Roosevelt Island Rivercross Mitchell Lama Co-Op Mortgage Refinancing Terms, 10 years $50 Million Interest Only Loan With Principal Paid At End Of 10 Years - How Repaid Unanswered, Isn't That How The Economy Got Into This Mess?

Image of Rivercross Building Entrance

Very soon, if not yesterday or today, Roosevelt Island's  Rivercross Mitchell Lama Co-Op Building will be refinancing their existing mortgage, made possible by the recent ground lease extension granted to Rivercross by the Roosevelt Island Operating Corporation (RIOC). Some Rivercross residents have expressed concerns with the proposed terms of the mortgage refinancing and unhappiness with what they perceive to be the Rivercross Tenants Corp Board of Directors and management company's failure to adequately provide information on the mortgage refinancing and other issues impacting the Rivercross Building. For instance, a Rivercross resident wrote to me:

...we currently have a 30 yr fixed (I think) 5.45% 25 million dollar mortgage.  The board wants to change to a 50 million dollar mortgage with 25 going to pay off current mortgage, 15 to improvements and 10 to put in the bank to pay real estate transfer taxes "if and when" we leave Mitchell Lama.  The way they want to finance it is with an interest only 10 year 5% mortgage which would take the yearly payment from 1.7 million to 2.5 million.  It is just unbelievable to me that the Board wants to do this, it seems very fiscally inappropriate.  Do they not realize that a 10 year interest only mortgage is a bad idea?

and:

... there is a pre-payment penalty for the current mortgage, which has about $22 million left on it - so $3 million dollars are automatically flushed down the proverbial drain with this new mortgage.  In addition, the board plans to keep the other $10 million in the bank, getting maybe 3% interest while paying 5% interest on it - effectively throwing away 2% of $10,000,000 annually ($200,000 annually) until "if and when" Rivercross privatizes.

Some residents have expressed concern that the terms of the proposed Rivercross Mortgage Refinancing is a very good deal if Rivercross is privatized and a shareholder plans on selling within the 10 year loan term but a very bad plan for those who intend to stay longer as well as any future buyers at Rivercross who will then have to make the $50 million balloon payment or refinance again under very different, the fear is, much higher interest rate environment.

Another Rivercross resident expressed concern over the proposed mortgage refinancing terms this way:

... To pay off the 50 million, it is hoped that money will come in from "flip taxes" should the building privatize. Whatever is not covered by flip taxes or other funds at hand, the building will have to borrow again. If borrowing seems impossible, it is logical to imagine any entity loaning 50 million would have the right to take over ownership of the building.

For people who:

1) are looking to sell their apartment as soon as privatization takes place, or

2) who might have a life expectancy of less than ten years, or

3) have alternate living quarters

there can be less concern over the future of such a loan.

However, any one who would like to continue living in Rivercross, there are four possibilities at the end of ten years :

1) everything works put nicely and "aren't we lucky?"

2) there will be a special assessment to pay off the loan not covered by funds on hand

3) the general economic situation will make a further loan not feasible

4) the building will be taken over by the outfit loaning the 50 million and whatever  ownership equity that came with privatization will disappear.

The proposal seems clever, but is also seems to have a substantial risk level for anyone intending to live here beyond ten years.

One further point, putting the 50 million loan in place practically guarantees privatization, since the overhang of that size loan will be a crusher for sure, without the anticipated flip tax income.

I asked the Rivercross Board to comment and they responded on May 20:

Fact, the interest on the new 10 year loan will be paid every month on a current basis, without raising maintenance.

The principal due in 10 years will be very substantially below the $50 million borrowed, whether Rivercross leaves the Mitchell-Lama Program or not.

If Rivercross leaves the ML Program under the proposed Affordability Plan supported by HCR, accumulated Transfer Fees will reduce the principal due in 10 years by about $15 million.

If Rivercross does not leave the ML Program about $15 million of this borrowing will not be used at the end of 10 years.

In the mean time, Rivercross will have the funds to invest in energy efficiency improvements that will save substantially on its electricity costs and heating bills, not to mention shareholder comfort and environmental benefits, during most of the 10 year period.

Also, the interest rate on the new mortgage will be lower than our current mortgage.

Therefore, this refinancing is good for all Rivercross shareholders, whether they plan to sell their apartments or stay for the long term.

I followed up with the  Rivercross Board including this question:

What is the basis, other than speculation and hope, for the Rivercross Board to conclude that Transfer Fees from future unit shares will reduce the mortgage principal by $15 million in 10 years?

