Six years ago, a retaining wall collapsed and the board at
Castle Village faced staggering challenges. How this Manhattan
cooperative coped – and prospered – is an object lesson in community living.
What doesn’t kill you makes you stronger. That saying could very easily be the motto of Castle Village. The sprawling, 550-unit co-op perched above the Hudson River in upper Manhattan has come through an ordeal that would have annihilated lesser properties.
It began with a catastrophic retaining wall collapse that cost tens of millions of dollars, which led to assessments, which led to finger-pointing, which led to contested insurance claims, which led to lawsuits, which finally led the co-op to the verge of a financial meltdown.
Today, almost miraculously, the physical damage has been repaired, many other improvements have been made, and an air of trust has replaced the suspicion and acrimony that once poisoned relations between shareholders and the board of directors. Along the way, the residents of Castle Village shed their renters’ mentality and became what they truly are: shareholders in a corporation, neighbors, and masters of their own destiny. This is the story of how staggering adversity made one co-op not only stronger, but also sounder, prettier, and just plain better.
The story begins in 1986, when this five-building complex set on 7.5 acres converted to a co-op. By all accounts, relations among the early boards of directors, the shareholders, the hold-out renters, and the sponsor were a stew of suspicion and ill will. Worse, the shareholders failed to grasp that they had stopped renting and were now partners in a corporation.
“There was a landlord-tenant mentality that was confrontational,” says Frank Nadal, who grew up nearby in Washington Heights, rented an apartment at Castle Village in 1983, then became a shareholder three years later. “After conversion there was still a renter’s mentality in a majority of the population. Keeping maintenance down was the top priority of the early boards. As a result, there was a lot of deferred maintenance.”
Nadal served on the board from 1994 to 1997. At that time, he says, “The board was beginning to see the light that you could get more done if you cooperate with the sponsor.” Nadal and his fellow board members passed an assessment for overdue capital improvements – a major break with the miserly practices of past boards. The year after he left the board, Nadal became the co-op’s resident manager, working for Goodstein Management. He’s still on the job.
In 2003, the board took out a $25 million, 10-year mortgage that rebuilt the reserve fund and paid for work on elevators, roofs, parapets, terraces, exterior brick walls, and the 75-foot-high retaining wall that affords the complex its priceless river views. That wall was developing an ominous bulge, and an engineer prepared plans for shoring it up. But while city bureaucrats were considering the engineer’s plans, the unthinkable happened. Late in the afternoon of May 12, 2005, a section of the stone retaining wall collapsed and tumbled onto the Henry Hudson Parkway. No one was killed, but the co-op had stepped into a living hell.
Figuring on Fingerhut
Jerry Fingerhut, an accountant who had worked as a partner in a Wall Street firm and served on the board of a Greenwich Village co-op, moved into Castle Village in 2001. He realized, in the chaotic aftermath of the collapse, that the board was faced with mind-bending challenges: lawsuits, insurance claims, and angry shareholders, plus a massive repair job. Convinced the co-op needed the kind of managerial and financial expertise he possessed, Fingerhut ran for the board in the fall of 2005 and was elected treasurer.
He promptly persuaded the board to pay for the repairs – which would end up costing $27 million – by tapping into the $6 million reserve fund, seeking an increase in the co-op’s line of credit, and imposing three assessments over time, totaling $17.5 million. That broke down to anywhere from $20,000 to $75,000 per apartment.
Facing such staggering costs, Fingerhut took it on himself to help his neighbors negotiate special loans with banks and file for “casualty loss” tax credits. He also worked with dozens of insurance companies so shareholders could collect on their policies’ esoteric “loss assessment rider.” In some cases, those insurance payments covered the entire assessment. The co-op also won an undisclosed amount in a lawsuit against insurers, engineers, and contractors.
Through it all, the board worked to keep shareholders apprised of swiftly changing events via letters, newsletters, and a website, as well as quarterly informational meetings. Those meetings brought out some bitter feelings, which led to a campaign to recall four board members, including Fingerhut.
The recall campaign fizzled, the wall got rebuilt, and it began to look like the co-op was going to make it. A lot of boards would have heaved a sigh of relief and taken a well-deserved vacation. Not the board at Castle Village.
From Walls to Corners
By late 2006, there was a sense that the traumatic experience of the wall collapse and its aftermath had changed something in the culture of the co-op. While there were still some unhappy and outspoken shareholders – witness the recall campaign – there was a dawning realization that the co-op had started acting like a co-op, that is, like a corporation composed of shareholders with shared interests.
