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The Pitch

You want something done these days, you have to sell it. As in advertise it, market it, convince people that they need it. It’s all about The Pitch.

 

 

Once upon a time in New York, a co-op or condo board considering a major repair or capital improvement had a fairly straightforward row to hoe. Establish the need for the job. Come up with the money to pay for it. Hire the contractor. Make sure the work gets done right.

Today, thanks to the grinding recession and growing unease about spending big dollars, more and more boards are finding that they now face an additional hurdle when they tackle a major repair or capital improvement. They have to sell the project to skittish shareholders or unit-owners. And as some boards are finding, that can be a tough, tough sell.

But not impossible. Here are two stories about boards that developed innovative, sometimes elaborate strategies to sell residents on the wisdom of pursuing major projects.

It’s a Capital Time Now

After redoing the hallways and the ground-floor commercial storefronts during the recent real-estate boom, the board of directors at 200 East 16th Street, a 194-unit co-op at the corner of Third Avenue in Manhattan, was eager to move forward with another major improvement: a lobby renovation.

The architect John Sherman drew up a plan that carried a price tag of about $350,000. Not cheap, to be sure, but definitely affordable for a co-op with a robust reserve fund of about $1.6 million.

Then the recession arrived.

“This [lobby renovation] was something that had been in the works for a couple of years,” says Rafael Weil, a graphic design consultant who is president of the co-op’s seven-member board. “But when the recession hit, we felt we had to be very thorough in explaining to shareholders why we still wanted to pursue the job.”

The co-op’s veteran property manager, Ellen Kornfeld, a vice president at the Lovett Company, knew that selling the project to shareholders was not going to be a leisurely walk on a country road. “We’re in a difficult time,” Kornfeld says. “People are paranoid. There were a lot of things going against this project. We have an empty commercial space, and people were asking, ’How can you spend that kind of money now?’”

But a curious thing happened. As the recession deepened, many tradesmen and contractors went almost overnight from being overworked to being hungry for work. As a result, some were suddenly willing to come down on the prices they were going to charge.

“Right now, you can negotiate prices that in the past you couldn’t,” says Kornfeld. “This is actually the best time to do any kind of renovation project, building upgrades, even replacing boilers. We decided we’d squash the project if we couldn’t get a better price.”’

The board turned to its long-time architect, John Sherman of Sherman Design Group, who had done the hallways and storefront renovations and has developed a good working relationship with the board and with Kornfeld.

“We take the role of client representative,” says Sherman. “We come up with the design, bid it to contractors and subcontractors to get a good price and a good product. By the time we bid [the lobby job], we were entering the down swing of the boom.”

 

Value Engineering

Sherman followed the board’s directive and went back to the contractor, Two-Tone Contracting Corporation, and the woodworker, Encore Millwork, and suggested that they all needed to lower their fees. They were willing. Sherman also did some “value engineering,” finding creative ways to cut costs without compromising the quality of the job. The new price tag was a sharply reduced $230,000.

Meanwhile, Weil had hit on an idea. Rather than try to sell shareholders on the lobby renovation at the annual meeting or through the co-op’s newsletter, he put together a detailed package. It outlined the rationale for going ahead with the project during a recession, and it included architect’s drawings, a budget breakdown, and a detailed construction schedule. The slickly produced package went out to all shareholders.

“While it may seem counter-intuitive to undertake a lobby renovation in the current economic climate,” Weil wrote in the package’s introductory letter to shareholders, “there are a number of compelling reasons for doing so. For example, both the co-op’s architect and contractor have reduced their fees significantly, and the cost of the mill work is now 30 percent less than it was a year ago. Additionally, if we put the project on hold until the economy recovers, there’s a good chance the total cost would increase. The projected budget of the renovation is $230,000 and will be paid from our reserve account, which currently stands at $1.6 million. Therefore, there will be no assessments or maintenance increases for shareholders as a result of this project.”

Despite this air-tight argument, the board was worried that the project would meet with strong opposition. When the package went out, however, a grand total of four shareholders came forward with suggestions. There were no objections, which Weil calls “amazing.”

But before construction began this spring, the board jumped through one more hoop. The lobby was to be closed during the renovation, with the mailboxes and building access moved to the basement. The board brought in the architect to meet with the family that lives in the only apartment that opens directly into the lobby, arguably the residents most acutely affected by the renovation. “The idea was to discuss scheduling of the demolition so they could plan accordingly,” says Weil. “I wanted them to be able to voice their concerns, and I wanted the architect to be there to answer their questions.”

Adds Sherman, the architect: “We felt it was important to sit down and convey to them that they weren’t going to be trapped in their apartment. We created a separate hallway and vestibule for them during the demolition process.”

Going that extra mile was typical of the entire project, Sherman says. “I’ve seen packages like the one Rafael put together on much larger projects before,” he says, “but not in a residential building like this. I think it was a great tool for involving the shareholders.”

When the lobby project is completed this fall, the board will consider the next high-dollar job: building a roof deck. If they decide to move ahead with that project, will they produce another package like the one they produced to sell shareholders on the lobby renovation? “Absolutely,” says Weil. “If there’s one thing we did right, it was creating that package. I think it would be wise to do it again.”

 

Parking Spots for Sale?

Sometimes, the marketing doesn’t go as smoothly. Three years ago, the board of directors at a 78-unit, post-World War II condominium in the Bronx was getting ready to tackle a $100,000 hallway makeover. The laundry list of major repairs would soon grow to $1 million – repointing bricks, upgrading hallways, and replacing two elevators and the roof. There was no question that the work needed to be done sooner rather than later. The question was, how to pay for it?

