It was a prescription for disaster, with unlimited refills. The property manager at this Washington Heights co-op was also a shareholder and president of the board of directors. To make the situation all the more sticky, family members were on the building’s staff.
Rent and maintenance payments in the 36-unit, early 20th-century building were collected erratically at best – which made the property manager/board president popular for all the wrong reasons. Capital improvements were postponed or overlooked. Taxes and water bills went unpaid. Although few shareholders knew it, their building, a limited-equity Housing Development Fund Corp. (HDFC) co-op, was approaching foreclosure.
“I think they were trying to help the building,” Joy Bailey, the current board’s secretary, says of the family that used to run things. “But a lot of people weren’t paying rent or maintenance. It snowballed, and they got overwhelmed. They stopped trying to enforce the rules.”
The root of the problem, as Bailey sees it, was a not-uncommon conflict of interest: the managing agent serving as board president. “The effect was that we didn’t know what was going on,” she says. “You’ve got to have checks and balances.”
Many shareholders were in the dark – and in for a shock. “I didn’t know the extent of the problems,” says Renee Davenport, a clinical iridologist and master herbalist who owns Brio Holistics. She moved into the building in 1995 and bought her apartment in 2003. “I didn’t know the building was about to go into foreclosure or that there were astronomical unpaid water bills and taxes. The board was going door-to-door to collect money for heating oil. Sometimes, there was no heat or hot water. The boiler was shot. The elevator was hit or miss. It was a mess.”
In 2003, some concerned shareholders started looking for answers. “I got phone calls from several shareholders asking what was going on,” says Ann Henderson, associate director of co-op preservation at the Urban Homesteading Assistance Board (UHAB), which supports, trains, and assists shareholders at limited-equity co-ops throughout the city. Henderson didn’t have to dig very far to learn that the Washington Heights co-op was in serious trouble.
“So I went there in May 2003 and explained the situation to the shareholders,” Henderson says. “The building was in the process of being foreclosed by the city for nonpayment of taxes. I told them they owed about $1.26 million in back taxes, and they could get $1 million of that forgiven, but it wasn’t going to be easy.”
It was, in fact, going to be a decade of hard, painful work.
The Long Road Back
The first order of business was to get rid of the cozy family affair and elect a new board of directors. This was done in February 2004, with Davenport winning the presidency (but turning it down, choosing instead to be chairperson) and Bailey becoming secretary of the five-member board. They then hired a new property manager, who set about aggressively collecting back rent and maintenance, the most fundamental building block of any financial turnaround. The board didn’t hesitate to take residents to court to collect arrears.
Board members also attended seminars organized by the Council of New York Cooperatives & Condominiums, on everything from budgets to hiring a lawyer to landlord-tenant relations.
Within three years, the finances improved enough for the co-op to secure a $525,000 loan from the non-profit Low Income Investment Fund. It was used to pay off back taxes and water bills, and it was to be repaid through apartment sales. (It was paid off in December 2012.)
The board simultaneously turned its attention to the daunting task of capital improvements. In 2006, it secured a 25-year loan of $902,000 with a two percent interest rate from the city’s Department of Housing Preservation & Development (HPD). The laundry list of neglected maintenance was long: a new roof, boiler, elevator, and windows; renovation of the lobby, hallways, courtyard, and several bathrooms; and potential repairs to a retaining wall. In addition to their other problems, the board members and shareholders had nightmares about reliving the disastrous collapse of a retaining wall at the nearby Castle Village co-op in 2005; luckily, their wall ended up not needing repairs.
Things That Go Bump
Disaster was averted, but there were more bumps in the road ahead. “What was hard was that as soon as the capital improvements got finished, the real estate market collapsed,” says Henderson of UHAB. “They had to operate without full occupancy, and that makes it difficult to meet your obligations. We met with lenders and brokers; we interviewed potential buyers during the recession. It was difficult for buyers to get financing. But in the last year, year and a half, they’ve had several sales.”
In 2009, as the recession bore down, the board secured another $106,000 loan from HPD to tackle Local Law 11 work on the building’s exterior. Maintenance, which had remained low at $100 per room under the old regime, has been raised by 50 percent as the board worked to return the building to fiscal and physical health. The building now boasts a $200,000 reserve fund.
“For the past five, six years, it’s been an uphill battle, but now we’re able to see the top of the hill,” says James Maistre, chief operating officer of Veritas Management, who was hired by the board in 2007, just before the recession hit. “When I came in, our income never met our expenses. Now apartments are selling at good prices, and the building is mortgage-friendly compared to what it was.”
It’s easy, in retrospect, to blame the building’s woes on the former property manager, who was also board president, and her decision to turn the co-op into a family business. But several residents acknowledge that, in fairness, there are other places to spread blame – including shareholders themselves. When the building was converted from a rental to an HDFC co-op in 1986, renters were able to purchase their apartments for a price that now seems unimaginable: $250. As a result, they point out, many retained a “renter mentality” and cared little about the condition of the building as long as maintenance remained low. Apathy was a big part of this prescription for disaster.
“If shareholders are not active and don’t take a vested interest in their building, they can wind up with serious problems,” says Henderson. “You need to deal with each issue and not let it fester. Don’t think that if you stick your head in the sand, a problem will go away by itself.”
Having worked with almost a thousand limited-equity co-ops over the past two decades, she knows that turnarounds like this one in Washington Heights are the result of teamwork. “It was everybody,” she says, “not just two or three people. The shareholders are now very active in the life of this building. That’s always good. These people value what they have.”
Maistre, the property manager, agrees. “I think there are three points,” he says. “Ann Henderson, the management, and the board have all been very strong. It’s about a team that’s working for the benefit of the building, not for their personal issues. It helps that Joy and Renee are very strong and we’ve got a very involved board. They know how to treat people who’ve been here from the start and people who are newcomers.”
Bailey, the board secretary, believes impartiality is also important. “You have to treat everyone the same – you can’t have favorites,” she says. “And you have to have a strong board that’s willing to enforce the rules. It also helps that our managing agent is impartial and strong. The rate of collection of rent and maintenance has gone way up. We’re able to pay maintenance online now, which helps, but even before that he was more diligent about collections.”
Even as the co-op basks in the knowledge of how far it has come from the threat of foreclosure, Davenport, the board president, remains uneasy about how board members have to learn the job on the fly.
“There are no standards for being on a board,” she says. “You don’t have to know anything about finance or math to be on a board – and yet you’re making decisions that affect people’s homes. I could get elected to a board because you like my shoes.”
Even so, there’s no denying that this turnaround has been little short of miraculous. As Davenport knows so well, it wasn’t about luck; it was about hard work. “In order to make intelligent decisions for your co-op, you have to read and you have to study,” she says. “You cannot just be casually interested. We’ve built an honest team – the board, the manager, the lawyer, the engineer, the super – and that’s a big reason why things are going well. It takes a lot to do this job.”