One co-op’s tale of crisis, communication, and
Donna rounds remembers well where she was when the wall came tumbling down. “I was here at work and somebody who goes online periodically to the local news came back and she said, ‘Oh, my God! A wall fell and blocked the Henry Hudson Parkway. It’s all closed down.’ I thought, ‘Holy cow,’ and I tore out of here fast. I grabbed a cab and the driver was like, ‘What, are you crazy? You want to go uptown?’ I ended up running uptown – I had meetings all day so I was in my little heels and skirt and it was difficult to get up there – and it was our wall. It was just a nightmare.”
The date was May 12, 2005, and the nightmare had only just begun. A section of the 75-foot-high retaining wall at Castle Village, the 580-unit, five-building cooperative complex in upper Manhattan, had suddenly collapsed onto the highway. For the seven-member board, of which Rounds is the president, it would be the beginning of a journey that sometimes appeared to be never-ending: a journey of callous insurance companies and cash-strapped shareholders, of increasing costs and frustrating ignorance, of raised voices and quiet talk. In short, it would be a journey of discovery and growth, as the board coped with what was, both literally and figuratively, an earth-shattering crisis.
In the Beginning
In its long history, nothing like this had ever happened to Castle Village. Real estate developer Charles Paterno had purchased the land in 1905 and constructed a four-story castle there that he used as his home. That eventually gave way to Castle Village, which Paterno opened in 1939 following the success of another nearby cooperative that he had built in 1924, Hudson View Gardens. (Legend has it that Paterno put up Castle Village in retaliation for the discriminatory housing policies at Hudson View; pointedly, the later property blocks the views at Hudson View.)
Castle Village rests on 7.5 acres of lush greenery on Manhattan’s highest point, the 200-foot bluff at 183rd Street near the George Washington Bridge, Fort Tryon Park, and The Cloisters. Because of the way the buildings were designed, almost every unit has river views. The amenities include sunken living rooms and extra-height ceilings in most apartments; Herringbone and parquet floors; sun-soaked balconies; acres of landscaping, gardens, and walkways; an on-site garage; a community room; a laundry room; a health club; and doormen in each building.
In 1986, Castle Village became a cooperative. According to Rounds, there are now nearly one thousand tenants (not all shareholders), of which 30 to 35 percent are senior citizens, many on fixed incomes; 25 to 30 percent, families with children; and the remainder, professional people, either singles or couples without children.
Rounds, who has a Ph.D. in molecular biophysics and works at Columbia University’s science and technology ventures department, has an eight-year-old son. She bought a unit about eight years ago and began serving on the board four years later. “When I was an undergraduate at Berkeley, there were three ways you could go,” she explains. “The dormitory system, the Greek system with fraternities and sororities, and the cooperative system. I was involved in the cooperative system where you contribute. It’s just my orientation. If there’s something I can do, I have to contribute.”
The 75-foot-high retaining wall, completed in 1925, supports the backyard and over the years had been a concern of various boards. Langan Engineering, the engineer at the time of the collapse, had been monitoring the wall and advising on necessary work. As repairs were required, Rounds says they were done.
As 2005 began, the property was in the midst of various ongoing capital projects, which included modernizing the elevators, replacing the roofs, repointing the façade, and repairing the wall. Taking on so many projects came in part out of necessity – there were leaks in a number of apartments, for instance, which required pointing – and also out of the board’s philosophy.
“Deferred maintenance is not a good thing,” explains Jerry Fingerhut, the current treasurer and a non-board member of the finance committee at the time of the collapse. “I tend to hold fairly strong views about proper upkeep of the building, tempered, of course, by what you can afford.”
The wall was soon to become a top priority. In February of that year, the board received a warning from the engineering firm: an ominous bulging had occurred. The board immediately hired a contractor who, with the engineer, prepared plans and went to the city. There, he encountered maddening delays.
According to Theresa Racht, a partner in Racht & Taffae and the long-time attorney for Castle Village, before issuing the permits, the Department of Transportation (DOT) wanted to get up close and personal. A lane of the highway would have to be closed to perform the repairs, so DOT said it would have to evaluate the impact of that on traffic flow. Only then would it give the go-ahead.
