The Lending Landscape The State of Co-op and Condo Financing

Today, some eight years after the Great Recession, financing for co-op and condominium buildings and individual unit purchases is widely available.  The market is overall quite healthy, and though there have been some systemic changes to this part of the financing world as a result of the financial meltdown of the last decade, today’s co-op and condo financing instruments are remarkably similar to what was typical before.

Co-ops vs. Condos - How They Differ

Perhaps the most basic place to begin is to understand the difference between a co-op property and a condominium. Simply stated, when you buy a condominium you are purchasing real property, just as if you’d purchased a stand-alone single-family house.  When you buy a co-op, you are purchasing shares in a corporation that owns the brick-and-mortar property and you receive a proprietary lease for the unit in which you will live.  These are two very different models of home ownership and require very different financing structures.

Typically, in a co-op building there is a mortgage against the entire property known as the underlying permanent mortgage.  The monthly payments for this mortgage are shared by the unit co-operators as part of their monthly maintenance charges.  No such mortgage exists in a condominium.  In a condominium, each unit is a separate piece of real property, and the common elements – lobby, hallways, physical plant components, and so forth - are owned jointly.  Unlike a co-op, for a condo association there is no single piece of property to act as collateral for a loan.  This is one reason why monthly maintenance charges in co-ops are generally higher than common charges in condominium associations.  It is also one reason why purchase prices of condominiums are generally higher than for co-ops of equivalent size and design.

Financing for Underlying Permanent Mortgages

Underlying permanent mortgages have always been sought-after as a preferred property type by lenders in areas where cooperative apartments are typically found, such as New York City, Chicago and northern New Jersey.  Traditionally, they were made by local savings banks with some participation by insurance companies for larger loans of say, $10 million or more.  More recently, securitized mortgage lenders known as ‘Wall Street-type lenders’ have participated in this space as well.  Some terms required by securitized lenders, such as prepayment restrictions known as ‘yield maintenance’ have made this otherwise well-priced product difficult for co-op boards to access, despite the lower rates generally available through these lenders.

According to Stuart Bruck, director of mortgage brokerage for New York City-based Time Equities, “The standard product for underlying permanent mortgages is a 10-year fixed-rate loan.  The best deal available now, due to the fact that the loan-to-value ratio for this product is so low, is an interest-only mortgage for 10 years.”  


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