Assessing unit-owners was the obvious answer. But there are assessments and then there are assessments. Some are more painful than others, and there are ways to ease the pain.

It was Scott Amaral, the board’s secretary, who had the “eureka” moment in late 2006. Rather than renting the building’s 23 garage spaces for just $60 a month, which was then the practice, Amaral asked himself: why not sell the parking spaces as a way to raise revenue and soften the sting of the inevitable assessments?

“I’d seen that some parking spots in Manhattan were going for $40,000 and up, Amaral says. “I didn’t know if we could get that kind of money in the Bronx, but whatever we could get would lessen the amount we had to assess.”

His fellow board members liked the idea, too, but a lawyer advised the board that changing the method of charging for parking spaces would require an amendment to the condo’s bylaws, which had to be approved by a two-thirds “super-majority” of unit-owners. The issue was complicated because the sponsor owned about 30 percent of the apartments, and she wanted a discount on the price of several of the parking spaces her rental tenants already held. The board acquiesced. Logical, of course.

It then hired a real estate agent who was familiar with the neighborhood to suggest a fair market price for each garage space. The agent came up with a figure of $30,000, which struck some people as high but also got rid of any appearance that the board was trying to give a sweetheart deal to the people currently renting the spaces. (Residents already using the spaces would have the first option to buy them, under the proposed plan. If a shareholder or tenant left the building, the apartment’s parking space would then be sold to the person at the head of a waiting list that has existed for several years.)

Then, the complicated discussions got even more complex. An attorney advised the board that it had the power to borrow money against the building’s income from common charges, thanks to a law that had been passed since the building had converted to a condo. This, too, would require approval of a super-majority of the unit-owners. And, naturally, they’d see the wisdom of the plan.

“The lawyer suggested we should take advantage of it,” says Amaral. “Since we’re taking the garage issue to owners, we thought, why not throw in the borrowing issue and give the board another tool?”

It may have all sounded like a good idea at the time, but guess what? Ideas don’t sell themselves (well, not usually). And an idea that involved giving the board new power and asking the unit-owners to fork over more money were not ideas guaranteed to sail through approval without a heavy marketing campaign. Or at least more than a brief mention in the agenda for the meeting.

Anyone who was not as closely involved as the board members were could have seen what would happen next. At the 2008 annual meeting, the unit-owners shot down both proposals. Giving the board the power to borrow money was approved by fewer than 50 percent of those voting. While well over 50 percent approved selling the parking spaces, that number fell short of the required super-majority.

Chastened, the board members admitted to themselves that they had failed to sell the proposals. “We felt we didn’t make enough of a case [as to] why we needed to make the change [on the garage spaces],” says board president Michael Dailey, an attorney who has lived in the building since 1991 and has served on the board since 2000. He adds that tacking on the borrowing provision almost as an afterthought “wasn’t very well thought through.”

Amaral agrees. “The board saw the ability to borrow as a way of avoiding assessments for small repairs,” he says. “But the owners didn’t want the board going into debt because they were afraid we would need an assessment to cover the debt. There was definitely a disconnect.”

The board was discouraged but not beaten. Given the voting percentages, the members decided to give up on pursuing the power to borrow money but stick with the idea of selling the parking spaces. The next time around, though, they vowed to do a better job of selling the idea.

 

A Return Engagement

Over the next 12 months, before another meeting was called to vote again on the proposals, the board undertook a serious marketing program. This time, it broke down the cost of the looming projects, along with the assessments that would be needed to pay for them – both with and without the income from the sale of the parking spaces. The price of each space would reflect “market value” at the time of sale. The board got the sponsor to give up her request for a discounted price. The numbers were mailed to all unit-owners, and the board convened an informational meeting a week before the annual meeting to answer questions and concerns.

“I think what finally sold the owners,” says Amaral, “was that breakdown of assessments. We were able to prove that it’s an old building and a number of systems are nearing the end of their usefulness. The only current option we have is to assess [the] one-, two-, and three-bedroom apartments. [They were] staggering numbers.”

Unless...

“Our other option is to give the board the authority to sell the garage spots,” Amaral notes. “If we do that, here are the numbers.”

Those numbers proved irresistibly attractive. At the 2009 annual meeting, the unit-owners approved selling the parking spaces by an eyelash, 67.65 percent.

Another key to the vote’s success was that a majority was convinced that selling the parking spaces would benefit everyone in the building, even those who never own a parking space. The sponsor, says Amaral, came around to the realization that in the long run, discounted parking spaces were of less value to her than reduced assessments.

The board also changed its marketing pitch. “This year, the one thing the board did differently was giving examples of what the assessments would look like with and without the income from garage sales,” says Amaral.

In the end, as with so many successful selling jobs, this one came down to dollars and sense. “We got it approved the second time around,” says Amaral, “so we must have done something right. We focused on the issue and we got the information out to the people what this meant in real dollars.”

In a cruel twist, however, the board learned that even a successful selling job may not be enough. After the vote, the building’s property manager, Carl Borenstein, president of Veritas Management, consulted two lawyers, who informed him that the board’s original legal advice was wrong.

“They told me a condo can’t condo parking spaces without approval of 100 percent of unit-owners,” Borenstein says. “But they can still do the next best thing: selling easements. This idea is still very, very attractive, but it’s trickier than we thought. It would be a lot easier to do in a co-op than in a condo.”

Amaral, understandably, was chagrined by the news from the lawyers. “It’s frustrating that we put so much time into it and might not get anywhere,” he says. “We’re hoping we can salvage something from it. [The board] will get together in early September to hash out where to go from here.”

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