In a 63-unit building near Prospect Park, the sponsor controlled slightly over 53 percent of the shares and would not sell any more apartments. Instead, he contracted with social service charities to house homeless people or other “difficult to place” clients. He also used co-op funds to renovate units he owned. Then, a shareholder appointed by the sponsor abruptly resigned from the board, and the balance of power shifted. The newly empowered board voided the building’s contract with its managing agent, an affiliate of the sponsor. The initial gathering of this board was held just before the annual meeting. The sponsor, who had gotten wind of the decision to fire the manager, quickly nominated a new tenant-shareholder whom no one had ever seen before but who could prove he was an owner. He was elected over the objections of the other resident-shareholders. The sponsor now held a total of three seats, a majority. At the next meeting, the new board passed a resolution canceling everything that had been accomplished by the old board, i.e., the firing of the agent.
A horror story from the sponsor-control days of the 1980s? Guess again. It’s a story from the supposedly (virtually) sponsor-free era of the 2000s, when the famous 511 West 232 Street Owners Corp. v. Jennifer Realty Corp. decision was supposed to have forced many sponsor stick-in-the-muds to give up control of the properties they had converted. Apparently, that isn’t the situation in boroughs outside of Manhattan. In dozens of buildings, mainly in Brooklyn and the Bronx, tenant-shareholders cite cases of abusive, just-won’t-quit sponsors (see box, p. 16), which has in turn led Brooklyn Assembly members Helene Weinstein and Jim Brennan to secure more funding for Attorney General Andrew Cuomo to beef up his enforcement staff.
Sponsors are intended to be the spark that gets a co-op up and running. But once the fire of tenant-shareholder management is lit, sponsors should pack up and ship out, with a modest profit. Or maybe not. Some sponsors believe their role has no expiration date. Instead, they have a new business model: managing rental operations and profiting from the properties, with or without the consent of the tenant-shareholders who actually occupy them. How profit? “The sponsor deducts the maintenance and the operating costs from the rental income received from each apartment and determines an annual net profit for each unit,” explains Arthur I. Weinstein, a co-op attorney. “When the annual net profit from renting exceeds the anticipated annual income to be produced from the net proceeds of the possible sale of the unit, the sponsor has no incentive to sell.” He adds that “there are, of course, many other factors involved in each sponsor’s decision-making process, including anticipation of future price increases, and the need to fund shortfalls between maintenance and rental from rent-regulated units.”
Battle of the Boards
Consider the case of Paul Stovel, a shareholder who was elected to a board at 2215-75 Cruger Avenue in the Bronx (the board was, however, later invalidated by the courts). Purchasing his cooperative apartment in 1988, Stovel found himself in what he calls a nightmarish situation: the sponsor not only controlled the managing agent but used sponsor-friendly purchasers to buy units so that he could control more than 50 percent of the shares. Stovel says that the sponsor, a corporation called Daejan New York Limited, which is headed by Labe Twerski and represented at meetings by Joshua Frankel, controls a majority of the co-op’s shares and rents but does not sell. Instead, asserts Stovel, Daejan buys back apartments from residents who want out. In some cases, it even installs compliant shareholders who back the sponsor, thereby circumventing the rule against sponsor control after five years. (These allegations are contained in a complaint filed at State Supreme Court in the Bronx by Stovel and other shareholders of 2215-75 Cruger Avenue.)
“He’s on both sides of the ledger, both owning a minority stake [three seats] on the board as the sponsor, and also having an additional seat voted by [friendly] shareholders...for a total of four out of the seven board seats,” says Stovel, who works in real estate.
Stovel and other determined tenant-shareholders called a meeting in early 2007 and elected a slate of directors that Daejan refused to recognize. In June 2007, Frankel, representing Daejan, sent a letter to the tenant-shareholders of 2215-75 Cruger Avenue in which he made it clear that they had no legal authority to hold a meeting on their own because Daejan holds 59.4 percent of the stock of the cooperative and a quorum is set at 50 percent of the shares. Any action taken at such a meeting, Frankel wrote, “is void and illegal. Any action taken as a result of such an illegal meeting may result in personal liability to those individuals who have directed the taking of any [such] action.”
Soon after that, the Stovel group filed two actions in Bronx Supreme Court against Daejan. In the first, its members argued that they were duly elected and that the Daejan board is actually the invalid one. Stovel says that Daejan tried to disrupt the election that Stovel’s board had called, stationing the building superintendent outside the meeting room to tell tenants that there was no meeting. According to Stovel, the sponsor also sent letters to shareholders telling them not to attend Stovel’s meeting. Meanwhile, Frankel, of Daejan, held his own election at his offices and declared his board elected.
Stovel and others – who filed legal papers against the co-op corporation, Daejan, Twerski, Frankel, and related parties – contend that the sponsor’s refusal to give up building control and sell apartments puts it in violation of the law and voids its right to constitute a legal board and manage the building. The papers say that the building’s manager, Residential Management is controlled by Daejan, which shares the same address.
