New York's Cooperative and Condominium Community

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Opportunity Knocks

They were the buyers from hell. Or, at least, that's how the board of an Upper West Side cooperative saw them. The bank had foreclosed on a one-bedroom apartment at the building, located on 181st Street, and then had attempted to sell it. But, from the board's point of view, every prospective purchaser was unsuitable: one was unemployed, another had a criminal record, while a third had been involved in a string of lawsuits. Besides that, the bank was offering the apartment at $50,000 — well below what the board felt was the market value.

The lender, frustrated, threatened litigation. The board, concerned, turned to its attorney, James Samson, a partner in Bangser, Klein, Rocca & Blum. Samson's suggestion to the directors: if you don't like the buyers, buy it and sell it yourselves. So the board did just that, purchasing the unit for $45,000, renovating it for $25,000, and ultimately selling it for $135,000.

Not every board seizes the moment. Samson recalls another co-op at 521 East 88th Street that faced an apartment default. The mortgage-holding bank took over the unit. The market was down, so rather than try and sell it, the bank simply auctioned it off. "A successful bidder bought it for $100," says Samson. "He was an investor. Now, the co-op could have bought the unit and then resold it. But they didn't. It was a good opportunity that they missed."

Opportunity knocks — and some co-ops have been heeding the call, buying units and then selling or renting them and turning a tidy profit. The reasons are varied — some have used the technique to settle litigation, others have done it to hasten the departure of a sponsor — but, whatever the situation, boards that buy have turned a potential problem into an opportunity and, in the process, found extra income for their communities.

"It's a no-brainer," observes Samson. "You make money for the building, and what risks do you run? As the board, you have an inside track: you know what other apartments are selling for, you control the approvals, and if you can't sell it, you can rent it until the market improves."

Nonetheless, there are risks involved and boards considering the do-it-yourself sale option, should be well-versed in all the positives and negatives of the procedures.


First, there are basic questions to ask and answer:

Can a cooperative corporation own an apartment? Aren't shares only allowed to individuals? Until fairly recently, the law, as defined by the Internal Revenue Service, didn't allow corporate ownership of a co-op unit. Now, reports Robert Tierman, a partner in Litwin & Tierman, it is perfectly legal. Although most co-op attorneys frown on outside corporations buying into cooperatives — in such cases, the corporation can turn the apartment into a pied-a-terre for its out-of-town executives — they generally approve of co-ops owning, since boards will presumably be looking out for building interests.

Where does the co-op get the money? Co-ops generally get the cash for purchasing apartments from the operating and/or reserve funds. When the unit is sold, money from the sale — minus closing costs and other expenses — is returned to the reserves or added to the operating funds. If the co-op needs to, it can also take out a line of credit from a bank or a second mortgage on the building.

At closings, who represents the co-op? According to Tierman, the co-op's attorney represents the board, with the manager usually as the transfer agent. The only potential conflict occurs in smaller, self-managed buildings in which the co-op's counsel also serves as transfer agent. In that case, that lawyer is serving in two roles that could present a conflict.

"As the transfer agent, he has a responsibility to be objective concerning all documents," explains Tierman. "Yet there could be a question as to how objective he is. To eliminate that possibility, it would be a better practice to hire a separate counsel for transfers. Purchasers expect the transfer agent to be neutral."

When should the board buy? You should buy any time an opportunity presents itself, although Tierman and others warn that boards should be careful. "You are speculating with other people's money," Tierman notes. "You have a fiduciary responsibility to proceed conservatively."

That said, buying is a question of recognizing a good opportunity. There are a variety of situations where such chances occur: sponsor defaults, litigation, auctions, or staffing difficulties


Some boards have no choice — the sponsor has defaulted and the co-op becomes the owner of last resort. Of course, the lender holding the mortgage on the unit or units in question is the one actually responsible, but, oftentimes, the lender simply wants to unload the unit as quickly (and often as inexpensively) as possible, either at sale or auction. Most boards try to avoid that because it decreases value.