“The anger and fingerpointing that used to be directed at the board and management were gone because we were out of the hole,” says Nadal, the property manager. “Our grounds were more beautiful than they were before the collapse.”
Theresa Racht, a partner at Racht & Taffae and the co-op’s longtime attorney, recalls that there was an “upbeat” vibe at the annual meeting in the fall of 2006. “We were moving away from rebuilding the wall,” she says, “and I realized the corporation had turned a corner. There was a lot of positive feeling. We decided that it was the time to do something we had been talking about for a while – redoing the governing documents.”
“There’s no question that the board built up good will and credibility during the wall rebuilding,” says Fingerhut, who was elected president of the board at that 2006 annual meeting. “We decided to use that good will to get the revised documents passed.”
Specifically, the board felt the co-op was losing out on hundreds of thousands of dollars in potential revenue from uncollected storage space rents, fines, sublet fees, and the absence of a transfer fee, or flip tax. To make the desired changes, the co-op would have to rewrite its proprietary lease, which required a “super-majority” of shareholders, in this case, 75 percent. The board, with all the accumulated good will from its handling of the crisis, decided to overhaul all of its corporate documents – not just the proprietary lease, but also the bylaws and articles of incorporation.
This was when the changes in the co-op’s culture became fully apparent for the first time. The board appointed a 30-member committee to get out the vote, and it was something to see. “They took the bit in their teeth,” Fingerhut says. “They were each charged with one-thirtieth of the co-op and it was their job to get them to vote. I put the pressure on week after week, and they were terrific. They realized that this is their home and they need to take responsibility and be proactive. What they found was that the board wasn’t pushing them away.”
The proposed changes were broken down into six items on the ballot, including electric submetering, various fines and fees, a three percent transfer fee, staggered terms for directors, and a change in the “super-majority” from 75 to 66 2/3 percent. In a special election overseen by the Honest Ballot Association, all six measures passed, with 75 to 90 percent of the shareholders voting on each proposal.
“Those numbers are unheard of – we barely get a 50 percent turnout for board elections,” Fingerhut says. “It happened because there was heightened community involvement. That was the birth of community action. That changed the mindset.”?Four years later, that mindset is still in place. And it turns out there’s no end to the challenges it must meet. With the enthusiastic backing of shareholders, the board authorized an energy audit with an eye toward “greening” the property. The audit resulted in an ambitious plan to launch a $3.4 million project that was paid for with a low-interest $2.2 million loan subsidized by the New York State Energy and Research Authority, plus $1 million in incentives, paid over two years, if certain energy-saving goals are met. The remaining $200,000 came from the reserve fund.
That project is nearing completion. Each building now has its own cogeneration plant that runs on natural gas and will soon provide 30 percent of the property’s electricity and all of its hot water. Other energy-saving measures – such as thermostatic radiator valves, energy-efficient lighting and plumbing fixtures, and tight seals on all exterior doors – have already cut the co-op’s energy bill by 12 percent. When the cogen plants are fully operational, the savings will more than double.
Other improvements include 80 new security cameras, extensive landscaping, a playground for children, and a renovation and expansion of the gym. All entrances will soon have handicapped access, and all buildings will have state-of-the-art intercoms and numerous Wi-Fi hot spots.
It adds up to a rosy picture, but the hangover from the wall collapse is not entirely gone. Four insurance companies have sued the corporation, claiming it is guilty of “unjust enrichment” because of the money it was awarded in its successful lawsuit against insurers, engineers, and contractors. The lawsuit seeks to recoup $726,000 that insurers paid to shareholders under the loss assessment riders in their homeowners’ policies.
To defend the co-op, the board has hired experienced litigator David Karel, a partner in the law firm of Wilkofsky, Friedman, Karel & Cummins. “This suit is totally overreaching, frivolous, and wrong-minded,” Karel says. “I’ve never seen [anything like] this in 30-plus years of practicing law: insurers going after a co-op. We didn’t recover everything. The co-op should not be the one to bear the loss. That would not be equitable.”
The co-op is also in negotiations with the Internal Revenue Service, which is contesting shareholders’ right to file for the “casualty loss” tax deduction. “This would affect every shareholder, about 200, who took that deduction,” says Nadal. “If that disappears, they’re going to have to come up with the deduction plus interest. We’re taking this very seriously.”
