Finance opportunities for below-grade co-ops.

Competition for underlying mortgages has been heating up all summer. For the first time since the co-op market collapse of the late 1980s and early 1990s, New York City's below investment grade coops can look forward to readily available financing at attractive rates.

Traditionally, NYC's AA and AAA rated co-ops have always had many financing options open to them, and A and BBB rated co-ops also attracted interested lenders. However, options for co-ops rated below BBB were very limited and these co-ops struggled to find ways to end their financing woes. This is not the case anymore. Many lenders are now enthusiastically expanding their offerings to below investment grade co-ops.

National Cooperative Bank (NCB), for example, is expanding their sponsor limitation to consider buildings with up to 49% in unsold shares and introducing several new programs aimed at helping the under-served market.

A current joint effort between NCB's underlying mortgage division and their new division specializing in individual financing (share loans), should provide a significant increase in financing for New York-area co-op owners. NCB's new "Route 51 Program - The Road To Health" will provide share loan financing for individual units in cooperatives with 40 to 51 percent tenant ownership. This innovative program will make additional financing options available for prospective buyers, increase sales activity, and most importantly, assist in bringing cooperatives up to 51 percent ownership, the current minimum required to qualify for underlying financing.

While many banks are reluctant to work on a underlying mortgage for a co-op building that has a sponsor position of over 30 percent, NCB will consider these deals and will, on a case-by-case basis, evaluate a co-op building with up to 49 percent unsold shares. Recently, NCB assisted two below investment grade rated co-ops with the refinancing of their $775,000 and $4.5 million mortgages.

The first co-op, located in Marine Park, Brooklyn, is a 36-year-old, 100 unit building, that was converted to a cooperative in 1979. A New York thrift held the first self-amortizing mortgage ($775,000), but the co-op was in need of an $800,000 second mortgage line of credit for capital improvements which would ultimately enhance the value of the building. The co-op's sponsor position of 27 percent and negative carry of $22,000 a year limited the number of banks capable of handling the co-op's needed refinancing. NCB was able to step in and provide underlying financing when no other bank would. In addition to values weakened by the declining sales market, environmental concerns required the original closing date to be pushed from january 7th to August 31st. When additional time was needed to resolve underground fuel tank issues, NCB brought in their environmental consultant to assist the co-op. NCB's willingness to help paid off and their expertise and knowledge of the investor market allowed them to close on a second mortgage that will mature on March 31, 2004 when the first mortgage matures and pays off. At that time, NCB will rise to a first mortgage, which will most likely be refinanced into a long-term fixed rate loan.

The second co-op, located on West 57th Street, is a 237-unit building comprised of one-bedroom and studio apartments. The co-ops negative carry of over $100,000 and sponsor position of 25 percent made it an undesirable loan prospect. Fortunately for the co-op, NCB didn't see it that way. NCB set up a $4 million first mortgage with a 30-year amortization at the 10-year fixed rate of 9 percent and helped negotiate with the sponsor to forgive $500,000 of debt. NCB aggressively worked with the co-op and because of NCB's efforts, the co-op's debt service has dropped and cash flow has improved.

Housing cooperatives represent a solid, safe and affordable homeownership opportunity. With barriers to credit continuously being minimized, more programs for below investment grade co-ops will arise in the coming year. The credit crunch for co-ops is ending and NCB will lead the effort to look for ways to facilitate the financing and development of housing cooperatives around the country.