The classic sponsor default scenario took place at Georgetown Mews, a Queens cooperative built in 1952 and converted in 1986. "In August 1989, we began looking into the finances," recalls Samson, the board's attorney. In December 1989, the sponsor sold its shares to a group called Overseas Commodities. In March 1990, the co-op discovered that the sponsor, who held the wraparound mortgage, had incurred late fees of $1.2 million with primary mortgage-holder John Hancock. In addition, the sponsor-selected property manager had rung up a substantial number of unpaid bills.

"Overseas bought the apartments at the top of the market," explains James Goldstick, the account executive at Mark Greenberg Real Estate, the property's management firm. "That meant they had a huge negative cash flow. So they had an enormous amount of problems as the market fell."

By June 1990, Samson had worked out a deal with Hancock; the board kept the Hancock mortgage, lowered interest on the wraparound, and added another mortgage at no increase in cost from the National Cooperative Bank, and gainined money to pay the vendors.

Meanwhile, in the summer of 1992, Overseas stopped paying maintenance on the 430 apartments it owned. "So we defaulted them," Samson says. "As a result, we got an assignment of rent notices to the 430 tenants," meaning that the renters would pay directly to the cooperative. The default also forced Overseas to cure the default. The company paid legal fees, late fees, and assorted other fines that totaled thousands of dollars.

In late 1994, Overseas started to market the units as a package for sale. The board saw an opportunity. Rather than getting another outside owner involved, the directors said, "Why don't we buy the apartments and resell them ourselves?" The daring move was heatedly debated. The risks were great. If the co-op bought the units, it would be a big investment that might not pay off. Some were wary of buying while there was still so much capital repair work needed. But others saw it as a chance to make money that could be recycled into the cooperative.

Observes Samson: "The board made an analysis, and finally decided that it was a good idea to get the apartments. If not, you'd get a new shark in there. Going for it made absolute sense."

The board approached Overseas with an offer to buy the units. After much discussion among lawyers, directors, and the Overseas principals, an unusual transaction was set up which was aimed, partially, at avoiding transfer taxes. On September 1, 1995, the co-op gained effective control of the 313 sponsor units for a purchase price of $750,000.

But where was the money to come from? Samson talked with New York Urban Servicing, a company affiliated with John Hancock, which agreed to lend the cooperative $450,000. Then the co-op decided not to pay water and sewer taxes for a year, which came to $300,000. "That was cheap money," Samson notes. "We paid for it at a nine percent interest rate." In order to sell units — and get the investment back — the board realized it needed working capital. The most efficient way to do that was to restructure the co-op's mortgage debt. It had already refinanced its mortgages a few times for that reason. In November 1998, the co-op refinanced again, obtaining a 15-year fixed rate at 6.85.

The board also had apartments to sell. "As of today's date, we have none available. We sold them all. The last one is under contract," reports Mary Fischer, the current board president. "We were a little leery about the whole idea at first. But we're not unhappy. Five years ago, one-bedrooms were selling in the $40,000 to $50,000 range. Now those same units are going for $100,000 because the market is so good."



In some situations, a co-op may be able to take over investor apartments as part of a deal. That was the case at Lincoln Spencer a 237-unit co-op at West 69th Street and Broadway.

Built in 1903 as a residential hotel with three apartments per floor, Lincoln Spencer was converted in the 1980s by, in current board member Eric Marcus' words, "people who expected to make a quick killing." However, about 30 apartments — mostly rent-stabilized units, occupied by the elderly and others on fixed income — went unsold.

After the market crash of 1987, the sponsor had trouble carrying them. "They were mostly small studio apartments and when the market experienced difficulty, the small studios got hit the most," says Connie Chusid, principal at Chusid Associates, a mortgage broker and financial advisor to the co-op. "There was a huge mortgage by the sponsor, plus a maintenance shortfall, plus the sponsor had assigned himself a commercial lease rent way below market value."

The sponsor was unable to keep paying the maintenance. The co-op, in turn, could not keep up its mortgage payments. In 1994, Lincoln Spencer defaulted, filing for bankruptcy protection. In 1997, as part of its workout arrangement, the board acquired the units for nothing. "Essentially, the sponsor saw them as a negative asset," explains Marcus.

The board saw them differently. At first, the directors toyed with the idea of selling them as a block, but decided against that. "When you have a large group of units, and you sell them all to another investor, you have the danger of someone defaulting you," says Sarah deLaurentis, the current board president. "He could throw us into the financial toilet. So, we decided to hold onto the units and sell them ourselves."

