You want trouble? Asbestos. A $2.4 million heating bill.
A multi-million-dollar federal lawsuit. The FBI. Neighbor fighting
neighbor. The amazing story of how one co-op faced the many crises of The Perfect Storm
This is a story about a “perfect storm”and how it nearly capsized a co-op in Queens. This storm was made up of terrifying elements – stratospheric heating bills, an onerous mortgage, inflated maintenance, emergency assessments, shareholder mutiny, and, finally, a federal investigation into possible criminal misconduct. Then, just when the co-op appeared to have weathered the worst, it was hit with the ongoing fallout of the credit crisis.
If you think your co-op or condo is immune to such a storm, you might want to think again. That’s what the residents of Parkway Village thought. That’s what the fishermen aboard the Andrea Gail thought, too. And they thought wrong. What happened to Parkway Village could happen to you.
Calm Before the You-Know-What
To begin to understand the complexity of the storm that battered Parkway Village, you have to go back to the beginning. This complex – 109 low-rise brick buildings sprinkled across 37 leafy acres in Kew Gardens Hills – was built in 1947 as rental housing for workers at the fledgling United Nations. At the time, the U.N.’s security council was meeting in nearby Lake Success, Long Island, prior to its 1951 move to permanent quarters overlooking the East River in midtown Manhattan.
From day one, Parkway Village was unique. It was designed by the legendary architectural firm of Schultze & Weaver, which drew up plans for the Waldorf-Astoria and several of the city’s most luxurious hotels. Partly because of its U.N. affiliation, Parkway Village was one of the first multi-racial communities in the country. Over the years, such luminaries as racial activist Roy Wilkins and feminist firebrand Betty Friedan have called it home.
Something less unusual about the complex was the substance that encased its miles of underground heating pipes: asbestos. In 1947, at the height of the city’s post-war building boom, asbestos was a common insulator. Not until 1976 did the National Agency for Research on Cancer classify it as a human carcinogen.
To add to the danger presented by this underground time bomb, all 109 buildings in Parkway Village were serviced by a single boiler. When the complex converted to a co-op in 1982, part of the sponsor’s offering plan was to replace the 35-year-old boiler. This was done, but the original underground pipes were left in place. That turned out to be the key element of the perfect storm.
Soon, the aging pipes began to leak steam so badly that the soil in parts of the complex was hot in the dead of winter. One benefit of this was that certain sidewalks never had to be shoveled – because snow and ice couldn’t form on the hot pavement. The drawbacks, on the other hand, were potentially disastrous. The most severe, of course, was that the steam leaks caused the co-op to start hemorrhaging money. Maintenance, already high, kept rising. Disgruntled shareholders turned annual meetings into shouting matches. Yearly board elections became a “blood sport,” according to one observer.
Then, in 1998, beleaguered board members made a blunder that could easily have taken the co-op down. They signed a 25-year, $20 million self-liquidating mortgage with J.P. Morgan Chase Bank, at an eight percent interest rate. If they chose to refinance the mortgage, the co-op would have to come up with a prepayment penalty of $5 million.
“That mortgage was a trap,” says James Samson, an attorney and partner in Samson Fink & Dubow, who was hired by the board in March specifically to refinance the mortgage and develop an asbestos-removal plan. “Any board that takes out a mortgage for longer than 10 years should be sued for malpractice. These long-term mortgages don’t work because you can’t see what capital improvements you’re going to need down the road.”
The Storm Strikes
Then, just four years into the 25-year mortgage, the final elements of the perfect storm clicked into place. With sections of the heating system beginning to collapse, the financially strapped board decided to cut a corner. Instead of contracting with an outside firm, the board ordered the superintendent to oversee excavations to repair the leaky pipes. But neither the super nor the workers he used were trained in proper asbestos-removal techniques. This cost-cutting measure would prove to be an expensive – and nearly fatal – mistake.
In the beginning of 2006, the co-op paid a staggering $1.8 million for heating fuel, roughly $3,000 per unit and about twice the going rate. Later that year, residents awoke one morning to the sight of Environmental Protection Agency (EPA) workers, dressed in haz-mat suits, digging into the grounds in search of illegally buried asbestos. Federal Bureau of Investigation agents watched them work.