Here is the May 27, 2011 response from the Rivercross Board:

Here is a revised statement from the Rivercross Board regarding the mortgage refinancing. The Board would appreciate it if you would print the statement in its entirety rather than trying to summarize what you think Rivercross is doing. With respect to your question about what happens in 10 years when the principal balance of the loan has to be paid off, this was discussed in detail at the Rivercross annual meeting. The Board intends to issue a follow-up memo for the benefit of shareholders who did not make the meeting in person. When that follow-up memo is distributed to shareholders, we will forward you a copy.

The Board has approved proceeding with replacing the building’s current mortgage (carrying an interest rate of 5.45%) with a new $50,000,000 mortgage. The proceeds of the new mortgage will be used as follows: First, to pay off the existing mortgage (approximately $25,000,000, including prepayment fees); Second, to create a $15,000,000 capital improvement fund to pay for energy-savings investments (new windows, a more energy-efficient heating system and submetering); and Third, to create a $10,000,000 fund to pay the real property transfer taxes that may have to be paid if and when Rivercross leaves the Mitchell-Lama program and becomes a private coop.

The proposed new mortgage would be for a term of 10 years and would only require the payment of interest (no principal) during the ten-year term. As a result, even though the mortgage is for a significantly larger amount, the building’s debt service under the new mortgage (assuming a 5% rate fixed for 10 years on the new mortgage) would only increase in 2012 from $1,768,000 to $2,500,000.

The building would be able to pay this increased debt service without any further increase in maintenance.

This refinancing is good for all Rivercross shareholders, whether they plan to sell their apartments or stay for the long term.

On May 31, I replied:

Thank you for your response. I will publish the Rivercross Board's statement in full and unedited as part of my post on subject.

To clarify the statement, I have been told that there is approximately $22 million left on the existing Rivercross mortgage and that there will be an approximately $3 million prepayment fee on the existing mortgage. Is that true?

Please forward me the Board's Statement on it's plan to repay the mortgage principal when issued. If possible, I would like to include it in Roosevelt Islander Blog post on subject which I will publish this week. If not possible, will publish it when received.

Here I must admit a mistake in that I have not followed up with the Rivercross Board as quickly as I should have to find out how they plan on repaying the $50 million mortgage principal. Having not heard back from the Rivercross Board I sent this email on June 22:

Just following up to see if the Board has issued the memo describing how it intends to pay back the principal balance of the mortgage that you indicated would happen in your message below. If so, can you please forward it to me, as promised, so I can include it in Roosevelt Islander Blog post.

I will publish post on Rivercross Re-financing soon so if there has been any change since last communication or any addition you would like to make, please let me know.

On June 24, the Rivercross Board's representative replied:

The Board has not issued any further memos on the subject.  I expect that there will be a memo issued by the end of next week.

As of the time this post is published, I do not know if the Rivercross Mortgage Refinancing has been executed.

A person who saw my messages to the Rivercross Board objected as unfair the way I phrased the "other than speculation and hope" in regard to the repayment of $50 million mortgage principal question to the Rivercross Board.

I replied to that person:

The question you highlight is not intended to be accusatory nor infer the Rivercross Board is incompetent or trying to mislead anyone.  I am just trying, in a responsible manner, to find out what the facts are regarding this refinancing which I think is of interest to the Roosevelt Island community and contains public policy questions regarding commercial real estate/affordable housing/mortgage lending that has implications beyond Roosevelt Island.

The question is merely intended to obtain a specific basis for the assumptions stated by the RIvercross Board regarding the likelihood of repaying a portion of the $50 million mortgage refinancing with $15 Million in Transfer fees from co-op unit sales over the 10 year period of the loan.

As you know the US and Global economies have been undergoing and are are still undergoing, severe financial difficulties. This is due in large measures to Real Estate Loans that were taken out by borrowers and issued by banks that were based upon very faulty economic assumptions concerning the ability of borrowers to pay back the mortgage. Many of these loans were issued based upon the hope and speculation that the real estate market would continue to rise in value during the following years enabling the faulty loans to be paid off in subsequent sales or refinancings.

I don't think it is unreasonable or unfair to inquire if this lending process is repeating itself on Roosevelt Island. Again, I am not stating or inferring that it is, but asking questions to determine if it is or is not.

As stated before, the Rivercross Board never provided any information, as they promised, regarding how it intends to pay back the $50 million mortgage refinancing principal when it come due in 10 years.

Here is the Rivercross Ground Lease Extension and Term Sheet from RIOC.

UPDATE 7/5 - Received this message from a Reader on July 1:

Board memo received this morning --

"We are delighted to advise you that we have completed the refinancing of the Building's mortgage this morning. .... at an interest rate of 4.64%." Later on in the memo they note "... annual debt service ... will only increase  from $1,768,000 to $2,352,000." without further noting that the first figure includes payments on principal while the second does not.