An Upper East-Side co-op takes advantage of cheap debt, a hands-on board, and in-house management to generate a whirlwind of activity.
The past three years have been a dizzying time of capital improvements for the residents of 201 East 66th Street, a 21-story co-op at Third Avenue. The building finished a major façade improvement, replaced all its elevators, and will soon overhaul its mechanical system. Perhaps even more impressive: the board has not raised maintenance fees to pay for the work, although it did levy an assessment. The secret to the building’s success lies in an unusual combination of cheap debt, a hands-on board, and in-house management.
By taking advantage of historically low interest rates, the board was able to pay for much of the work with a new underlying mortgage and a line of credit. However, its unique management structure has also played a critical role in how work gets done.
Unlike most large Manhattan buildings, this 256-unit co-op is self-managed, meaning it does not employ an outside company to handle its business. Instead, the property manager works directly for the board and lives in the building, saving the co-op money on management fees and giving the board tremendous control over operations. The result is a building with a lean budget that has successfully completed a series of complicated and involved projects all on its own.
“With an outside management company, and a less active board, you couldn’t do the kinds of things we’re doing in the way that we’re doing them,” says Burt Spiegel, the board president, who is retired and spends about half of each day dealing with the business of the co-op.
The building hasn’t always been self-managed. Until 2000, executive manager Jon Shechter served as the property manager through an outside company. But shortly after Shechter moved to another firm, the co-op board approached him with a novel idea: quit his day job and work for the building exclusively. The superintendent was leaving and Shechter needed a new apartment, so he took the post and moved in.
The arrangement saves the co-op about $100,000 a year in additional salaries – Shechter doubles as the superintendent – and voilà, the building has an in-house property manager, a luxury usually reserved for white-glove buildings (for which they pay a premium). The co-op, however, forgoes the sort of discounts that large management companies pass onto their clients, like buying goods and services at a bulk rate.
On the other hand, when problems arise, the board doesn’t have to call an off-site manager who could be busy tending to one of the other properties he manages. Spiegel can just head downstairs to speak with Shechter anytime he needs him. Spiegel assists with bids, researching projects and hiring consultants. He speaks with Shechter almost daily. “It’s a collaboration; it’s a team effort,” says Shechter. “It requires the board to roll up their sleeves and really dig in.”
Since 2010, the building’s management system has been put to the test. A Local Law 11 inspection revealed that the building would have to do immediate and extensive façade work, including replacing about 20 balconies. The building had thought that it would not need to do work of that magnitude for at least another five years. However, according to Shechter, new city regulations changed how and when the work could be done. The building’s balconies were being repaired at a leisurely pace – one or two a year; now, however, they had to be done all at once; the $2 million bill came as a shock. “We were blindsided,” observes Shechter.
At the time, because of a large prepayment penalty the board wanted to avoid, the underlying mortgage could not be refinanced. So, the directors had two options: they could raise the maintenance to cover the cost or levy an assessment. As it is, maintenance fees have gone up annually to cover rising real estate taxes. The board was loath to tack a $2 million project onto the fee. In the end, the members decided a short-term assessment was the better of two unwelcome choices.
The board held an emergency meeting with all the shareholders and told them about the two-year assessment of $11.63 per share. For a two-bedroom apartment, that came to about $330 a month, or 20 percent of maintenance.
“That’s never a conversation you like to have. It’s painful,” says Shechter. Some residents balked at the news, but Shechter compares it to living in a single-family house and discovering that the roof needs to be replaced. It’s expensive, but it can’t be ignored. Ultimately, all the residents paid the assessment. This spring, the work was completed.
Other projects went more smoothly, largely because they were planned. The mid-century building had three aging elevators that broke down frequently. Only two of them went all the way to the basement. “They were kind of limping along,” says Shechter.
The board decided it was time to replace them with a newer, more efficient system. The building also had to resurface and waterproof its 115-car parking garage and needed to upgrade its mechanical system. Together, the three projects would be expensive. Replacing the elevators alone would cost $750,000. The new mechanical system could run to about $1.7 million. The board did not want to levy another assessment on weary residents.
