Q&A: Determining Co-op Debt

Q My 47-unit Brooklyn cooperative is carrying $1.7 million of debt, all of it  already spent, in an interest-only mortgage, and contemplating taking on more  debt. By what measure or measures does a cooperative determine how much debt is  too much?  

 ---Fiscally Aware  

A “In my experience, cooperative boards vary greatly in their approach to the  cooperative’s debt,” says attorney Michael T. Manzi of the New York-based firm Balber Pickard  Maldonado & Van Der Tuin, PC. “Some prefer little or no debt, others, moderate or considerable amounts of debt;  some prefer interest-only mortgages, others amortizing mortgages. There is no  hard and fast rule on the matter, unless one is set forth in the cooperative’s governing documents.  

 “Many factors affect boards’ decisions regarding debt, including required repairs and capital improvements  to the building, the amount of monthly maintenance paid by the shareholders,  the ability of the shareholders to pay assessments on top of maintenance, other  potential sources of income for the cooperative such as transfer fees, and  current interest rates. Usually, the borrowed funds are used to fund capital repairs or improvements or  to increase a reserve fund in anticipation of such needs in the future. The monthly debt payments, however, affect the maintenance payments. If the maintenance increases above a rate that brokers consider acceptable for  the particular building and its apartments, the high maintenance can affect the  marketability of the apartments.  

 “Generally, the decisions regarding debt are up to the board of directors, but in  a small number of cooperatives, the governing documents place limitations on  the amount of debt that may be incurred. You should check the proprietary lease, by-laws and certificate of incorporation  for your cooperative. If there are no limitations on debt in these documents, then the board’s decisions regarding debt are only subject to what is known as the “business judgment rule”. Under this rule board the must act (1) within the scope of its authority, (2) in  a way that legitimately furthers the corporate purpose and (3) in good faith. So long as self-dealing or other personal misconduct is not present, boards are  given a great deal of legal leeway in meeting these standards. If the board has not acted within the scope of its authority under the business  judgment rule, its decision can be challenged by the tenant-shareholders and,  if necessary, subjected to judicial scrutiny. Unless you have reason to believe that the board has not acted in accordance  with the business judgment rule, its determination on the appropriate amount of  debt cannot be challenged legally. That should not prevent you, however, from raising your concerns about the  cooperative’s debt at the next meeting of shareholders.”  

 

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