Two Co-ops, Two Very Different Paths

Changing Course
When Carole Holland moved into eight-story, 155-unit Maple Plaza in 2012, she quickly learned two things: the building was plagued by shoddy construction, and the co-op was saddled with a $16.7 million mortgage that carried a stinging 6.25 percent interest rate. “There was a lot of infighting,” Holland says. “It was a classic co-op drama.”

Holland got elected to the board in 2012 and eventually helped bring in Halstead Property to begin addressing a host of problems, including unpaid bills, a pair of chronically balky elevators, water leaks, faulty thermostats, and more.

“Changing to Halstead put us on the path to financial solvency,” Holland says, “and that made us attractive to a private bank.” That was crucial for Holland and like-minded shareholders who wanted to get out from under the HDC mortgage and the accompanying HPD regulatory agreement.

“The benefit of a commercial bank loan would not just be money,” Holland says. “It would be the freedom to run the co-op the way we wanted.”

An HDC mortgage and accompanying HPD regulatory agreement have advantages and disadvantages. On the plus side, a co-op enjoys a 421-a real estate tax abatement for 21 years; and income restrictions and resale profit taxes tend to thwart speculators looking to cash in on cheap apartments. On the negative side, subletting is forbidden, the pool of potential commercial tenants is restricted, and the co-op has to cover the expense of HDC’s mortgage insurance and various fees.

Shareholders in Maple Court and Maple Plaza faced a basic philosophical question: should we stay with HDC or should we go get financing from a commercial bank? Put another way: Do I want to keep the building affordable, or am I more concerned about increasing the value of my individual property?

Hamstrung by Debt
Juma Waugh moved into Maple Plaza in 2008 and got elected to the board the following year. It became immediately apparent to him that the HDC mortgage was the co-op’s enemy.

“Our mortgage payments were ridiculous,” Waugh says. “We were hamstrung by our debt, and we couldn’t address the physical problems in the building or plan for the phase-in of real estate taxes, which are scheduled to begin in 2021. One of our motivating factors for refinancing was to prepare for the future.”

So the board put a committee together to canvass lenders. They brought in 10 mortgage packages, including one from HDC with an interest rate and other terms that were not competitive with the commercial banks.

“We could not accept HDC’s terms in good faith,” says Waugh. “It would have kept us tied to them for another 30 years – to their benefit, not ours.”

Finally, on Oct. 15, 2015, the co-op closed on a $13.5 mortgage with National Cooperative Bank that cuts the interest rate from 6.25 percent to 3.95 percent, a savings of $600,000 a year on debt service alone. The mortgage also established a $1 million line of credit. Maple Court, on the other hand, recently refinanced with HDC.
 
Maple Plaza still has a long way to go. While the financial relationship with HDC has been severed, the HPD regulations remain in place until their prescribed expiration in 2021. The sublet ban and income restrictions remain in place, as do restrictions on commercial tenants and parking space rentals.

The new mortgage has freed the board to tackle endemic problems. Now that the elevator mechanicals have been replaced, using money from the reserve fund, the board is preparing to attack a list of projects that include replacing the roof, fixing the non-functioning thermostats, redoing the laundry room, completing mandated Local Law 11 façade work, and installing energy-efficient plumbing and lighting fixtures. The board also hopes to add a playroom for kids and a gym.

“One of our motivating factors for the refinancing was to prepare for the future,” says board vice president Waugh. “I understood that even if we refinanced we would not be able to take advantage of market prices right off the bat. My concern is that future boards don’t have to feel the crunch, the stress and strain of the financial picture we had.”

“I feel extremely positive about the direction we’re going in,” Holland adds. “We’re going to show the direction for other HDC co-ops that want to become traditional co-ops.”