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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

What Lies Beneath?

After years of dealing with a sagging first floor, a Chelsea co-op board dug down to look at the problem – and came up with a fistful of real estate gold.

 

When a small but significant chunk of Kathryn Bedke’s first-floor foyer collapsed into her co-op’s basement in 2003, the five- by eight-inch hole offered a peek at what many owners in the tony West 23rd Street cooperative had long wondered about but had never actually seen: what lurked beneath?

Instead of what the residents expected – solid dirt – there was roughly four feet of empty space, sitting on top of another nine feet or so of dirt. It was a partially excavated basement. Could this be the long-sought answer to this co-op’s perennial question: “How do we create more space – and find more money – for our building?”

And so began the four-year saga of one co-op board that coaxed, cajoled, insisted, and finally prevailed in its quest to dig down to dig out of its cash conundrum. Was it possible to clear out the rest of the dirt, and create a real basement and shore up the first floor once and for all?

 

Things That Make You Go “Hmm”

Built in 1937 as a rental, Chelsea Gardens is a six-story, block-long, 170-unit building at 255 West 23rd Street. It was mostly a solid affair, except for the first floors of the units on the 24th Street side of the building. As the decades passed, the sub-flooring began to dry out, creating dips and valleys in the floors that left shareholders tiptoeing around their apartments.

Keeping up with the sagging floors was a consistent headache for the board. From time to time, engineers were called in to assess the problem, which they would squint at through small openings in the basement walls. Plywood was laid down, propping up jacks that were raised and lowered according to shareholders’ needs. After the jacks came “lally” columns, made of adjustable metal and inserted below the floorboards to be ratcheted up or down.

“It was really a hodgepodge, slapdash way to take care of the problem,” recalls Lia Troy, the former president of the seven-person board. A shareholder would complain about a sagging floor “and the remedy was to install another column.” The board always knew that the columns were temporary, but with all the other pressing needs of the building, thinking long-term about the floor stayed on the back burner.

But then a small part of Kathryn Bedke’s front hall literally gave way, and although there wasn’t quite an “aha!” moment as the board pondered the opening in Bedke’s foyer, there was a long, thoughtful “maybe ...” Since Bedke’s foyer so obviously had to be repaired, “if we are going to do that, why not think about scooping out the dirt?” remembers Gil Neary, a board director.

It was an interesting idea, but one that would have to wait. First, the storefronts on the 23rd Street side of the building had to be repaired and then the mechanisms of four elevator banks had to be updated. Then there were the day-to-day operations of the building to track and more than 200 shareholders to keep happy.

But the hole in Bedke’s unit gave Troy an idea. She researched the history of the sagging floors and amassed a pile of paper documenting the amount of money spent to keep shoring up the first floor. “I thought [what we were doing] was not the best way.”

Curious, she finally climbed into the unfinished basement herself and looked around. Then, she started to bring other people there, beginning with a series of construction consultants and engineers, trying to get their assessment of what could be done. “I had them excavate [the dirt] in sections,” which led to a mini-revelation: with some of the dirt removed, the basement walls measured 13 feet high, tall enough to meet the legal requirements for occupation. If all the dirt in the basement was removed, the co-op would be sitting on an additional 5,000 square feet – space it could either sell to the shareholders on the first floor to create duplexes or offer to buyers as new units.

It was an exciting idea, but Troy, a real estate broker with years of experience dealing with the whims of homeowners and would-be homeowners, wanted to move carefully. After getting general opinions about the use of the space, she convinced the board to hire a structural engineer to prepare a formal report. “He was in there about an hour and a half, two hours, and said as far as he could tell, excavating the space was possible – it would have air/light, ventilation, windows.” For the board, the project was a go.

 

All on Board

Slowly a plan began to form. To pay for the excavation of the basement, the board decided it would sell the super’s two-bedroom apartment on the first floor, move the super into a new, three-bedroom apartment in the basement, and carve up the remaining basement space for sale to either the shareholders on the first floor – to make duplexes – or as stand-alone apartments for new buyers. It seemed like a win-win for everyone involved.

With new construction costing roughly $350 a square foot and co-ops selling in Chelsea for about $1,000 a square foot, the board was convinced that it could make a tidy sum, earning back not only the excavation costs but securing upwards of $30,000 to $40,000 – the equivalent of a year in additional maintenance. That would be thousands of dollars in additional income in perpetuity for the co-op. It seemed like too good an opportunity to pass up. But first, the board needed to know whether the first-floor shareholders wanted in.

“We began to talk with people [on the first floor] about whether they would be interested,” recalls Neary. “Several of the shareholders, including two then-board members, expressed keen interest in the idea.” To make sure the first-floor shareholders were on board, Troy brought each of them down to the basement to stand in the partially excavated space and talk about the possibilities. With those shareholders signed on, it was time to pitch the idea to the full Chelsea Gardens co-op family.

The first informational meeting was held in the building’s lobby in 2006 – and the board members were peppered with questions. How long would the excavation take? How much would it cost? How much did the co-op think it would earn from the sale of the super’s apartment and the raw space in the basement? Was there enough money to start the project? What about the construction? How would it affect the building’s quality of life?

Going to the shareholders was strictly optional, explains Troy. “It was clearly laid out in the bylaws that the board of directors can [claim] unused space and relocate the super, but I didn’t feel comfortable doing something like this [unilaterally].”

At the first town hall meeting, the board presented the parameters of the project. The co-op had a $1 million line of credit from Citibank. It would use that money to start the excavation, and then after the super’s apartment was sold, that money would be used to pay down the line of credit. Then the sale of the raw space in the basement would pay for the rest of the excavation. Finally, the co-op would be able to collect maintenance on five additional units, thus helping to secure the co-op’s finances in perpetuity. At the next public meeting, the board had the architect present an outline of the project and answer questions. Finally, there was the vote. More than two-thirds of the shareholders were in favor of the renovation.