The purpose of the exercise, Stovel says, is for Daejan to profit in at least four ways. First, the sponsor circumvents rent control and rent stabilization laws, which don’t apply to a co-op apartment after the original renter moves out. Second, by creating a wraparound mortgage for the building, the sponsor gains an investment vehicle with tax advantages that is partially paid for by tenant-shareholders. Third, the sponsor remains a landlord in the lucrative New York City rental market. Fourth, the sponsor can make loans to the co-op on his terms and call them in at will, profiting from investments made by the other shareholders.
This leaves those tenant-shareholders looking to increase the value of their holdings and manage their own affairs in a distinctly inferior position, contends Stovel. Their desire to bring up building values by upgrading amenities and building systems is at cross purposes with the sponsor’s desire to put profit first. Says Stovel: “The sponsor’s interest is in running the building down to save money as much as possible – as long as it doesn’t go under – because it’s just a rental to him.”
The Stovel group’s second action in State Supreme Court cites the landmark Jennifer Realty case, which, broadly speaking, required the sponsor to let the property be a “viable” co-op. In line with that, the Stovel group action contends that the sponsor is not selling apartments, that Daejan is “openly and notoriously” renting them, that it is abusing its powers, and that it has used its management company to obtain negative information on tenant-shareholders. Daejan then alledgedly takes owners to housing court to seek their eviction. In addition, the suit contends that Daejan has refinanced the building’s underlying mortgage without board approval and has affixed signatures to legal documents which were not actually signed by duly elected board members to facilitate the loan.
Stovel says that Daejan’s allied company, Arasta Finances USA, is servicing a loan for $100,000 made to the co-op, which the shareholders did not approve and for which “there is no stated reason.” Stovel says his board cannot find any record of where the money went. “The more we looked into it,” Stovel notes, “the more we started to realize that Arasta, Daejan, and another firm called Dirot Reaty are all closely related.”
Stovel and others have filed a complaint with the attorney general’s office, and New York City Councilman James Vacca has reportedly gotten involved and is helping Stovel’s group. Telephone calls to Daejan’s Labe Twerski for comment were not returned.
Out of Control
Meanwhile, Diane Stein, a tenant-shareholder at 160 Ocean Parkway in Brooklyn, has her own sponsor problems. Benjamin Hirsch, the principal of Kensington Terrace Apartments and the man who converted the 54-unit building, has kept control of the cooperative for more than the requisite five years. As board secretary, she claims that she is being unlawfully thwarted in carrying out her fiduciary duties. Her conflicts with the sponsor date from 2003, when she was first elected to the corporation’s board of directors. From that time on, she says, it’s been a pitched battle, and she’s been in and out of office, with the board fighting to refinance the building’s mortgage and make other improvements and Hirsch not going along or ignoring them. She says that he made all decisions on building repairs and mortgage terms by a majority vote (which he dictated) until an election in August of 2007.
As a new board member back in 2003 – Stein got on the board to “protect her investment” – she says she pushed for Hirsch to pay back maintenance and arrears. In a 2003 letter to Deputy Attorney General Nancy Haber, Stein, who works for the teamsters’ union, said that Hirsch owed back monies and was “involved in an active campaign to undermine the legally constituted Board of Directors…to milk the building for profit,” and that in response to calls to repay back money he used his shares to call for a new election, which was scheduled for August 14, 2003. On that afternoon, as Stein prepared to leave her Manhattan office, the lights started to flicker and a citywide blackout hit New York, stranding commuters. Hirsch held his meeting anyway in the darkened lobby of 160 Ocean Parkway, obtaining a statement from the building’s doorman that a lawful meeting had been held. He says he used the meeting to approve a new insurance policy for the co-op, but Stein says he notified shareholders that he controlled a new board of directors. A sworn October 2008 affidavit by Stein at Kings County Supreme Court further says Hirsch treats the cooperative corporation as “his personal fiefdom, to prevent needed maintenance and repairs and cavalierly thwart the reasonable desires of the tenant cooperators.”
On August 27, 2007, Stein and other tenant-shareholders won seven seats on the board (later offering one seat to Hirsch since he still had an interest in the building). According to Stein, Hirsch then employed intimidation tactics, threatening her personally with litigation. She tried to reason with him: “I took him aside, and said, ‘We would get farther if you would understand that you have to make people comfortable.’ He replied, ‘This is business, I don’t have to make people comfortable.’ ”
The new board has moved to make needed repairs, including correcting elevator violations, but Hirsch is only paying maintenance and assessments that existed before the new board came on – and not any of the later increases, arguing that the current board is not valid. The board tried to refinance the mortgage for about $850,000 but Hirsch went to court. A judge then enjoined the board from making any long-term agreements, not wanting to rule immediately on who legitimately controlled the majority of co-op shares.
