One of the components that makes co-op ownership unique is its financing structure. Unlike a condominium, the property is owned as a whole, fee-simple estate – and so the entire property can be encumbered by a permanent, long-term loan. This financing vehicle is known as an underlying permanent mortgage.
A Bit of History
The genesis of the underlying permanent mortgage lies in the history of the co-op form of ownership. Co-ops have been around for a long time. In fact, the first in New York City was built in 1881, located at 152 West 57th Street. At that time (and well into the second half of the twentieth century) co-ops were primarily for the very rich. The more middle-class co-op boom didn’t really happen until the mid-1970s and lasted into the early 1990s, when the city saw its first real bust in the co-op market.
Why the proliferation of co-ops in the 1970s? New York City was in dire economic crisis at the time, and many landlords, faced with tightly-controlled rents and steeply rising expenses, chose to sell their buildings to their tenants at reduced prices to get free of properties that had become liabilities. Virtually all of these properties were encumbered with existing commercial mortgage financing. Conversion to cooperative ownership, rather than condominiums, provided the pathway to transfer that existing debt to the co-op rather than pay it off, which often involved substantial prepayment penalties and higher offering prices. Thus, the underlying permanent mortgage became a fact of life for co-ops.
If your co-op’s underlying mortgage is coming due in the near future, there’s a healthy market in which to refinance it. “Most underlying permanent mortgage financing today is done by local savings banks – and in the case of larger mortgages by insurance companies,” says Robert Delitsky, Senior Vice President and Managing Director with NorthMarq Capital in New York City.
According to Harley Seligman, Vice President of National Cooperative Bank (NCB) in New York City, “Loans are available for five to as much as 30 years, with amortization up to 30 years. Rates are based on a spread over corresponding Treasury Bills of between 140-170 basis points.” That places rates at 3.5 to 4 percent today. “Most loans are for 10 years,” Seligman continues. “In the tri-state area, the main providers of underlying permanent mortgages are the savings banks. For the $10 million to $50 million ‘Park Avenue’-type loans, some insurance companies are active, but mainly it’s the savings banks.”