Before the evaluation could be made or permits issued, however, the wall collapsed.
When part of the wall came crashing down, it had the suddenness of a summer storm. Nobody expected it and everyone was stunned. Although no one was injured, half-a-dozen cars were buried in the rubble and traffic was backed up for miles. For the next few days, the site became a hellish crisis zone of flashing lights, blaring sirens, and raised voices, as police, firefighters, and contractors worked feverishly to clear away the rubble and shore up the remaining portion of the wall. “It was just a nightmare for three or four days and nights,” recalls Rounds. “There were trucks and walkie-talkies and this whole high-tech setup that they deployed right away, that night. The area was closed off. There were cars underneath 40 feet of rubble. Thank God nobody was hurt.”
Rounds immediately contacted her fellow board members, the managing agent, and Racht to coordinate the building’s actions. Outside experts who are familiar with the collapse, say that the board’s response to the catastrophe followed the crisis management “playbook” to the letter. A memo was sent to the shareholders, informing them about what had happened. The insurance broker was contacted. All the pertinent documents, including past minutes and engineering reports, were collected and put on CD-ROM. The board then hired attorneys who specialized in insurance and litigation.
An informational meeting for the shareholders was held on May 24, at which Langan Engineering presented the facts of the case. Many of those who attended were still in a kind of shock, recalls Rounds. “What are we going to do?” they kept asking. “What’s happened here? What’s the response?”
For the next two months, Rounds and other board members found that the wall consumed their lives. “You’re running around like a chicken with your head cut off trying to get organized and have some sort of coherent response and sort it out,” Rounds says. “Everybody was literally in a state of shock for probably a week afterwards, trying to figure out everything that needed to be done.”
The board found itself involved in emergency clean-up (it took days) and regular inter-agency meetings with various government authorities (a board member was always present); dealing with concerns by everyone about the stability of the remaining portion of the wall (since no one knew why the catastrophe had occurred); coping with the press (an initial reluctance to talk had led to some negative reports); and keeping shareholders informed.
From the moment of collapse, however, one of the biggest questions was the price tag for the repairs. It seemed to grow larger every day. The city, for example, hit the co-op with whopping emergency repair bills. Its itemized invoice for services rendered charged the co-op $2.1 million for clean-up expenses, listing costs for park rangers, supervisors, contractors – and even the operational figures for area police precincts.
And there was more. The Metropolitan Bridge and Tunnel Authority sued Castle Village for close to $200,000 in “lost tolls” caused by the closing of the highway on that May weekend. It could have been a bad joke, but with everything else going on, it all added up to extra pressure on the board that went beyond the simple nuts-and-bolts of the repair work.
After months of engineering studies and contract bidding, the estimated reconstruction price tag was set at roughly $25 million. Paying that would now become the cooperative’s overriding concern. The complex had $6 million remaining in its reserve fund, some of which was allocated to ongoing capital work. Fingerhut, the treasurer, argued that it would be unwise to spend it all for this one project. “We allocated $2 million of the current reserve account for wall-related expenses, leaving the balance for what we knew to be coming up the pike in terms of needed capital expenditures,” he reports.
So where would the board get the rest of the money?
A Financial Plan
The co-op’s first option was its insurance, but that proved to be a dead end. The carrier was making noises about not paying, arguing that the wall might not be covered. “This is a very, very technical area,” explains Racht. “Is the retaining wall covered? Retaining walls usually are. Well, is this really a retaining wall?”
In December 2005, Castle Village filed a lawsuit against its carrier, and also against its insurance broker and former engineer. Racht told the board not to expect immediate relief from that front, however. “We’re going to have to rebuild that wall before we know what the insurance is going to pay,” she said to them.
