When Your Building's Mortgage Bomb Explodes in 2025

If your building's mortgage is coming due soon, you're not alone — and you're definitely not prepared for what's coming. Don Einsidler, president of Einsidler Management, reveals the harsh reality facing co-op boards as interest rates skyrocket from the low threes to over six percent. Einsidler shares actual loan scenarios from his portfolio, explains why many boards are dangerously unaware of their loan maturity dates, and provides a roadmap for communicating these inevitable cost increases to shareholders.

If your mortgage was refinanced around 2015, this episode could save your building from budget disaster. Don't wait until the last minute to face the music. Habitat's Paula Chin conducts the interview.

How To Run Your Building: For Co-ops and Condos

Transcript

Paula Chin: Welcome to Inside Track, a conversation with New York's leading property management executives.

I'm Paula Chin with Habitat Magazine, and my guest today is Don Einsidler, president of Einsidler Management. With today's rising interest rates, refinancing an underlying mortgage has never been more expensive, and as a result, many boards are choosing not to increase their, the amount of their mortgage. But with local law mandates, that's often not possible, which means buildings whose mortgage is coming due must face the inevitable.

Don, tell me what's happening with some of your boards and how they're rising to the challenge. 

Don Einsidler: I think the key for now, if the loans are not due yet, but they're coming due in the next year, let's say. A lot of the loans were refinanced as 10 year loans in around 2015. So in 2025 or late 2024, it starts to become a situation where they have to look toward what a refinance looks like.

What the boards are doing, and we're starting to notify them at this point now that we see where rates are here to stay, is how a budget going forward for the inevitable increases in debt service, which is a very large part of their budgets. 

Paula Chin: Now tell me what co-ops are doing to pull off their refis successfully.

Are they extending their amortization period or taking out certain types of loans? In other words, to get the money they need, probably for capital projects. 

Don Einsidler: I had two properties that fortunately refinanced in the last two years, in anticipation of rates rising.

So what they were able to do was basically increase the amount of time they had for amortization. One had a 25 year amortization, they increased it to 30; the other one had a 30 and they increased it to 40. But because of the increasing interest rates, in those instances, the rates were going for from the low threes to, I'm gonna say the mid fours.

Those rates now have sailed, but those two co-ops were successful and still paying the same amount of debt service, which is great. It didn't affect their budget at all by increasing the amortization, as I just said, and also taking out a fair amount of cash for the next 10 years' worth of capital improvements that they need to do.

The climate right now unfortunately, is these same loans that didn't refinance for whatever reason back then, because they didn't wanna pay prepayment penalties, wanted to wait and see what happened. Now the rates are more like six and a half percent or higher, as opposed to even when we were mid refinance period, it was four and a half.

Now it's up two points from there, but still significantly up. A lot of the loans are in the threes and low fours, and now they're gonna go when they do refinance to, I'm gonna say mid sixes, maybe as high as seven. We don't know where rates are gonna go at this point. They have fallen back a little bit. But it's something that we need to watch in the next year and see if there becomes a golden opportunity to pull the trigger on a refinance. 

I don't think that they're gonna have the opportunity to pay the same or less. I think they're gonna definitely have to pay more in debt service and they're gonna have to make a decision how much based on the loan they need and their capital needs. Unless they want to use an assessment for capital needs instead of your loan as a vehicle to get extra funds for the next 10 years.

Paula Chin: So these buildings were foresighted and they were lucky in that they refinanced before the rates went up. What are you telling buildings where, like you said, it's coming due in 2025. Obviously they don't wanna wait till the last minute. So what are you advising them? 

Don Einsidler: We're advising them that they should start the plan now. They need to look at their budgets.

 I just got five quotes on buildings that are coming due in '25. And depending on the amount of their loan and whether it's interest only-- I have one particular loan, unfortunately is interest only. And if their rate went from $3.75M for, let's say $4.175M, and you needed to cover the closing costs, you'd have $4.3M as a new loan at 6.4%. You are looking at an increase of about $9,900 a month in debt service, which equates to about $129,000 a year. So that's a big hit for co-op. Obviously the larger the co-op, usually the larger the loan and they could spread the cost out over more people.

But that's just one scenario of an interest only loan that's coming due.