Hirsch, whose company owns a number of properties in central Brooklyn, denies Stein’s charges and says that she and other tenant-shareholders are overreacting. He insists that the interests of the sponsor are the same as those of the tenant-shareholders: to have a secure, well-managed, and healthy property. “We want the building to run well,” he says. Hirsch notes that he became active in building affairs when a loan came due and Stein’s group of tenant-shareholders wanted to refinance the building to a level of debt that he called irresponsible. He says that the tenant-shareholders mishandled a mortgage deal that would have locked in a low-interest rate some years back. “Crazy things were happening,” he says, “and we had to get involved [in building management].”
He says that he is the victim of shareholders who “send out scary letters and spread slander to get people riled up.”
Hirsch acknowledges that he filed a legal action against certain tenant-shareholders who contend that they are a legitimately elected co-op board, based on a lawful election in August of 2007. Hirsch disputes that.
Stein charges that Hirsch is determined not to sell additional apartments to prospective owners, something he does not deny. “I’m in the rental business,” he notes. At the same time, he contends that selling apartments has not been a problem for tenant-shareholders at 160 Ocean Parkway and that Kensington Terrace Apartments has taken a passive role in vetting new applicants. “As long as they have [good financials],” he says, “we don’t get involved. That’s a neighbor issue.”
Hirsch says that tenant-shareholders like Stein want to have it both ways, and seek to change the character of a building which was a known quantity when they moved in. “Every person who bought into this building bought into the status quo,” he observes. “So, for them to cry foul now is disingenuous at best. This is the nature of this building. You will pay less [for an apartment] in a building with substantial sponsor control. [Stein] got her [good purchase price] because this was and is the situation.”
Stein sees it differently. “Now we’re doing the elevator repairs and everything else the building needs,” she says. “We worked our asses off to hold the building together. But we’re at a legal standstill. We can’t have an annual election because we can’t get a quorum. Hirsch doesn’t come to meetings and he has convinced the holders of unsold shares to stay away from meetings, so we’re continuing to serve. At least the shareholders now know what is going on at 160 Ocean Parkway.”
That knowledge has come from newsletters the board members send out and from the nature of the tenancy. “We’re a tight-knit building,” Stein says. “Everyone is interested.”
But few are as involved as Stein and her colleagues Beverly Wasserman, a retired clerical worker, and the president, Dominic Diorio, an accountant who “was very helpful in making the refinancing make sense to us.”
Money is on Stein’s mind these days, too – other people’s, which she is trying to protect, and her own and her fellow board members which they are spending on the lawsuit with Hirsch. “The co-op’s insurance won’t pay for it,” she says matter-of-factly.
As for advice to others: the teamster worker has a solid lesson that could be drawn from her union job: “Organizing is key. You’ve got to stick together in order to survive.”
The FDC Strikes Back
If the sponsor won’t give up control, what can a co-op do? To whom can the owners turn? On September 10, 2008, a meeting convened by Brooklyn’s Flatbush Development Corporation (FDC) provided some answers. At the session, 75 angry co-op shareholders heard Brooklyn Assembly members Jim Brennan and Helene Weinstein, along with FDC staff and attorney Beatrice Lesser (who litigated the landmark 511 West 232 Street Owners Corp. v. Jennifer Realty Corp. case) explore the limits of sponsor control. Jennifer demonstrated that a sponsor can be held liable for harming the viability of a co-op – by milking it for money, for example, to the point where operational expenses cannot be met.
In building after building, tenant-shareholders who have put up with bad management stood to add their voices to the chorus. From the huge Mansfield Gardens co-op, Arlene Lennon said that her super often goes missing and that the board is “inactive.” Vicky Madden, of 300 Ocean Parkway, complained that “the sponsor sells apartments at or below market rates to cronies.” A cooperator from the Bronx (who did not want his name mentioned) put up a list of key points in his co-op that seemed to resonate with everyone: the sponsor, he said, (1) has financial control and is also the management company; (2) the building is beholden to the sponsor for money; (3) the board is “at the beck and call” of the sponsor; (4) there is no reserve fund; (5) the sponsor has not sold apartments for years. The striking similarity of the problems led him to talk about “cross-pollination” among sponsors. “This is a whole lot bigger than what we believe to be the case,” he said.
Robin Redmond, the executive director of the FDC, took an activist position that pleased many in attendance: “We want to create a citywide movement to help cooperators who are struggling with sponsors who do not have the building’s best interests in mind,” she said. Lesser held what amounted to a mini-legal clinic at the FDC meeting, noting that Jennifer compelled the sponsor-controlled board to sell shares. But that litigation, proving that the co-op was not viable, took ten years. After considering the above cases, the definition of a non-viable co-op emerged. “You have to have regular meetings. You have to be able to reach all apartments. You have to be able to refinance your mortgage. You have to have a reserve fund. The board must be in control. Otherwise, the co-op is not viable, and you can bring a Jennifer[-type] case. But that takes money and determination.”
Lesser urged a rent strike if the warranty of habitability is violated, and she called the loose confederacy of sponsors behaving badly “a money-making machine” that can only be fought through collective action. “[As an individual, you] can do it yourself. But if you try, you’re picked off.”
For more information about the FDC and upcoming events: e-mail: email@example.com or phone Aga Trojniak at FDC (718) 859-4763.