To make up the shortfall between the rents being paid and the maintenance on the units, the co-op assessed the shareholders the difference. That decreased as the co-op slowly sold off the units. Holding onto them — a dangerous move when it was tottering on the financial brink — was a gamble that paid off. Immediately following the bankruptcy, studio apartments were selling for $70,000; they are currently being sold for $150,000. One-bedrooms, formerly $160,000 are going for $400,000. "The prices are just unbelievable," Chusid says.


Besides sponsor defaults and workouts, boards can acquire apartments in other ways and for other reasons. One method is as a means to settle litigation. "Occasionally, there is a dispute with a shareholder," says Tierman, the attorney. "The co-op and the shareholder are in a dispute, and that leads to litigation, with neither side wanting to compromise or back down. This occasionally leads to a shareholder surrendering or selling the apartment [to the co-op] as part of a settlement."

This happens more often than you'd think. "I've often presented it as an alternative when you have a difficult shareholder," observes attorney Richard Siegler, a partner in Stroock & Stroock & Lavan. One board settled a pollution claim by buying, cleaning up, and reselling a unit; another took over an apartment from a couple that had bought the place for their son, who, it turns out, had a drug addiction. Rather than cancel his lease and face possible litigation, the board bought and resold the unit.

The classic settlement case involved the Sherry Netherland, a Fifth Avenue cooperative at 59th Street that was built as a residential hotel years ago. The conflict arose about some years ago, after a portion of the building went co-op. As apartments began selling for as much $6 million, many of these new owners did not like sharing the building with transient tenants. The board passed what some felt were onerous restrictions on the hotel residents. "They felt they did not get the same amenities as the co-op owners," explains Siegler, the attorney for the co-op.

The lawsuit began in 1999, after two hotel investor groups bought the units and felt the board was treating their residents as second-class citizens, denying them amenities and consideration that they claimed was granted to the tenant-shareholders. The lawsuit was settled when the first hotel owner sold his 15 units to the co-op in 2000, and the second sold his 23 units to the co-op in 2001. The board took out a revolving line of credit from the holder of its first mortgage, Emigrant Savings Bank, and also obtained purchase money financing from the seller of the apartments.

Siegler says that it was a "common sense" solution, which has worked out well for the co-op. The lawsuit and acrimony are gone and, as of June 2002, the property only had 10 of the original 38 units still available.


Co-ops can also take over apartments of shareholders in arrears. Clover Dale Gardens, a 168-unit garden apartment co-op complex in Queens had an unusual situation involving that issue: a shareholder, in arrears to the cooperative and owing money to the lender, suddenly died. When her relatives declined to assume responsibility for the unit, the bank holding the mortgage put it up for auction. The board decided to make a bid.

"We thought we'd try," explains Tricia Gallagher, the board president. "We didn't want to get an investor in there. We wanted to keep control. So, we thought we could sell it or, if we couldn't, we'd rent it out."

Using money from the reserve and operating funds, the board topped another bid and acquired the unit. After repainting it and making minor renovations, the board rented the space. "At the time, the market wasn't that good," Gallagher says. "So we figured we'd rent it until things got better and then sell it."

The board found the perfect renter, too: a former owner who had moved out with her husband some time before. After they divorced, she wanted to come back to Clover Dale Gardens. "It worked well," Gallagher notes. "If you have a good tenant, a good manager advising you, and a good financial situation, this works out nicely. If you have a terrible tenant and a bad management company, owning it would probably be an aggravation."


Some boards are even more proactive in buying apartments, using them as a carrot to keep staff members

happy. Plaza 400, a 622-unit East Side cooperative purchased a two-bedroom apartment for its superintendent. "In order to get a first-class super, you need to do that sometimes," explains Siegler, the co-op's attorney. "You can then resell the old super's apartment at a profit."

That was the situation at 428 West 111th Street, a 41-unit cooperative built in 1907 that had a well-respected superintendent who was thinking of moving to another building because his family was getting larger and the one-bedroom apartment in which he was living was becoming too small.

