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Metamorphosis

Kafkaesque. It may not be the first word that comes to mind when you think about the problems that can besiege a New York City cooperative. But then you surely haven’t heard about what happened at 328 West 17th Street. It makes waking up with the body of a gigantic insect – as happened to poor Gregor Samsa in Franz Kafka’s “The Metamorphosis” – look like a day at the beach.

Years ago, when this co-op’s crisis reached its peak, a shareholder named Jeff Goldstein said woefully: “There’s only one word to describe it all: Kafkaesque. This is a nightmare of major proportions.”

Today, the co-op has not only awakened from its nightmare, it has entered a sort of happy dream condition where the finances are in shape, the building has been refurbished, and shareholders and renters live in a state of contentment and harmony.

“They overcame a lot of challenges,” says Lynn Whiting, director of management at Argo, which has managed the building since 2001. “When we took over, there were a ton of violations, there were people paying $90 a month in rent, there was litigation. Today, it’s a different property – completely different. It’s actually quite charming.”

How this nearly miraculous metamorphosis came to pass is a story that can chill – and educate – every co-op board in the city.

Misapplied Money

It began in 1984, during the first flush of the city’s co-op frenzy, when a developer named John Siegel formed a limited partnership to buy the five-story, 64-unit walk-up apartment building at 328 West 17th Street in Chelsea. That block, between Eighth and Ninth Avenues, still had its share of grittiness at the time, but Siegel saw a bright future for the area. He was not alone.

Three years later, after securing a generous $1.4 million mortgage from Central Federal Savings Bank, Siegel converted the building to a co-op under a non-eviction plan. Eighteen people, a mix of insiders and newcomers, bought into the corporation at prices ranging from $90,000 to $100,000. The remaining units were rent-controlled and rent-stabilized apartments that were renting for an average of about $200 a month.

Most of the shareholders – an eclectic mix that included an art director, a firefighter, a computer programmer, and a massage therapist – were happy with their renovated spaces. No one knew that dark clouds were about to converge on Wall Street.

On October 19, 1987, just as the co-op was getting on its feet, Black Monday hit. The Dow Jones industrial average lost a staggering $500 million that day, and the city’s real estate market, recently so up, soon followed the stock market down the drain.

The implications for 328 West 17th Street were cataclysmic. Siegel, president of the co-op’s original three-member board, did not let the shareholders know that he was encountering rough seas, not only at 328 but at several of his other properties as well. With his income from the building’s rent-controlled and rent-stabilized apartments locked in at a low figure by city law, Siegel had hoped to cover the mortgage with profits from sales. But with the real estate market suddenly flat, prospective buyers did not come knocking.

Although shareholders didn’t know it, Siegel was in such a bind that he was using their maintenance payments to run the building – not to pay off the mortgage. It wasn’t until 1990, when the state attorney general began requiring sponsors to disclose any arrears, that the alarm finally went off.

“That’s when we first found out we were in trouble,” Michael Heitner, a former board member, said in the early 1990s.

Make that a world of trouble.

Impending Doom

Financial statements disclosed that Siegel was five months in arrears for 70 percent of the building. When concerned shareholders went directly to Central Federal Savings Bank, they learned the harrowing truth: foreclosure proceedings had already begun. Papers would arrive in a matter of weeks.

Faced with impending doom – the very real prospect of losing their investments and their homes – the minority shareholders banded together and decided to fight for their survival.

After hiring attorney Robert Tierman, they stopped making maintenance payments to Siegel. Tierman, meanwhile, began talking to the bank – and the story got even darker. “Central got caught up in the co-op appreciation craze,” Tierman told Habitat back in 1991. “Banks were very naïve in making their appraisals.”

So naïve, it turned out, that the federal Resolution Trust Corporation (RTC) was already in the process of shutting down Central Federal and liquidating its assets. Meanwhile, the sinking bank had gotten a court-appointed receiver, Phyllis Solomon, to supervise the co-op’s finances.

The move proved to be nothing but a large dose of salt in the co-op’s wounds. The receiver and the shareholders clashed instantly, frequently, and bitterly.

When rental leases expired, for instance, rather than putting the units up for sale – which would have been the logical way to bolster the building’s sagging finances – Solomon granted the tenants new two-year leases. (Receivers were pocketing five percent of a building’s rental income.) She also told frustrated shareholders that she did not have the legal authority to sell apartments.

The building’s anemic operating funds thinned even more when several renters, unhappy with the condition of the property, staged a rent strike. Rather than going after Siegel and the renters, Solomon sued the minority stockholders for withholding their maintenance during the foreclosure fight.

While this tempest was raging, Siegel quietly fled the city in favor of sunny Florida, and Central Federal Savings Bank finally went under. Then a court not only rejected the shareholders’ suit to have the receiver removed, it also awarded Solomon control of the shareholders’ escrow account, which was paying the lawyer.

Shareholder morale hit rock bottom. Many wanted to simply give up, forfeit their apartments, go elsewhere, and start over.

Brigham Golden, a shareholder since 1995 and a former board president, still remembers just how hard everyone had to scrape to keep the co-op alive. In fact, the spirit of camaraderie that developed in that time of crisis led shareholders to refer to the co-op, only half-jokingly, as “The Commune.”

Unable to afford a super, shareholders rolled up their sleeves and did maintenance and renovation work themselves. In a desperate move to raise quick cash and enhance the co-op’s value and creditworthiness, Golden and other shareholders went door-to-door offering renters the chance to buy into the co-op for as little as $2,500. (Astonishingly, they got only two takers from the 40 rental units.)

Meanwhile, the blooming gentrification of Chelsea had not yet filtered down to the still-gritty 300 block of West 17th Street. One day shortly after Golden moved in, a junkie died of an overdose in one of the building’s hallways. Later, a posse of troublemakers who called themselves “The Vampire Cult” tried to burn the place down.

