There are two primary types of financing needed by cooperative members: blanket mortgages and share loans.
The blanket mortgage is the loan obtained to cover the primary costs of developing the property. It is the responsibility of the cooperative corporation and is repaid as part of the members' monthly charge. A blanket mortgage can be refinanced at a later date to obtain a lower rate if rates fall, or to obtain additional funds for major rehabilitation, or for any other purpose allowed by the Articles of Incorporation. Blanket mortgages are usually secured against the property and are typically first mortgages.
Share loans are obtained by the individual members. These are not usually required by the first members if the amount needed to purchase a share to join the co-op is relatively low. An amount roughly equivalent to the first and last months' rent plus a deposit for renting an apartment in the same neighborhood is the affordable entry goal of many LEHC developers. However, if the resale formula allows for reasonable increase of property value, the later generations of households that buy the rights to a unit may need financial assistance for the purchase. The share loan is the member's individual financial responsibility. The loan is considered personal property and is secured by the Occupancy Agreement.
Determining Financial and Subsidy Needs
The blanket mortgage has similarities to a regular first mortgage for a rental property. As with any low-income housing development, the developer must determine the feasibility of carrying the first mortgage. This process is accomplished by working backwards.
1Determine the carrying charges that are affordable to the target population.
2Project the vacancy rate and potential losses from nonpayment of member charges.
3Establish the actual operating expenses and the necessary reserves.
4Deduct vacancy, losses, operating expenses and reserves from the potential income .
5Subtract the debt service coverage that lenders require. The remaining amount is available to pay debt service on the blanket mortgage.
6Negotiate the best loan available from a lender, based on rate and term with any possible modifications to debt service coverage, vacancy rate, operating expenses, and the other costs.
7Ensure loan repayments are reasonable for the members.
8Calculate subsidy needed. The difference between the affordable loan amount and the total costs of developing the property (including acquisition, construction, architect, etc.) is the amount needed in subsidy. In situations where members can only pay operating expenses, the property development and debt service must be paid for with some form of subsidy or equity.
Co-op developers face two financial needs: a loan and a subsidy. The blanket loans are available from conventional lenders and from specialized lenders such as the National Cooperative Bank (and its subsidiary, the National Cooperative Bank Development Corporation), which focuses on community development. Lenders (and lender consortia) vary in their familiarity with the cooperative legal structures and lending requirements. Nevertheless, cooperative housing loans have been made in many parts of the country, although extra security enhancement (e.g., local government guarantee, insurance) is sometimes necessary.
Obtaining a blanket loan requires clearing several hurdles:
Lenders can be reluctant to lend on property with recorded covenants that restrict the value for several reasons:
they worry that the restrictions do not offer adequate incentives for co-op members to concern themselves with the property.
if the co-op defaults and the lender needs to foreclose, the lender, as well as any new buyer, could have to maintain the affordability requirements and restrictions. These restrictions will limit the value of the property compared to a similar property without restrictions, constraining the resale possibilities (as well as the value as shown in the appraisal).
Appraisals of a co-op by an appraiser unfamiliar with co-ops can generate under valuations. If the co-op lacks subsidy sources, it will need a relatively high appraisal value to obtain a high loan amount. Lenders who are comfortable making loans to cooperatives can act as a resource to less familiar lenders.
Borrowing can be used to lower the costs for residents. Lower cost credit exists from loan funds and religious institutions. They can provide short-term loans at lower rates that could lower the total costs of development. They may also be able to offer the primary loan if the amount and term fall within their lending capabilities.
Obtaining Subsidy
Need Money?
Potential subsidies include widely used programs such as Community Development Block Grants, local housing trust funds, the Federal Home Loan Bank's Affordable Housing Program, Section 8 and Hope VI.
As with any low-income housing development, LEHCs require subsidy. Many of the local, state, and federal programs that provide subsidy and security enhancement for other types of low-income housing developments are also available to cooperatives. Tax increment financing is available in states that utilize this financing approach. A local or state government can allocate general revenues for this purpose. Foundations and religious institutions are also good sources.
There are three different kinds of subsidies and all are frequently employed:
Interest subsidies reduce the cost of financing.
Rental subsidies, such as Section 8, reduce the monthly payments for individual
households.
Capital subsidies, usually grants, are made to the co-op at the beginning of development to reduce the need for financing.
The final financial and subsidy package is usually a patchwork of programs and sources that form the financial base of a successful housing development. Please see the resources for further ideas about lenders and possible subsidy sources.