An ensuing investigation into the co-op’s absestos-removal practices led the Occupational Safety and Health Administration to levy $117,000 in fines (which the co-op subsequently negotiated down to $70,000). The U.S. Attorney’s office then began an investigation to see if the co-op could be charged with criminal violations.
Battered by these developments, a group of disgruntled shareholders formed the Strategic Marketing Directive Committee and began urging fellow shareholders to explore the market value of the property. One supporter of the committee, speaking on condition of anonymity, says the committee’s ultimate goal has never been to dissolve the co-op and sell the entire property to a developer, as stated in several published accounts.
“We would like to investigate the market value of the property,” this shareholder says. “That’s all we want to do. I love living here.”
Such claims are disingenuous in the eyes of the co-op’s general counsel, Abbey Goldstein, a partner at Goldstein & Greenlaw. “They wanted to establish market value for the express purpose of selling,” he says.
In any event, voluntary dissolution of the co-op is unlikely. It would require approval of 80 percent of shareholders – and eviction of the occupants of 70 rental apartments, many of which are rent-stabilized.
In response to the committee’s activities, a rival group called Preserve Parkway began meeting, hoping to dissuade fellow shareholders from pursuing a sale. The factions became known as “Sell Parkway” and “Save Parkway.” It was neighbor against neighbor.
Then the storm actually intensified. Last winter, sections of tunnels collapsed, leaving 225 apartments without heat. Temporary boilers and fuel tanks were brought in as a stopgap measure. With fuel prices soaring, the co-op’s heating bill for the year hit the truly harrowing figure of $2.4 million, which led to yet another assessment.
Parkway Village had finally reached the brink.
Shelter from the Storm
Alan Bentz-Letts has lived at Parkway Village since 1986, but it wasn’t until the summer of 2007 that he became alarmed that he might actually lose his home. He started attending meetings of Preserve Parkway and soon became a co-chairman of the group.
When the co-op’s annual board of directors election approached last September, Bentz-Letts and five like-minded members of Preserve Parkway ran for the six available seats on the seven-member board. (The seventh seat is held by the sponsor.) The Preserve Parkway slate won four seats, while a rival slate won two.
“Our group’s overall goal is to restore Parkway Village to its original beauty and stability,” says Bentz-Letts, a 65-year-old ordained minister who now works as a chaplain at a hospice. “Replacing the heating system is the top priority. A new mortgage is crucial. Other priorities are being more responsive to maintenance complaints, having regular communication through our newsletter and town hall meetings and website, and continuing to speed up renovations of building exteriors.”
But after just a few weeks on the job, Bentz-Letts and the other three members of the board’s majority faction realized just what a monstrous challenge they had undertaken. Despite their shared sense of mission, personal idiosyncrasies began to surface. With the fate of the co-op hanging in the balance, nerves frayed and tempers flared.
“We started having clashes,” Bentz-Letts says of his allies on the board, Ephraim Talmi, Tony Boehm, and Dennis Garcia. “As a chaplain, I do counseling, so it’s something I was familiar with. In December, we had a meeting. I shared an incident about how I’d worked out a problem with my father. The others followed my lead and shared something about their personal histories. That helped us realize we all had vulnerabilities, and it added a softer edge to our discussions. We could approach each other as human beings.”
When all is said and done, that meeting may stand out as a pivotal event. With a renewed sense of unity, the majority faction got busy. The board started meeting once a week, sometimes more often. It hired an engineering firm to develop options for the heating system, another firm to develop an asbestos-removal plan. In March, it decided to install one or two (depending on the size of the building) gas-fired boilers in the basement of each property. The new system would make it possible to remove the old steam plant and simply abandon the asbestos-encased underground lines.
The only way to cover the $14.5 million price tag would be to refinance the mortgage. But Chase, despite the recent wave of foreclosures brought on by the credit crunch, kept insisting that the co-op pay the outstanding $15.5 million on the loan and the $5 million penalty.
“They’re taking advantage of our position,” Goldstein, the co-op’s general counsel, said during the negotiations. “Because they know we’re desperate to refinance, they’re trying to skin us.”
