Underlying co-op loans tend to be lower leverage and are highly desired in CMBS. The loans are a niche product mainly because not many residential properties are under a cooperative form of ownership outside the New York metropolitan area.
A residential cooperative, or co-op, is a legal entity, usually a corporation, that owns real estate consisting of one or more residential buildings. The corporation is membership-based, with membership granted by way of a share purchase in the cooperative. Each shareholder in the corporation is granted the right to occupy one housing unit. A primary advantage of the housing cooperative is the pooling of the members’ resources so that their buying power is leveraged, thus lowering the cost per member in all the services and products associated with home ownership. Each unit owner/shareholder pays its pro-rata share of the costs to operate the building, including taxes, insurance and common utilities. Each owner is free to sell the share in the corporation representing their unit in the open market. The corporation is managed by a board of elected officers.
So where does a CMBS loan fit in a co-operative structure? Many residential buildings that are under a co-operative form of ownership were previously rental apartments that were “converted” into a co-op. As part of the conversion, the co-op assumed the existing mortgage secured by the apartment buildings. This loan is known as the “underlying” mortgage. The mortgage is typically a balloon that eventually matures and needs to be refinanced. In addition, the refinancing provides an opportunity to increase the loan amount to provide for major capital improvements. Plus, the loan needs to be non-recourse to the unit owner/shareholder. A CMBS conduit loans fits all of the above parameters and is an excellent choice for co-op boards.
“We have done a handful of underlying co-op loans at ValueXpress, mainly as a function of our proximity to the New York metro area, which has many co-ops,” commented Michael D. Sneden, Executive Vice President at ValueXpress. “We remain on the lookout for more of these transactions.”