A Long Road
With its house largely in order, the board is now looking to the future. The current underlying mortgage will expire in 2013, and two years after that the lease on the five-story parking garage, originally negotiated by the sponsor, will expire. The board views the two events as a single opportunity.
“The [garage] lease has been very profitable for the garage management company,” Fingerhut says. “Clearly, in the future we’re not going to allow anybody to take that money from us. We might co-op one of the five floors. The restructuring of the mortgage will probably allow us to repay early as we see profit from the garage rentals or from [co-oping] a portion of the garage. Either way, there should be money available to start paying down the mortgage.”
It’s been a long journey from the day the wall collapsed to the day when Fingerhut could make such an optimistic prediction. Along the way, the mindset of the co-op isn’t the only thing that changed. Fingerhut, a forceful personality, acknowledges that he has changed, too.
“I’ve served on corporate boards before,” he says, “and when you’re on the board of a corporation it’s a benign dictatorship. When you make a decision you assume some people are not going to like it, and that’s just too bad for them. The difference in a co-op is that those people are not your employees; they’re your neighbors. You have to have political skills. When I first got on the board, people had to tell me not to slice and dice people. It took me a while to realize how to act in this environment. That was a major change for me.”
As the president changed, the rest of the board – and his fellow shareholders – changed along with him. “The board used to be intent on saying ‘no’ and not spending money,” Fingerhut says. “Some people on the board were vicious, which bred a genuine fear of interfering with the board. As a result, the board was seen as the enemy.”
After living at Castle Village for almost 30 years, first as a renter and now as shareholder and property manager, Nadal can state flatly that those days are in the past. “The majority has confidence the board is acting in the corporation’s best interests,” he says. “It’s not confrontational anymore. There’s more of a sense that we’re a community.”
Castle Village Point Man Departs
If one man can make a difference, then Jerry Fingerhut is that man. As the treasurer and then president of the board at Castle Village, the sometime accountant successfully helped guide his co-op through its most devastating crisis: the collapse onto the Henry Hudson Parkway of a section of the 75-foot-high retaining wall at Castle Village, a 550-unit, five-building cooperative complex in upper Manhattan.
“Jerry was invaluable,” says Theresa Racht, a partner at Racht & Taffae, the longtime attorney for the property. Fingerhut eventually became the point man handling a project with a price tag of $27 million.
That figure was daunting but Fingerhut was unfazed. He worked tirelessly for the building, structuring a one-year, three-part payment plan for the shareholders and helping them to find ways to pay it. Among the challenges: arranging for financing for the co-op, assisting shareholders finance their share of a $17.5 million assessment, and dealing with the city, numerous architects, engineers, and lawyers. He also talked with 35 different insurance companies, convincing almost all of them to pay shareholders’ loss assessment rider claims totaling in the millions.
The aftermath of that event continues today. The wall has been rebuilt; the grounds, many say, are more beautiful than ever; an expanded children’s playground was completed this fall; and a graceful pergola with seating overlooking the Hudson River, the Palisades, and the George Washington Bridge has been completed. “The sounds of kids playing on our acres of lawn are now once again heard,” Fingerhut notes. “People picnic when the weather is conducive and when it snows, kids find the grades suitable for sledding.”
The job done, Fingerhut has decided that he’s done, too: in June, he and his wife, like a latter-day Lone Ranger and Tonto, will ride off into the sunset. Only, they’re not riding west; they’re going to move to a little community in Wilmington, North Carolina. Friends of theirs had successfully moved to the rustic area, and on an 11-day trip earlier this year, the Fingerhuts were impressed by the bucolic beauty of the neighborhood. Although the two are lifelong New Yorkers, they eventually found themselves looking at thirty houses and then buying one.
“We never lived anywhere else but New York City,” he says, “but we decided to take the plunge, shocking as that may be.”
Shock was also the state of mind of many Castle Village board members and residents when they heard the news. But Fingerhut is trying to reassure them by hand-picking a successor. “A lot of people acknowledge that I’ve been very good for the co-op,” he says. “But the truth is, the co-op has been very good for me. Studies have shown that it’s important to keep your brain active – to stimulate it. And since the wall came down, my brain has been very stimulated. I’ll have to find something comparable in Wilmington. I may have to join a homeowners’ association down there.” –Tom Soter