NCB provides financing for 224 Riverside Drive.

National Cooperative Bank recently provided two-tier mortgage financing to 224 Riverside Drive, a 24-unit cooperative. The restructuring, a move indicative of the steps that some co-ops need to take to restructure their debt, will reduce the Manhattan co-op's debt service expenses by some $40,000 annually and restore financial viability to the co-op corporation, according to Ed Howe, a vice president of NCB.

"The cooperative was being stifled by debt and faced the distinct possibility of not being able to rollover its existing mortgages as they were coming due," Howe said. "Absent a debt restructuring, foreclosure seemed likely."

A key to the restructuring, Howe said, was the willingness of the sponsor to forgive $225,000 in debt owed to him by the co-op corporation.

The 24-unit building was converted to a co-op in 1985. Since then, the co-op had accumulated $1.8 million in debt: a $600,000 first mortgage, a $200,000 second mortgage and a $1 million third mortgage in the form of sponsor-held paper. This debt load gave the co-op a loan-to-value ratio of 40 percent -- too high in today's market. With the first and second mortgages coming due this year, the co-op was in need of refinancing but was having difficulty finding a lender willing to finance the entire amount.

Having a clear understanding of the co-op's financial position, NCB recast the co-op's debt as follows: the first mortgage was increased to $1.3 million, and the second mortgage, increased to $300,000, was put on an accelerated amortization schedule to enable a faster pay-down of principal and subsequent reduction in the total debt load on the co-op. With the restructuring, the co-op's total debt service is $155,000 annually. Had the co-op been able to finance the entire $1.8 million as originally proposed, the interest charges would have been $195,000 annually.

The co-op's sponsor agreed to accept a discount of 25 percent in principal of his third mortgage. "The sponsor had a significant amount of equity in the building, and thus his interests and the co-op's interests were aligned. The sponsor recognized that values were down and that the alternative could have been foreclosure by the first and second mortgage holders. In today's market, chances are good that he would have taken an even bigger hit on his principal, and his equity would have been lost," Howe said.

According to Howe, "I think you will find more sponsors around town who will be willing to work with co-op boards on debt restructuring in recognition of the depressed real estate market and the need to preserve the long-term viability of the co-op corporation's main asset."

NCB predicts a wave of co-op mortgage loans will come due in the next 12 to 18 months. Most will be first and second mortgages originated five years ago when values were booming. Many co-ops borrowed heavily then to repair and upgrade their facilities and to capitalize on the relatively low interest rates that were available at that time.

The refinancing structured by NCB is emblematic of the steps that many New York area co-ops may need to take to redress their financial position in a depressed market that has pulled down value to 20 percent or more, according to Howe, who worked with the co-op board and its attorney in arranging the restructuring.