasons exist for this. First, interest rates are at an uncommonly low level which makes it rather advantageous to take out a loan, While the existing mortgages are typically low, the rates now are extremely attractive and may not last much longer, Thus, there is a window open now to get great interest rates, Second. Many cooperatives complain that HUD has been more unreasonable in its demands than in the past. They seek to get rid of the regulatory Agreement with HUD by eliminating the mortgage that was subsidized by it. A third reason is the need to amass a sufficient sum of money to undertake repairs, renovations and enhancements of the property. Many cooperatives would prefer not do these tasks over an extended number of years but, instead do it all at once.

Boards ask us what steps are involved. The initial step is to determine where the authority lies to borrow money. Most bylaws give that authority to the board. However, We do not recommend that the membership be excluded from the process. Information ought to he shared so the members know and understand and what is being done and why. The most common question is what impact will this have on carrying charges, and you should have an answer. Many cooperatives have refinanced with no increase in carrying charges because of the low interest rates, and the amount borrowed, Informing the members is an important part of the process and is a politically correct thing to do, but their approval is not required. Again, typical bylaws allow the board to decide such matters.

It should be noted here that HUD initial demanded a vote of the members. When challenged to point to the law or bylaw provision that mandated that, HUD backed off and simply requested evidence that the members had been informed. While we do not agree that HUD can require it, boards that we represent agreed to furnish information to the members. To do otherwise is an invitation to a disgruntled membership

The next step is to see what rates are currently available. A quote should he requested from the National Cooperative Bank in Washington, DC’. But the inquiry should lot stop there. Many lenders are interested in competing for your business and they should he asked to provide proposal.

Once these are obtained, the hoard should get professional assistance in analyzing the proposals It is not as simple as looking at the various interest although that is an important component. Other issues include the amount of the closing costs and requirements demanded by the lenders. These are not alike.

We recommend that the board “short list’’ the lenders and negotiate with the lenders with the best two or three proposals We have found a lot a flexibility and willingness to compete when this process is used. Do not accept proposals at face value. Try instead to press t he lenders for better deals. Unless expertise exists on the board, this task should be done by the management agent and the attorney.

Once a selection is made, the lender will issue a formal letter of commitment. This outlines the entire deal and the requirements of the lender. The management agent and attorney should he charged with handling these tasks. Among them is securing a full survey of the property, getting a special type of title commitment clearing up any clouds that may he in the cooperatives chain of title, and providing the lender with financial and other records. The existing lender must provide a payoff letter. HUD needs to be notified of the refinancing.

With, respect to HUD, a full discharge and release of the Regulatory Agreement should be obtained. In the case limited equity cooperative such as 221(d)(3)’s, HUD will require a new deal known as a Use Agreement. The use agreement is a scaled down version of the Regulatory Agreement that does not contain all of the numerous conditions and terms you are accustomed to but does require the cooperative to remain affordable housing for the balance of the term of the Regulatory Agreement. Those who paid off early encounter some difficulty in dealing with HUD on this document, and there were different directions given by HUD in Washington and HUD’s local offices. This seems to be getting better, but you should allow for sufficient time to handle this negotiation. This is best handled by the attorney for the cooperative.

When all these prerequisites are fulfilled, the closing will take place and he loan proceeds will he dispersed. From the loan proceeds, the existing mortgage will be paid off and a discharge will be obtained from that lender, which needs to he recorded with die registrar of deed s. The Regulatory Agreement needs to be released and recorded. The attorney handles these details.

Once HUD is gone a number of opportunities exist. The cooperative may want to amend its governing documents to remove references to HUD and the Regulatory Agreement. While doing so, you may also want to clear up nagging problems such as quorum issues. as well as liberalize the manner in which voting takes place - such as absentee ballots, day - long voting and the like. Where the law has changed and made bylaw provisions obsolete, such as in the limited proxy area, you may want to take advantage of the opportunity to clear, up such matters. The cooperative attorney needs to be involved in these issues.

If the cooperative is going to undertake repairs or renovations with what money is left over, you need to seek proposals from various contractors. Before that can be done, the board must determine with some degree of specificity what it wants to accomplish and develop specifications that are written and sent out to a number of contractors. Proposals should be sought, a “short list’’ derived by the board and negotiation should be undertaken to get the best deal possible. Your management agent should take the lead in this process. Once that is done, the attorney needs to prepare a contract to protect the cooperative. Make sure that there is adequate insurance and indemnifications, that there are warranties, and consider including liquidated damages for delayed performance and perhaps a bonus for early completion.

Depending upon the magnitude of the project, it may tie desirable to engage a construction manager to coordinate the contractor and deal such issues as partial payments and subcontractor issues. Of course. this add to the expense but may be merited if you are going to have numerous contractors engaged instead of just a single one. Perhaps your management agent is experienced in this role and can provide assistance.

In sum refinancing is an option that is worth while examining to see if it makes sense to your cooperative. It should be done now while we still have good interest rates. A team approach including the board, management and the attorney will ensure that it is done properly and in good order. It is not a quick process but if experienced professionals are used, it can be expedited. Once it is complete, it opens up a wide range of opportunities for the cooperative to move forward in to the Future without the hassle of HUD, and typically with enough money to make the cooperative appearance compete with other housing stock, leading to less vacancies and great or pride among the membership.

Volume 1, Issue 3
November, 2003