Braverman calls for re-financing task force

Real Estate Weekly, Nov 17, 1993

Edward T. Braverman, one of the city's leading cooperative apartment industry attorneys, is urging the city to create a task force of govermment, co-op market and financial leaders to study a problem impacting thousands of middle-income co-op apartment owners: the inability of co-op boards to refinance building mortgages for more than a short term because a large number of apartments in the co-op buildings, invariably rent-regulated units, continue to be owned by the conversion sponsors.

When a co-op building doesn't have access to long term refinancing funds, Braverman said, the co-op's apartment owners and potential apartment buyers find it next to impossible to obtain coop loans for individual units (end-loan financing), and sales in the buildings grind to a halt. This stymies both the apartment owners, whose families have gotten larger, and buyers looking to move up.

The problem primarily is being confronted by co-op owners in the outer boroughs, Braverman said. When conversion volume was peaking in the boroughs under non-eviction plans, he explained, the economy already was slowing and demand for owner-occupied units was failing off. Co-op sponsors had to hold and operate large blocks of unsold rental units, or sell them to investors who also operated them as rentals. Most often, he noted, these rent stabilized or rent controlled apartments produce rentals that are lower than the monthly maintenance charges on the co-op apartments. This gives the sponsors a negative cash flow on the rental units.

The co-op attorney believes there is no on-the-horizon market solution to the need for co-op building financing, and that the problem may be impossible to solve without some type of government assistance. "This is why we need a task force - to look into possible solutions," he said.

"Bringing in the government is not as extreme as some market observers might suggest," Braverman added, "because the city will benefit in significant ways if the logjam on co-op sales could be broken." He points out that "the city would gain because the middle-income sector of the co-op market for first-time apartment-buyers would open up, and this in turn would help to stimulate the city's economy." He also noted that earlier this year the state of Connecticut implemented a partial mortgage guaranty program which is intended to help open up that state's residential market.

The proposal to form a task force was made recently by Braverman, whose firm represents more than 80 cooperative apartment buildings in the city. Braverman's rough estimate is that there may be as many as 50,000 co-op apartment owners in converted buildings where sponsors or investors are operating large numbers of apartments as rentals, and whose tenants are paying below-market, regulated rents that often are under the carrying charges for comparable co-op apartments. "This is the very situation that has made it next to impossible to refinance the underlying mortgages on these buildings, Braverman pointed out.

He observed, too, that any-situation where expenses on apartments exceed income threatens the financial viability of the sponsor holding the units and, accordingly, of the co-op corporation itself. He emphasized that bank mortgage lenders do not want to run the risk of adding to the bank's list of non-performing loans by providing financing for co-op buildings whose sponsors have a negative cash flow on a sizable number of unsold apartments.