The board discussed the matter and it turned out that one of the directors was selling a larger unit. "We saw an opportunity," explains Denis Berger, the vice president. "We figured we could buy that place, turn it into a super's apartment, and then renovate and sell the old super's apartment. It would accommodate our needs and his."

Berger says that the board took the proceeds from the sale of the smaller apartment, plus upwards of $20,000 from the reserve fund, to purchase the larger unit. "Everything came together in a month; we knew the super needed a larger apartment; one of our board members said she was leaving, we put together the deal."

Although it happened quickly, the decision was not made lightly. The board was concerned about investing such a large amount of money in the purchase. "We've never been flush with money," Berger admits. "But we looked at the economics and decided that it was a very good economic and human resources decision. We could have lost the super."

Berger adds that the co-op has never deferred tough choices, instituting a long-term capital improvement program that regularly upgrades the building's systems. "It was a big investment," he says, "but it was part of our overall vision of how to appropriately run the building. And the sales in our building have gone up substantially, which I think is because of the quality and overall condition of our building. It's about good planning."


Finally, should your board take the risk and buy an apartment? In deciding to purchase, boards must weigh the positives and negatives. "The process has to be thought through and discussed very carefully," warns J. Brian Peters, senior director of management at Rose Associates. "You have a fiduciary responsibility. This is your shareholders' money you are speculating with."

Agrees Tierman: "The board has to carefully analyze that what it's doing makes economic sense. In an up market, New Yorkers are forever talking about the quick profits that can be made. If that bug bites a co-op board and they start speculating, be careful."

Peters says there is a real possibility of self-dealing, as well. "How do you know that a board member is not going to try and sell it to a buddy at an insider price?" he asks.

But many experts say that the positives can far outweigh such considerations. Most co-ops that have taken the plunge have used the profits to build up reserve funds and/or operating expenses and have directly reinvested the money into necessary capital improvements. "The sale of the apartments has provided us with half-a-million dollars for restoration of the facade and for roof work," observes Marcus of Lincoln Spencer. "It was a windfall that helped improve the building."

Such moves, in turn, help increase the value of other apartments. With that in mind, the board at 41 Fifth Avenue transformed a potentially devastating situation into a financial windfall. It started in early 1998, when an out-of-state bank decided it could no longer carry a perennially delinquent shareholder at the 88-unit Manhattan co-op and foreclosed on her shares. Although a good move for the bank, the foreclosure threatened the corporation's fiscal health. The bank offered the shares for the one-bedroom apartment at $144,000 — less than half the market value. That could dangerously lower the market value of the co-op's other shares.

To make matters worse, the financial state of the prospective purchaser did not meet the co-op's standards because he would have had to devote at least 60 percent of his income to maintenance and mortgage payments. The unrenovated apartment also needed anywhere from $5,000 to $50,000 worth of repairs.

The board decided to buy the shares from the bank feeling that, even if shares sold for half their market value, the board could make some profit and protect the value of other units. (To save on the 10 percent commission a broker would get from the foreclosure sale, the board members decided to show the apartment themselves.)

The efforts paid off. Within a week of the co-op's purchase from the foreclosing bank, the co-op sold the apartment on the open market in a bidding war for a whopping $326,110 — over $45,000 more than the record-breaking sale of a one-bedroom at the property only two months before.

Another East Side co-op took similar steps when an investor tried to buy two units well below market price. The board talked with the seller. When he wouldn't budge, the board bought it and then resold it at a significantly higher rate, more than covering its costs and making a significant profit.

In addition, the board keeps investors/speculators out, knows it won't have a hassle over approvals for the buyer, and understands how to price the unit because it has inside information on what other apartments in the co-op have been selling for.

In the end, it may not exactly be a no-brainer, but buying and selling a unit is something a board might want to consider. "It is an individual decision," says Marcus of Lincoln Spencer. "It's a lot of work, but it paid off for us. Every situation is unique, though. I recommend you talk with a great financial advisor and a good attorney, the way we did. The mistake boards make is that too often they try and go it alone."

"I feel it's a win-win for the co-op," concludes Goldstick, the manager. "The board can avoid the bad shareholder and also make a profit in the process. It's all about looking out for opportunities and making the most of them."

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