So I think right now we are just beginning to notify our boards as to what the impact potentially is when their loan comes due.

It's interesting how boards are not necessarily keyed in on when their loan is coming due. Maybe a good treasurer would be, but not all treasurers are created equal. So there's an education process involved too, as to looking at the financial statement, showing them where the information is so they can become familiar with what their loan situation is.

I think it's just one part of inflationary things that the boards have to deal with. Insurance is also through the roof. It's just the nature of the world we live in right now. So it's really more an education of how to plan and not be stuck at the last minute with, oh my God, we need a huge increase.

Maybe we do gradual increases. And I think also communication to the shareholders as to why and what the scenario is. Because nobody likes to pay more, at least with a good explanation to the shareholders of a corporation, it's important for them to know what's coming not get hit with it last minute.

So I think we always say communication is the key to joy, and I believe that's true. Even if you're communicating not such good news. It's important to communicate with your board and your shareholder as to what's coming. 

Paula Chin: Don, do you have an example of a building that you had to remind them and let's say they weren't keeping track and then they looked at when they're coming due and let's say it's very soon. And they were in for a pretty bad shock. Do you have an example like that? And can you tell us what happened there? 

Don Einsidler: We have about a year to go on most of the loans, so we're just beginning to notify the loans. So I don't have an example yet, but what I have done is I have gotten proposals on what a refinance would look like if we did it today.

So I actually have actual numbers and what those increases would be based on certain loan scenarios for them. And most of these, if not all of them, are not cash out loans. That's just to cover the closing costs. Maybe a little bit of cash out, but not like the olden days where you could pay the same, and the rates went from five and a half down to three, and you were able to keep the payment the same and take a big chunk of money out. I don't see the loans as the vehicle that they used to be to take out more money without paying the piper in the budget. 

Paula Chin: Circling back to communication and informing shareholders, obviously when you work with boards on this, part of the plan is to work out their budget and to factor in these increased costs.

Has that been what you're you've been doing? 

Don Einsidler: The 2025 budgets are gonna be due in a couple of months, and I think when we do the 2025 budgets, which are when the vast majority of these loans are coming due, because they were refinanced in 2015, when we do the budget, that would be part of the discussion for the budget and certainly the line item of debt service needs to be the reality check of what's coming and the explanation of why. 

Paula Chin: Meaning it has to likely increase, and you wanna factor that in. 

Don Einsidler: Yes. All of the five loans that I'm looking at are various sizes and different forms of amortization. But I have a loan that's currently $4,674,272 and their existing payment is $20,437 a month. With a new loan of $4.875M at 6.4%, it's gonna go to $27,906 a month, which is increase of 7,400 a month, times 12 is about almost $90,000 a year just for that particular building.

 Again, some of the loans are smaller, one of the larger loans here that I have right now are in the 4 to almost 5 million range. Some of them are $650,000, but you have to assume that if it's a $650,000 loan with a current balance of $580,000, the building is gonna be much smaller. The impact is relative; so if they have a $14,000 increase for that loan going from 4% to 6.7% with 40 year amortization. So while it's a different number, it's also spread over a smaller number of units. So obviously the more the units, the less impact it is. I guess there's a positive thing to high interest rates, and that means that their interest deduction will be higher, although it's blood money to collect.

Paula Chin: Don what's the final takeaway here for our board members? 

Don Einsidler: I think the final takeaway is that boards need to be educated and aware of what's coming, and that they've been fortunate enough to have refinanced the last time in a very great, low interest rate environment.

And unless something significantly happens in the economy to lower these interest rates, that they should expect a large increase. But I think they need to be aware. I think awareness is the first step. There'll be conversations at board meetings about what to do. We all will sit around the room at a board meeting or a Zoom meeting and kick around, "so how do we wanna handle this? How do we wanna communicate?" We certainly have advice for them, obviously honesty is the best policy, but, I think we need to ease the blow and start earlier rather than later to communicate with everybody as to what's happening. 

Paula Chin: Don, this has been very informative and I think a great use to our listeners. Thank you so much for joining us today. 

Don Einsidler: It's my pleasure. If you have any questions, I'm happy to answer them at any time.

Paula Chin: Great.