Fingerhut, on the finance committee and then as treasurer on the board, looked at many alternatives before settling on the three that seemed the most feasible. What he suggested – and the board implemented – was to use part of the existing reserves, seek a substantial increase in the co-op’s line of credit, and assess the shareholders. (Additional corporate financing totaling $13 million was eventually secured as well. The financing consists of an $8 million construction loan, and a $5 million emergency line of credit)
The assessment was the most significant and controversial blow to the shareholders, one that the board, because of faulty preliminary estimates of the work, had initially felt would be unnecessary. Based on shares, it came to anywhere from $11,000 to in excess of $40,000 per apartment, for a total of $11 million. Fingerhut structured a one-year, three-part payment plan tied to the construction/repair schedule.
To ease the pain of the assessment, arrangements were made with three lenders to provide streamlined shareholder loans. Information was also supplied for shareholders to claim a casualty loss on their 2005 income taxes.
Rounds and Racht say that the board was fortunate to have the volunteer services of Fingerhut. “I had been president of my former co-op for 20 years, so I had plenty of board experience, and joined the Castle Village board when it became clear – and I know it sounds egotistical – that this place really needed some professional business and financial guidance that it wasn’t getting. I am a CPA, I was a partner with a public accounting firm, I was both CFO and CEO of public companies, so I have some expertise in this area.”
According to many of those involved, Fingerhut worked tirelessly for the shareholders, offering financial advice and guidance, negotiating special loans with banks, introducing the residents to the banks to help them get low-interest loans, and working with insurance companies and also the New York State Department of Insurance to help people get paid on their homeowner’s policies so they could pay the assessment. Fingerhut has also successfully concluded negotiations with at least 20 co-op insurance carriers, securing millions of dollars in insurance recoveries for over 90 percent of Castle Village shareholders. In some cases, the recovery paid the assessment in full.
“Some people are very appropriately upset about the amount,” observes Richard Dattner a long-time resident who served as chairman of the architecture committee. “It’s unfortunate. But the board and the financial committee has done an incredible job explaining how people can get some of it back, helping them with an insurance policy. After a long argument, my policy gave me $5,000 for the assessment. The board has been very successful in getting money for people.”
Of the 90 percent of the building complex that is shareholder-owned – the sponsor owns 10 percent – Fingerhut says about 90 percent have paid off the assessment in a timely manner.
Dealing with Dissent
Both in the short and long terms, the board felt it was important to keep the shareholders informed, releasing information (in letters, newsletters, and on the complex’s web site) as it developed, sometimes even when it was incomplete. (That occasionally led to trouble: an early report that no assessment would be necessary was used against the directors by some angry owners.)
Rounds says that the residents were consulted as often as practicable. Initially, for instance, they were asked for suggestions concerning what to do regarding replacement. Many submitted long responses, a few drew sketches of how they would replace the wall: some wanted a swimming pool; others wanted to remove a grove of trees. The board, however, made the final decisions.
The directors also staged quarterly informational meetings, at which Power Point presentations were made, questions answered, and issues raised. The first session was held just a month after the collapse. At each gathering, there were a number of very vocal complaints, primarily because of the large assessment.
“It’s a lot of money,” notes Lynn Schulson, who moved in eight months before the collapse and who is currently running for a position on the board. “I am unhappy with [the board’s] tactics, and the way they’ve gone about doing what they’re doing.” She asserts that the size and the one-year turnaround for paying the assessment is unusual and unfair: “There have been property agents that we’ve spoken to who have said that they’ve never, in their vast experience, ever seen anything as large as this over a capital loss.”
“The shareholders were assessed these insane amounts,” adds another resident, who asked for anonymity out of fear of board reprisals. “We are the only ones that have ever been assessed at that amount. My personal assessment was $17,500. We’re not high-income people.”
The board is sympathetic to such complaints, although Rounds feels that they ignore the steps the board has taken to ease the burden. “Here we had this massive emotional event,” she notes. “Many people who’d been living here – a few who had been here since childhood, but many who had been here for many years – this was the worst possible thing that could ever happen to them. People’s nightmares had come true. When that wall fell down, it was like something ripped open the emotions of some of the people here.”
