Dreamy Hollow, a 164-unit co-op in Norwalk, Connecticut, no doubt drew its name from its serene setting: a grassy, low-lying area at a quiet remove from traffic-clogged U.S. Route 1. But in reality, ever since the complex’s construction in 1959, life at Dreamy Hollow has often been nightmarish. For decades, the community has been plagued by a heavy debt load, lax management, neglected maintenance, and finally, as of this spring, dissolution. The co-op is being converted to rentals, following a controversial but ultimately successful buyout campaign by a Greenwich, Connecticut, investment firm, Belpointe Capital.
A majority of shareholders were either eager to sell or resigned to it out of a belief that the co-op’s financial circumstances left them no choice. But an angry minority charged that the co-op was being plundered. Some, like 62-year-old Ann Romanello, had lived at Dreamy Hollow for decades. She has since moved to a condo about three miles away, but she continues to wake from nightmares in which somebody is coming to steal her home. “I paid off my mortgage last March,” she says, “and I had to sign it away in June.”
The story of how Dreamy Hollow reached its sad conclusion is essentially a case study in how not to run a co-op. As one of the real estate brokers who helped orchestrate the buyout likes to say, “Dreamy Hollow was born in sin and dwelled in sin forever.”
How It All Began
Initially, the property seemed very attractive. A cluster of 13 two-story brick buildings with cement porches, Dreamy Hollow was one of the more affordable ownership opportunities in the Fairfield County city of Norwalk (pop. 85,000). “The prices were so much lower there than for a condo,” says Linda A. Cappello, the owner of Cappello Realty Shoreline Properties, in Norwalk, who sold units in the co-op. “A two-bedroom would probably go for $70,000 to$75,000, whereas a two-bedroom condo in Norwalk would start in the high $200s.”
But what looked like a bargain became less appealing up close. At $800 to $1,000 (including heat), the monthly maintenance fees at Dreamy Hollow were high. “We didn’t sell many units mainly because of that,” Cappello says. What’s more, finding a lender willing to finance a purchase was a major challenge. “Most banks didn’t want to be bothered with a co-op,” she says. “In Norwalk, Dreamy Hollow was really the only one.” There were also chronic issues with building upkeep, observes Chester Kolakowski, a shareholder who moved out in 1986 and, unable to find a buyer, rented out his one-bedroom apartment for years.
The co-op’s financial problems dated back to its conception as a rental complex built on leased land. Not only did it have to pay rent to the landowner, but the property also had a triple net lease, which requires the tenant to pay the net amount of three costs: real estate taxes on the leased asset, building insurance, and common area maintenance.
Those arrangements stayed in place, with some adjustments, when the complex was converted from a rental to a co-op in the early 1970s. By 1994, about half of the co-op’s operating budget, roughly $729,000, was going to the landowner. At the same time, a local newspaper reported, an appraiser hired by the board estimated that the complex needed $2 million worth of repairs for everything from leaking roofs and cracking patios to buckling floors.
Shareholders felt unfairly treated by their lease arrangement and took their case to Norwalk’s Fair Rent Commission in the mid-1990s. The commission found that the co-op had failed to establish a proper reserve fund while the landlord had taken advantage of a “one-sided lease.” The parties were ordered to share the cost of necessary repairs, as determined by a civil engineer, and more importantly, to renegotiate the lease to protect both the tenants and the landlord from the effects of inflation. That renegotiation ultimately yielded a sale: in 1997, the leaseholder finally agreed to sell out to the co-op for $7.66 million. The burdensome lease deal was gone.
Not Out of the Woods
Although they had gotten rid of the triple net lease, the co-op was in a deadly Catch-22: it needed money to make repairs, but it was in such disrepair that the board couldn’t get banks to lend money. As a result, over the ensuing decade, Dreamy Hollow failed to make necessary repairs. Shannon Eagan bought a unit in 2004 and joined the board five years later because “the concrete porches were literally crumbling under our feet.”