To get the co-op out from under the existing mortgage, attorney James Samson was brought in to negotiate with Chase while exploring options with other lenders. Samson worked out an agreement for a $39 million, 10-year mortgage with the National Cooperative Bank at a 6.4 percent interest rate. It would enable the co-op to escape the Chase mortgage, install the new boilers and gas lines in all buildings, dispose of all exposed asbestos in basements and crawl spaces – and still have money left over for long-neglected capital improvements.
The minority faction on the board was not pleased. “They chose the most expensive, invasive heating system that was proposed,” says Susan Emmi, a math teacher who has served on and off the board since 2004 and is a member of a dissident group, Explore Your Options. (The other dissident is Linda Carlino, who was elected in 2007 and is active in the Strategic Marketing Directive Committee.) “The board was about to enter into a $39 million loan,” Emmi adds. “We’ve been told that if that goes through, maintenance could go up another 10 percent, plus another assessment. This is a middle-class co-op. It cannot afford that mortgage.”
A Solution at Last?
This already-complicated maze of problems achieved Catch-22 status because everything was predicated on laying to rest the prospect of criminal charges by the U.S. Attorney. The federal government is not renowned for making swift decisions, but with another winter looming, patience was a luxury the co-op simply could not afford.
“We needed to get the [criminal] complaint resolved before we could get the new financing,” says Bentz-Letts. “So, in April we asked our criminal lawyer, Richard Finkel, to approach the government and say we needed to reach a settlement, and we needed it urgently.”
A meeting was held in June. Taryn Merkel, the U.S. Attorney handling the criminal complaint, adopted a “hard line,” according to Bentz-Letts. When the government proposed a settlement in mid-July, Finkel advised the board not to sign. He then went back to the feds seeking a compromise.
Finally, on August 5 the board voted to accept the deal Finkel had hammered out with the U.S. Attorney and the Environmental Protection Agency. Under what’s known as a “deferred prosecution agreement,” the co-op agreed to pay the EPA $490,000 to cover the expenses it incurred while excavating the property and removing asbestos. The board also agreed to publish ads in newspapers acknowledging that the co-op had disposed of asbestos improperly. Criminal charges would remain in abeyance for three years while the heating system is repaired and asbestos is removed from basements and crawl spaces. If the co-op complies with the conditions of the agreement, the charges will be dropped after three years. “We fully expect that within 36 months this will be a closed book,” says Finkel.
“We’ll have this hanging over our heads for three years, but that shouldn’t be a problem,” Bentz-Letts says. “At least now we can begin to repair our reputation. We take this seriously, and we’ll abide by all the government’s provisions.”
“Clearly the co-op and board will have to be careful,” adds Goldstein, the general counsel. “But there’s no reason to expect a problem.”
The Turning Point
While negotiations with the federal government were at their most intense, the board got some unsettling news. The disgruntled minority board members, Emmi and Carlino, announced that they were quitting the board.
“We were ignored,” Emmi says. “After nine months, there was no reason for us to be on the board. I just got tired of it.”
But the former board members did not go quietly. They hired an attorney, Eliot Zuckerman, and began circulating a petition calling for a new board election. After claiming to have secured the signatures of 25 percent of the shareholders, as required by the bylaws, the group presented the petition to the board on July 7.
Zuckerman declined to comment, but Goldstein, the board’s general counsel, says it’s unlikely the board will schedule an election before the next regularly scheduled vote on November 12.
“They essentially want to stop us in our tracks,” Goldstein says of the former board members. “They want a new board that would stop the refinancing. But the existing board has taken the position that, with all that’s going on, we can’t in good faith hold an election. It would be irresponsible.”
After the National Cooperative Bank signed off on the deferred prosecution agreement, the new mortgage was signed. Only one hurdle remained: Fannie Mae had guarantee the mortgage. Everyone involved thought it was a mere formality, and so work on removing exposed asbestos was finally begun in late summer. Meanwhile, another crew got ready to start installing new boilers.