By this time, the 10-year underlying mortgage had matured. So, in October 2012, the board refinanced. Because of historically low interest rates, it was able to take out a new mortgage that was $1.1 million larger than the previous one, without substantially raising its monthly payments. The new $7.6 million mortgage has a 3.59 percent interest rate, compared to the previous rate of about 5.5 percent. At the same time, the building took out a $2 million line of credit with a floating interest rate. The additional cash flow has allowed the building to take on several major projects without dipping into its reserves. “It was a way of doing the projects with little impact to the building,” says Spiegel.
The building updated the elevators first. But the road to a smooth ride was paved with a grueling work schedule. For nearly a year, one elevator was constantly out of service. The board sent residents updates in the building’s bimonthly newsletter and Spiegel sent monthly letters as needed. Announcements were posted in common areas to keep residents up-to-date. “Communication is key. The more you talk to them, the more they know and the more they leave you alone,” says Shechter. But there are always “some people who you’ll never make happy,” he observes.
The elevators were replaced with new motors, controls, and cabs. Perhaps most significantly, the new motors use a permanent magnet technology and don’t need a generator to convert from AC current to DC, reducing the building’s electrical bill.
They’re also pretty. To come up with the new design for the elevators, the board set up a design committee, gathering input from residents. The result is a much lovelier ride. The old elevators were slow, bumpy, and had dreary Formica walls. The new ones have granite floors, a marble trim and frosted glass panels and provide a smooth, fast ride. All three now descend to the basement. “It’s just really nice,” said Shechter. “The residents are happy. They’re impressed.”
The building has one more project in the works: a new mechanical system. The co-op heats both the building and domestic hot water with steam purchased from Con Edison. Steam heat is expensive as it is generated at a Con Edison plant and then piped into the building through city pipes. Not only is the building saddled with an expensive and inefficient system, its equipment is aging. Its chiller for air conditioning needs to be replaced.
Cogen is the Future
Shechter first began thinking about options five years ago when a Massachusetts energy company cold-called him on the idea of cogeneration. Cogeneration is a method of generating electricity with a motor and then capturing the steam that is produced during the process and reusing it to heat the building or the water.
For 201 East 66th Street, it would mean installing a natural gas-fueled cogeneration system and converting the building to natural gas. Shechter suggested the idea to the board. The board at the time rejected it out of hand, largely because few other residential buildings in the city had gone cogen system. There are currently fewer than 200 cogen plants citywide, according to Con Ed.
When Spiegel was elected president, he too was intrigued by the idea of cogeneration. After doing his own research, he brought the idea up to the board. The members rejected it. He set out to woo them, presenting them with information, examples of successful models, and data on how much the building could save. Still, the matter was repeatedly tabled. For two years, the board punted. Finally, Spiegel moved in for the hard sell.
“Burt said, ‘I’ve been killing myself on this, and I’m about to pull the plug,’” recalls Shechter. “‘Are you people ready to pull the trigger or not? If it’s something you want to do, let’s do it.’”
Finally, the board relented. The potential savings were hard to ignore. Shechter estimates the building will save $315,000 a year in energy costs, with a five-year payback on the $1.7 million project. Just the savings made by converting from steam heat to natural gas is extraordinary. Steam costs about $2.90 per unit compared to $1 for the equivalent amount of natural gas, according to Joe Weinschreider, an associate at Energy Concepts, the Rochester-based consultant designing the co-op’s new system.
“Cogeneration is something different. It’s not like a boiler that buildings are used to,” says Weinschreider. “There were a lot of questions. They wanted to understand why it saves so much money. That was the largest time chunk in educating them.”
The new system will include a new chiller, four new boilers, and a cogeneration system. Weinschreider anticipates that the cogen will generate about 70 percent of the electricity for the building’s common areas.
Although the board did not need the support of the shareholders to move forward with the work, it wanted to keep them informed. The board called a shareholder meeting in early April to present them with the idea. This time, unlike with the façade work, the cogen project was an easy sell. The shareholders were overwhelmingly supportive of the measure. The board hopes to begin work before the end of the year.
“Here’s where the beauty of it comes in,” says Shechter. “When you say, ‘Ladies and gentlemen, we are going to do this infrastructure work that won’t cost you anything and it will save the building money,’ how can you say no?”