Energy Office is folded; payments re-arranged

Real Estate Weekly, May 17, 1995 by Lois Weiss

Some banks, such as Citibank, are using the payment to write down the principal and doing the work to re-adjust payments so that borrowers can continue to benefit from a decreased interest payment.

But others are merely using the state payment to lop off the back end, refusing to re-adjust the payment schedules. The energy loans were designed to bring interest down to an affordable level by rebating money every six months to the borrower.

Because the banks are not adjusting the monthly premiums, and no more subsidy checks will be issued, "It's causing severe problems for the recipients," explained Dan Margulies, executive director of the Community Housing Improvement Program (CHIP).

"They are just saying the term will be shortened or the balloon - in some cases where they are not self-liquidating - will be less. The borrowers have to come up with the same payments as before, but in the past they were receiving a subsidy check," Margulies added.

The subsidy check that Marguiles described was the twice yearly payment sent by the New York State Energy Office to the banks to help reduce the borrower's actual interest payment to about 2.5 percent. In reality, rather than re-calculating the borrower's payments, the banks merely sent the check directly to the borrower.

So a property owner or co-op could budget to pay out a certain amount every month, while twice a year could count on receiving back a portion of those payments.

"Presumably, several years from now you will receive the benefit," added Marguiles. "That doesn't solve the [current] cash-flow problem."

The Energy Office, among its other duties, oversaw this Energy Loan Program that helped subsidize the interest payments on small loans - most were well under $500,000 - that were used to install energy-saving equipment in buildings. Among these items were new boilers, fuel computers and windows.

According to Brian Henderson, one of the State employees who is wrapping up the program and the transfer of the Energy Office to the Energy Authority, the state had about $7.8 million in subsidy commitments outstanding on 741 loans and is in the process of paying them out. "Compared to what it was, they wouldn't have gotten anything," he noted, referring to an earlier State posture that would have merely ended the program and left borrowers and lenders without recourse.

The funds for the loan supplement program came from a 1970s' Federal lawsuit settlement paid by major oil companies that was dedicated to providing energy subsidies of one sort or another.

Governor George Pataki, however, ordered the closing of the Energy Office by March 31st and the end of the loan program. Any remaining funds are expected to go to different kinds of projects and may supplement state-owned facilities.

Rather than having banks be stuck for the loan subsidies, a decision was made to send them money, after discounting the present value of the loan subsidy by 6 percent. In a letter to the lenders and in further loan agreements they were required to sign, the state required the use of the money to write down the principal amount.

In this manner, the payments would remain the same, but the loan could terminate sooner. "They didn't necessarily have to adjust the monthly payments," explained Patricia Brettone of Citibank's Economic Loan Development Center of the bank's responsibilities. "But we wanted some kind of cash-flow relief to the buildings to continue," she said. "We didn't want such a great program to end on a sour note, so we approached it from a customer service standpoint and decided to give the borrower - our customers - the net effect. It takes a little more energy [to re-calculate the loans]," she added.

One happy borrower is Rubin Pikus, president of the Queens-based Milbrook Properties that operates in the rent stabilized middle market. "Citibank will reduce the principal and is making my payments reflective of the reduced amount," he said. "I was lucky."

But other leaders are not making all of the adjustments necessary to reduce their borrower's current costs. "I can't see how they can take a principal payment and not read just the interest," observed Edward T. Braverman, senior partner of Braverman & Associates, an attorney who represents co-ops and building owners who have used these loans. Since his client has separate principal and interest payments, once the principal is reduced, his lender will also reduce the amount of the payments.

That will not necessarily be the case where there are fixed payments, explained Robert O'Hara, a vice president in the small business lending group of European American Bank, which has about 35 energy loans outstanding. In those cases with fixed payments, the payments would remain the same, but the interest payments made over the long run would be reduced, as would the principal.

He did not believe his customers were in cash-flow situations whereby they needed the lowered payment. "Should I be mistaken," O'Hara said concerned, "they would come to us and we would work it out."