Such feelings led to a petition-writing campaign for the recall of four members of the board, including Rounds and Fingerhut. (The petition was created by an attorney who, Schulson says, has over 30 years’ co-op experience; he refused to comment on the case.) Schulson claims the dissidents had 26 percent of the shareholders behind them but Racht declared the petition invalid, although she refuses to give her reasons.
Rounds is more frank, saying the dissidents – or at least some of them – did not disclose the real purpose of the proposed meeting to the signatories, falsely asserting that it was for informational purposes only and pressuring people to sign.
Schulson disputes this, swearing that everything was clearly spelled out with no pressure applied. “If people wanted to stand there and talk to me for an hour, even after they said they didn’t want to sign, I would stand there and talk to them for an hour. I was knocking on people’s doors from the time I got home from work until around 9:30 at the latest.” Another anonymous dissident claims it is the board – not her group – that has been using high-pressure “Gestapo tactics” in this situation and others to stop the dissidents from being heard.
Racht is not surprised by such inflamed rhetoric. “Interestingly,” the attorney says, “it is exactly the same faction of people that have opposed everything the board has ever done for years. If the board says the sky is blue, they will insist it’s green and that we don’t know what we’re talking about. Unfortunately, this group feels that all the shareholders should make every decision. But you can’t run a building that way.”
Herb Cooper-Levy, a co-op and condo housing expert who is not associated with Castle Village, says that, in such a situation, dissent is to be expected. “There are always going to be people pissed off because they have to pay money. Equally, those same people are more likely to point a finger and say, ‘You should have done this and this wouldn’t cost me.’ The first reaction of most boards would be, ‘Wait a second, we did this and we did that. We’re doing the best we can.’ But clearly no board is prescient and the most the board can do is to reach out to appropriate skilled professionals to get the best information that they can get and then act appropriately.”
Cooper-Levy suggests that in a large complex like Castle Village where everyone may not be able to attend informational meetings, the board hold smaller gatherings, “more along the lines of block meetings – either building by building or even floor by floor as necessary to really involve folks and assure that the information is getting out. You have a whisper campaign [by dissidents] and things get way out of whack and people believe what they hear. Putting something out in writing helps because then they’ve got information in front of them that the membership can react to. But there’s nothing better than a face-to-face meeting.”
The Past Is Prologue
There are important lessons to be drawn from the crisis at Castle Village. To begin with, in emergencies, the board should try to stay calm and be objective. “You have to decide what you want to do,” Fingerhut says, “what the options are, pick the best course of action, try to decide on how to finance it, who’s going to pay, how you are going to pay – you have to really chart it, so that you can present a cogent argument, first to your fellow board members and then to your shareholders.”
In both crisis and non-crisis situations, the board should be run like a business. “Since I’ve been on the board, my goal has really been to try and make it more professional, try and make it more organized,” Rounds explains. “Part of that means taking a look at what the needs of the co-op are, from maintenance of the physical plant to management of the operation to generating enough revenue to maintain the physical plant.”
The board must also remember that salesmanship is part of the job description. “It’s very easy and glib to be able to say that the board has the authority to do whatever it wants to do in terms of spending money,” says Fingerhut. “That’s true. But we also have to live here. So you have to be able to convince shareholders and anticipate the questions that the shareholders are going to ask about why we chose this action versus any other action, and all the logical questions that develop from it.”
For the future, many of those involved see changes at Castle Village. The co-op is taking on at least an additional $8 million to $10 million in debt, which, Fingerhut admits, is “a serious number. We have reason to believe that our [insurance] recovery will pay off the additional debt. But, certainly, if it doesn’t, it will have a negative impact.” The large debt will also probably change the nature of who can buy there.
But Racht sees at least one positive sign that the co-op has turned a corner. “They have groves of trees on these grounds. And at the last shareholder meeting, nobody wanted to hear about the financing or the wall. They only wanted to hear about the trees. ‘We’re being told they’re all going to be cut down. What about our trees?’ So, the board actually feels they’ve turned a corner. And you know what? I think they have, because it’s no longer ‘how can you assess us this amount of money,’ it’s about ‘what’s going to happen to the trees?’”