SELLING YOUR CO-OP'S COMMERCIAL SPACE

"We managed to close a major transaction and get a new mortgage without a hiccup," says the co-op board's treasurer, Stanley Nasberg (below at right, with board president Amy Steiner). With a shrug he adds, "It always helps to be lucky."

But co-ops, like people, tend to make their own luck, and 201 East 79th Street (click on image above to expand) is living proof of this maxim. Built in 1964 and converted to a co-op four years later, this 22-story building operated for many years under a "ground lease," meaning the corporation owned the building but not the land it sat on — paying rent to do so. When the lease came up for renegotiation in 1988, the board put an end to this expensive and undesirable arrangement and had the co-op buy the land for $16.5 million.

But freedom from rent brought with it a new $19.2 million mortgage that required a significant jump in maintenance. It was then that the board made the first of many farsighted decisions.

"They decided that since the maintenance was high, they needed to offer more services," says Gerard J. Picaso of Gerard J. Picaso, who has managed the property for the past 20 years. "Their idea was to have Park Avenue services on Third Avenue."

Spending Money to Make Money

An elaborate upgrade began. A concierge shift was added, porter shifts were increased, and a gardening service was brought in to spruce up the portion of the garden that's visible from the lobby. Also, a new resident manager (superintendent) was hired and charged with tight oversight of the 18-member staff. The lobby was renovated, the elevators rebuilt, and the hallways redone. Handicapped and baby-carriage access was enhanced at the rear entrance on 80th Street. The property is kept spotless.

"This building," Picaso says, has "had astute boards that realized that in order to keep the value of apartments appreciating, you have to invest in the building all the time."

Despite the constant upgrading, a major problem remained. The building's commercial tenants — eight stores and a garage — were enjoying rents far below market value because the co-op had to conform with the so-called "80/20 law" (since overhauled), which stated that co-ops would enjoy certain federal tax benefits only if 80 percent of their operating funds came from shareholders and no more than 20 percent from commercial rents.

About four years ago, Picaso began researching the benefits of selling the commercial space instead of collecting underpriced rents. "He thought there was real value in the stores, and so did I," says board treasurer Nasberg, who owns an accounting firm. He and Picaso sat down and worked up some "rough numbers" about what a sale might do to monthly maintenance payments.

Commercial Space Turned Residential Shares

Meanwhile, Picaso brought in Richard Siegler, an attorney with Stroock & Stroock & Lavan. The board hired Cushman & Wakefield as appraisers, and Douglas Elliman Property Management to co-broker the deal with Picaso. Siegler also secured an Internal Revenue Service ruling that would allow the co-op to convert commercial space into residential shares, with the understanding that the buyer would, as a member of the corporation, be free to use the space for either commercial or residential purposes.

"We had a lot of smart people on the board who understood finances," says Picaso. "The goal was to maximize our equity by selling that space and at the same time paying off our $19.2 million mortgage, which we had refinanced a couple of times since the purchase of the land."

One of the key decisions by the board at this time was to keep the process streamlined so that information flowed quickly and accurately between the various professionals and the board.

"The president at this time [the late Dr. Charles Nechemias] gave himself and myself the job of doing some due diligence," says Nasberg. "It became pretty obvious that selling the property made the most sense — if the price [were] right." The right price, according to the appraiser, would be $20 to $22 million.