 

Dusty Days

Then, as Neary recalls, the real challenge began. “We had to pick an architect and begin the work.” The board itself had “a gazillion” meetings on the best way to proceed. The architect designed a plan, the board hired a construction firm to clear out the basement and then, as Neary puts it, the first headache started. To empty out of the basement, the dry dirt had to be wetted down and then shoveled into buckets and carried out. While the watering reduced some of the dust, it was impossible to contain all of it, and the halls, elevators and apartments on the 24th Street side of the co-op became dusty.

After the dust came larger problems. “There was more granite and shale than was anticipated,” recalls Neary. “That gave us about six weeks of jack-hammering, which really drove everyone crazy.” Then, a shareholder on the third floor sent the board a photo of a crack in his wall, which he maintains was caused by the work. So the directors brought in a second engineering firm to assess the project. When that firm said more bracing had to be put on the building, the project engineer balked. The board got a third opinion and fired the project engineer.

“We switched architecture plans and initiated a redesign of the support structure,” adding structural steel in the basement and installing bracing on the outside of the building for two months, says Neary “Of course, that was a little bit alarming to people,” seeing the braces on the outside of the building, but the work proceeded.

But tension continued to rise. Frustrated with the dust and the noise, a group of shareholders, including the first-floor residents on the 24th Street side, filed suit against the board, the architect, the construction company, and the management company last spring, complaining about the excessive noise and dust and asking for reparations. The lawsuit was filed after the dirt had been removed and the jack-hammering had ended, according to Neary and Troy, and after each of the affected shareholders had been awarded $7,500 apiece. (Because of the litigation, Rudd Realty, the building’s manager, declined to comment. The co-op’s lawyer did not return repeated phone calls.)

While acknowledging that several of his clients were initially among the most supportive of the project, Joel M. Lutwin, an attorney for the plaintiffs, says their enthusiasm waned as the days wore on. “The project was ill-conceived. The noise was tremendous – the jack-hammering, the welding gas, dust so thick you couldn’t see. The board said, ‘Oh, that’s terrible,’ and then did nothing.” Lutwin refuses to disclose how much his clients wanted.

Neary maintains the board was very sympathetic to the shareholders, touring the affected apartments, and responded to shareholder’s concerns by changing engineers and putting additional bracing on the building. “We always knew we would have to compensate them for the enormous inconvenience,” says Neary. “We had meetings, conversations, daily e-mails about noise, dust, odor. We had double the number of air machines, additional barriers between the ceiling and the lower level of the first-floor apartments. The problem is, if the boulder is rolling down the hill, you can’t stop it.”

While the jack-hammering was onerous, it was hard to stop it once it was started – after all, the shale and granite had to be removed. Then the plumbing lines had to be replaced, windows cut, and part of the gardens re-landscaped, all of which pushed the cost of the excavation upwards, from $1.5 million to more than $2.5 million.

 

Dark Before Dawn

But while the obstacles seemed daunting, the board and the shareholders persevered. Things got worse when the Department of Buildings (DOB) issued a stop-work order, citing technical violations. For six months, nothing happened on the excavation project. The irony, says Troy, was that the order came after the excavation was completed. Floors once supported by “jacks placed on plywood sitting in dirt” were now resting on a “fortress-like foundation” of concrete, brick, and steel,” writes the board president Jason Turken in the co-op’s first newsletter, distributed in February. “The new, garden-level windows, and walkways already add charm to the garden and courtyard” and units “continue to sell at market rates.”

While the lawsuit over the excavation has raised questions with potential buyers, “none of the prospective buyers or their banks have ultimately indicated any hesitation to move forward with investment in Chelsea Gardens,” he concludes. “I have a very positive outlook and believe that the physical environment at Chelsea Gardens will be lovelier than ever and the historically high happiness quotient will not only recover, but reach new heights.”

The lessons? When a board takes on such an extensive project as this, it is incumbent upon the board members to not just rely on the management company to keep shareholders apprised of what is going to happen but to consider the literal fallout (dust and noise) alongside the metaphorical fallout complaints and possibly litigation. The board must do whatever it can up front to mitigate the effects of the work, points out C. Jaye Berger, an attorney specializing in co-ops and condos and construction law. “What did the board do in terms of letting people know about the project timeline?” Even though they have the power and authority to take on such a huge project, the board members “still have to consider the human aspect” of the project, she says.

At the end of March, the board finally had some good news – the DOB announced that the stop-work order had been lifted and the basement renovation could continue. And, even though the super’s apartment is still unsold, Neary, who has co-managed a Chelsea real estate firm for more than two decades, is confident that it will sell and close to the asking price of $1.1 million. That money will go into the reserve fund. The sale of the basement units will help pay for the excavation costs. And the board will have five more units paying maintenance in perpetuity – no small feat.

Says Neary: “The project makes money for the rest of the life of the co-op, as opposed to a couple of years. Not only are we fixing what was structurally a problem, but we found a way to generate income from the sale of the apartments. We are sitting in a building that is very under-built, in a very expensive neighborhood in the middle of Manhattan and we were able to create this additional space. Somehow or other, we are going to figure out a way to make this beneficial to everyone here.”

Was it all worth the effort? “I’ve never been good at answering what-if questions,” notes Neary. “However, in my life, I have learned that I regret things I have not done more than things I have done. Is there anything that’s worth doing that’s not a pain to do?”

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