Then, just when it seemed that things couldn’t get any darker, a white knight rode onto the scene.

Enter the White Knight

In 1996, shareholders got Cheshire Partners to agree to pay off the co-op’s debts and provide a line of credit in return for 75 percent of the value of all unsold apartments. “We suddenly felt like we had some breathing room,” says Golden, 38, an anthropologist who travels frequently to Indonesia and Mexico, “but the war had not yet been won.”

Peter Schultz, the board’s current treasurer, bought into the co-op in 1996 at the transitional moment when Cheshire Partners and the co-op were entering into their somewhat unorthodox relationship. “The co-op wasn’t in good shape financially,” says Schultz, 48, an architect and furniture maker. “Some of the very first issues we attacked were large payables on the order of a couple hundred thousand dollars, such things as attorneys’ fees and arrears in property taxes.”

The board also embarked on a farsighted, three-pronged campaign to secure its financial future: it aggressively tried to sell apartments; it challenged its tax assessment (a reduction was finally obtained in 2002); and it applied for “hardship” status that would allow it to increase rents on rent-controlled and rent-stabilized apartments by as much as 20 percent.

Some basements were renovated with storage spaces that were then rented out. A one percent flip tax was instituted in 2000. Commercial space was rented out to a hair salon. Suddenly, there were new tributaries feeding a healthy, growing income stream.

As the real estate market rebounded and units began to sell, the co-op used its 25 percent of the proceeds from each sale to attack capital improvements, including roof repair and brick repointing. The metamorphosis was under way, but there were still moments of friction between the shareholders and their white knight.

“It was a long, contentious relationship, but no one can complain,” says Golden, who paid $36,000 for his one-bedroom apartment in 1995. “My apartment has increased in value 20 times over what I paid for it.”

In time, the minority shareholders became the majority. Today, only 15 of the 59 units are rentals. (The total number of apartments has declined slightly because of the combining of several apartments.)

“We’re in good shape financially,” says board treasurer Schultz, “better than most co-ops. There’s a cash reserve of $80,000, and the only unfinished capital improvement is replacing the boilers.” Monthly maintenance is far from onerous – about $1 per square foot.

Victor Sidy, the board president since 2004 who is being replaced this year by Wit McKay, says the co-op has changed in other ways. “Only in the past five years has the building been able to make the mental shift from a ‘poverty’ mentality to a more professional way of doing business,” he notes. “In the past, the low bid was the only consideration, quick fixes had to be made. The guidance of our managing agent, Argo, was crucial for us.” He adds that the building’s location and character have tended to attract creative types: actors, designers, photographers, and artists.

“We like to look at a problem from different points of view, discuss it, and run with the best idea,” says Sidy, an architect who is dean of Taliesin West in Arizona. As an example, he cites a plan to plant trees in front of the building. Initially stymied by word that it was illegal to plant trees above underground utilities, residents started researching the matter. They found an infrastructure survey and realized they could plant trees in certain locations. “Now those trees are flourishing,” Sidy says, “and they’ve changed the entire character of the block.”

Golden, the former board president, says simply: “We’re not living on the edge anymore. We’re more of a traditional co-op.” Which is both good and bad, as far as Schultz, the treasurer, is concerned. “Most shareholders are unaware of what’s happening in the building,” he says. “That’s very typical of most co-ops. As people pay more and more for their apartments, they become more demanding.”

The More Things Change

There are at least two lessons to be learned from the metamorphosis of 328 West 17th Street. One, surely, is that the more things change in this city, the more they stay the same. One shareholder even went so far as to describe the co-op’s struggles as a microcosm of what’s happening in the city at large.

“This is not the story of a fancy co-op with a lot of resources, a lot of property. These are very basic people. These are the kind of folks who need to stay in New York to make it a success, yet no one is helping us. That’s the problem with the city. It’s becoming a place for the wealthy and the poor. There is no in-between anymore.”

Those words sound like they were spoken yesterday, don’t they? But they were not. They come from the time when the co-op was teetering on the brink of ruin – way back in 1991. There is, truly, nothing new under the sun.

Another lesson is that crisis can actually be a healthy thing for a co-op. “One thing I learned is that in times of desperation, it’s very clear what’s productive and what’s frivolous,” says Golden. “We didn’t have time for internecine squabbles and small problems. I’ve watched other boards, and it’s shocking how short-sighted and frivolous they can be. Our difficulties strengthened us. The trick is not to lose sight of those lessons as the board changes. We have an institutional memory here.”

Sidy agrees. “We benefited from prioritizing our goals as a board,” he says. “For example, we determined early on that trees, sidewalks, and hallways were more important than new entry doors and stoops. So we put our money there, spending a bit more but having the work done professionally and in a high-quality manner. Also, although the board includes members with a great deal of expertise, we were not reticent about calling upon outside experts as needed.”

The final lesson of this metamorphosis is that white knights, shareholder camaraderie, elbow grease, determination, ingenuity, and pluck are wonderful things, but they can carry a co-op only so far. And they pale in the face of that great double-edged sword known as market forces.

This, in fact, is the crowning irony of the story: the very thing that caused all the trouble in the first place – the relentlessly cyclical nature of the New York City real estate market – is also what brought an end to all the trouble. Just as the co-op suffered mightily thanks to the declining market after Black Monday, it has flourished thanks to the market boom of recent years.

“What allowed this building to make it through the difficult years was the dramatic increase in real estate prices,” says Golden. “If you tried to pick a block in Manhattan that’s been more blessed by the boom, you’d be hard-pressed to find one. In the end, the boom is what saved this building.”

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