I've been fuming over my coop board's decision to refinance the underlying mortgage, and it was the final straw that made me decide to sell and get the heck out of here. What do you all think of this financial move?
My building had an amortized underlying mortgage at 8% interest that was due to be paid off in 2019. At that point, it would have been a financially solid building with very low maintenance, and many of us had taken on the relatively high maintenance with that understanding. (I know...face punch me for buying into a coop with debt to begin with, but I know better now.) Enter the coop board director who was jonesin' to redo the hallways...
The solution? Refinance the underlying mortgage and take out extra money to pay for the hallway redo. With a commercial mortgage, though, there's a catch: you have to pay all the interest you were going to pay over the next several years ("yield maintenance fee") plus a hefty prepayment penalty. No problem, just roll that into the new mortgage, along with all the free cash the board could possibly want.
The result? A $5M debt at 8% interest instantly became an $11M debt at 4.5% interest, with monthly payments only slightly less. The new debt is amortized over 30 years, but it's set up as a 10 year term with a balloon payment due at the end. The board at least had the grace to look nervous when talking about what might happen at that time if mortgage rates were to go up. To be fair, we did get two capital improvement projects plus a small increase in reserve fund contributions out of it, but at the cost of a 14 year debt setback and now permanently high maintenance.
In case you're wondering, the board refused to consider a line of credit for the hallway redo because one of the board members' mother had a bad experience with one. Oh, and they never consulted with a past board president who is a mortgage loan officer at Citibank.
When those of us with basic math ability challenged the board on this decision, they gave the precious response in the title of this message. Of course, you have to carry debt! Debt is good!