Then came the thunderclap. On September 7, the federal government announced that it was placing the troubled mortgage giants, Fannie Mae and Freddie Mac, in a conservatorship. The next day, the Parkway Village board learned that Fannie Mae had declined to guarantee the mortgage.
“We jumped over all the hurdles and we were one step away!” says an obviously distraught Bentz-Letts. “We applied at the worst possible moment. This would have gone through at any other time. Now we’re paying for the government’s failure to regulate the banks and these subprime mortgages. Innocent people suffer.”
But Bentz-Letts vows to find a way to secure a mortgage that will enable Parkway Village to stay afloat. “We’re going to keep fighting and try to find our way out of this,” he says, “either without Fannie Mae or with some other bank.”
“They weren’t willing to sit down and talk with us, this is an indication that they were having problems on their side. The plan was so intricate that if any one part failed the whole thing would fail. And in this case, we didn’t get that last part,” says Samson, who adds: “We’re going to go to other lenders who deal with non-Fannie Mae loans. There’s got to be financing out there. I’ll find it.”
Despite such determination, Bentz-Letts can’t conceal his disappointment that the rescue plan had foundered at the last minute. “I’m discouraged, disheartened and tired,” he says. “But we’re not going to let this stop us.”
As Bentz-Letts sees it, Parkway Village should serve as a cautionary tale for the many co-op and condo complexes in the city that have asbestos time-bombs ticking on their property. “Many co-ops are starting to realize they’re going to have to deal with this,” he says. “We’re one of the first to go ahead and deal with it completely.”
“A lot of times these very complicated problems don’t get solved until a board is pushed to the brink,” says Samson, the attorney. “This is hair-raising for the professionals. We had to do very radical surgery – and the patient may not survive.”
“We had a clear platform of what we were going to do,” Bentz-Letts says of his majority faction. “The four of us kept our unity, we met every week, sometimes twice a week. It was hard work, but we kept our eye on the platform. We hired good professionals and good consultants, and a strong sense of mission kept us going. We knew we had to do the work this year, so our backs were to the wall. We knew we couldn’t use the old solutions because if we did, we were going to lose our homes. Old boards didn’t have the gumption to make the tough decisions.”
There’s still work to be done. For one thing, a new mortgage has to be negotiated without the backing of Fannie Mae. For another, early board elections have resulted in a high rate of turnover among both board members and property managers. “That needs to be fixed,” says Bentz-Letts. “I’d like to put in two-year terms.”
Whether the board terms are extended to two years or remain at one year, though, he and his Save Parkway compatriots all plan to run for re-election on November 12. “We want to see this done properly,” he says. “We all want to see it to completion.”
Engineering A Solution
After its pivotal meeting in December of 2007, the majority faction on the Parkway Village board had to get busy exploring options and making tough decisions. Time was of the essence. In January of this year, EME Group, which had conducted a New York State Energy and Research Development Authority (NYSERDA) audit for the co-op in 2007, was hired and charged with developing a list of options for replacing the worn-out heating system. David Newton, a mechanical engineer with EME, produced five possible scenarios. The one favored by the board – installing a boiler in every apartment – would have cost a prohibitive $21 million. The board opted instead to install two highly efficient “condensing” boilers in the basement of every building, at a cost of about $14.5 million.
Then, as required by city law, Airtek Environmental Corp., an environmental consulting firm, was brought in to survey the exposed asbestos in all basements and crawl spaces. Airtek produced cost estimates for asbestos removal. The company will monitor all work and inspect every apartment for asbestos. Airtek’s services will cost the co-op a bit more than $200,000.
Bids were put out and contracts were signed. Asbestos removal work began in early August, and installation of boilers began after Labor Day.
“It is our intention that by Thanksgiving, the portion of the campus serviced by the temporary boilers in the trailers will be completed, and the trailers will be gone,” says Newton. “The whole project will take about a year.”
“We think what they’ve come up with is pretty efficient,” says Benn Lewis, vice president of Airtek. “They’re doing just what they need to do to get this done.”
And when the job is complete, Parkway Village will be one of the snuggest properties in the city. “They will have gone from having one of the least energy-efficient heating systems in the city to having one of the most efficient,” says Newton. “Their savings should come to about $1 million a year.”