While New York City has not been hit as hard by bankruptcies and mortgage foreclosures as many other parts of the country – California and Florida come to mind – this recession is definitely taking its pound of local flesh. The city’s minority neighborhoods are suffering the worst foreclosure hits, and now the pain is spreading to once-invincible suburbs, from Greenwich to Great Neck.
In other words, this recession is proving to be an equal-opportunity monster.
So, it was no great shock when a shareholder started falling behind on his monthly maintenance payments at a 77-unit red-brick co-op in the middle-class Riverdale section of the Bronx. What is remarkable is how the co-op’s board, through diligence and a generous dash of serendipity, turned one shareholder’s misfortune into a bonanza for the entire co-op.
The story began to unfold in late 2007, after the nation’s housing market had begun to show stress fractures but a full year before the city’s real estate market and the world’s economy plummeted. When the shareholder in the Riverdale co-op began to fall behind on his monthly maintenance payments, the board got its attorney involved, but attempts to collect the arrears were spotty. As the co-op’s legal fees mounted, patience began to wear thin.
“Early in the process we tried to be patient,” says Dan Hughes, 59, an assistant professor at Mount Sinai School of Medicine who has lived in the building since 1977 and is now president of the co-op board. “As it dragged on, the outstanding balance waxed and waned but the legal fees kept piling up. The shareholder was not prepared to get his mind around the fact that the legal fees were his responsibility. There were periods when we got no response to our communications.”
Part of the problem was that the shareholder had moved out and the apartment was unoccupied. Since he had used up his three years of subletting rights allotted to all shareholders, there was little hope that he would be able to generate enough surplus income to erase his growing debt.
“After 12 to 15 months of negotiations,” Hughes says, “we drew a line in the sand and said they had to resolve their outstanding financial obligations to the co-op or we would proceed with a dispossess action.”
The five members of the board – Hughes, an attorney, a social worker, and two schoolteachers – had little stomach for seizing a neighbor’s home. But their fiduciary responsibilities left no doubt in their minds that they had to go after the money.
“From the board’s perspective,” says Hughes, “having to chase after some one’s maintenance and then take them to court is not a pleasant process. As a group we regarded this as the option of last resort.”
It was also a “learning process” for the board, says Hughes, as all five members turned to the co-op's three professionals – property manager, attorney, and accountant – for guidance as they attempted to gain possession of the shares and then auction them off. (It was not, strictly speaking, a foreclosure proceeding because the co-op is a corporation, not a lending institution.)
The learning process led to a question that would have great consequences for the building: should the co-op buy the shares or let someone else buy them and simply try to recoup the unpaid maintenance and legal fees?
Carl Borenstein, president of Veritas Property Management, has managed the co-op since 1993 and is deeply familiar with its history. Borenstein and the co-op’s other professionals (the accountant Martin Hirst and attorney Scott Konner of Konner Teitelbaum & Gallagher) advised the board that several conditions should exist before they bid on any apartment. The co-op should have a healthy reserve fund and should not be facing any major expenses or capital improvements; it should have a history of apartments selling for attractively high prices; and the apartment in question should be bought at an attractively low price tag.
The co-op met these conditions, chapter and verse. It was then sitting on healthy reserves of $225,000 and had no major projects coming up. One-bedroom apartments, which sold for an average of $170,000 during the market’s peak, were still fetching about $130,000. Historically, when selling off shares in the co-op, the sponsors had done “very well,” according to one board member. Based on these considerations, the board decided to bid up to $50,000, but no higher, when the apartment was auctioned off on the steps of the Bronx County Courthouse last fall.
Enter that generous dash of serendipity.
At the public auction sale, three parties outbid the board. The directors then had to perform a routine analysis of the top bidder’s financial condition. The top bidder, who’d offered $102,000, was rejected over questions of his income and fears that he was speculating. With the city’s real estate market growing more bearish by the day, the other two bidders hastily withdrew their offers, which were both slightly under $100,000. At a second auction, the board’s $50,000 bid bested the only other bidder.
And just like that, the co-op had purchased the shares to the apartment at a fire-sale price. The board got busy renovating the apartment and prepared to rent it for about $1,200 a month. If the real estate market rebounds, the board may eventually sell the shares.
“It made sense for us to diversify our portfolio,” says Hughes, the board president. “We can rent the apartment and cover our expenses and slowly replenish the reserve fund. With the market so low, why sell now? The longer we hold it, the more valuable it will become, assuming the market strengthens. I don’t think our exposure to loss here is great. Essentially we have an apartment 'in the bank.'”
Borenstein, the property manager, gives the board high marks for turning sour economic conditions into a sweet deal. “I think they did a great job of banding together and establishing what their limits were,” he says. “These are intelligent people who realize how their money should be invested. They keep their shareholders informed, and they take every body’s issues into consideration.”
So there you have it, a recession story with a happy ending. Maybe not for the man who lost his apartment, but certainly for his 76 neighbors who got what Borenstein calls “a steal of a deal.”