Ben Levy ran for the board in 2013 because, after three years at Dreamy Hollow, he found it to be “very disorganized.” Once on the board, he learned of pressing problems, including a looming $200,000 replacement cost for a dangerously decrepit boiler that supplied heat for three buildings.
As of 2014, both Levy and Eagan recall, the co-op’s reserves were so low that the association was technically in default of the terms of a mortgage obtained in 2006 from its mortgage with the Commingled Pension Trust Fund of J.P. Morgan Chase. “We were supposed to have at least $750,000 in reserves,” Eagan says. “We had probably $100,000.... We kind of lived in fear that at any time they would come and pull our mortgage.”
The board began looking for ways to refinance their mortgage in order to pay for repairs. (Their new mortgage prohibited additional borrowing.) But decrepit, cash-poor Dreamy Hollow proved an unattractive candidate. The co-op’s attorney at the time, Genevieve Salvatore, approached several banks, Eagan says. Only one agreed to meet: Patriot Bank, a community lender based in Stamford.
Initially, the bank sketched out a potential $6 million or $7 million mortgage refinancing, but even that wasn’t enough to cover what the co-op owed on its mortgage, which carried a yield maintenance prepayment penalty, explains Richard A. Muskus Jr., Patriot’s chief lending officer. If the co-op prepaid its mortgage to take out a new one, it would be liable for the full amount of interest owed through the remainder of the loan’s 20-year term. But that soon became a moot point.
The bank found that there was a “massive amount” of arrears – about $500,000, plus another $144,000 in late fees and interest, according to a balance sheet distributed at a May 2015 board meeting. The property’s physical plant needed major work. And to top it off, a number of units were in foreclosure, a major red flag for any lender. (Court records show at least six had been foreclosed on or were in the process throughout 2015.) When Patriot Bank officials learned of these details, they backed away.
And so, worried that the co-op was on the verge of collapse, the board quietly turned to the possibility of a buyout, a scenario the members thought would produce a better outcome for shareholders than if Chase called their mortgage.
A buyout was an option because of a recent change in the bylaws. Previously, a person could not rent or own more than one unit. In June 2013, a full year before the board would propose seeking an outside buyer, Salvatore revised the bylaws and a majority of the shareholders agreed to changes. The new bylaws placed no limit on the number of units a single owner could own.
A former board member, who requested anonymity and was not on the board at the time of the change, says that the amendment came about because “a lot of what was in [the bylaws was] either outdated or not legal. That was a major thing that Genevieve [our lawyer] undertook, and the new bylaws were passed by an overwhelming majority of the shareholders. Looking back on that part, I’ve wondered if Genevieve had anticipated that a buyout may have been an option [in the future]. But I’m quite certain the board did not.”
Adds former board member Eagan, who also wasn’t on the board at the time: “It seems the change to multiple owner/residency was one [our lawyer] put in there without anyone catching it. My understanding is that she had not discussed it with the board prior to putting it in the new document. So did she anticipate [a buyout]? Only she knows.”
In 2014, Salvatore brought in Frank Farricker, a local real estate broker and consultant with whom she had frequently worked, to talk with the board about what the terms of an acceptable buyout offer would look like.
In July of that year, the board sent a letter to shareholders alerting them that the co-op was in serious financial trouble that warranted immediate action. The letter laid out three possible courses of action: a one-time additional assessment of $7,000 per unit; a hike in maintenance charges to between $1,100 and $1,500 per unit; or the sale of their shares to an investor.
Shareholders were to vote on the options at a meeting in September. But, in the meantime, the board members signed a six-month contract with Farricker authorizing him to begin looking for a buyer and talking to unit-owners; his firm would receive a monthly “expense payment” of $3,500.
The possibility of a buyout came as welcome news to many residents. Those who had bought during the housing bubble, when financing options opened up, were now deeply underwater and saw no other way out. “It was a no-brainer for most,” says Matthew Hirschman, who paid $128,000 for his two-bedroom apartment in 2004, and still owed $84,000 on his mortgage. “We were in unsellable units because the banks wouldn’t lend anymore.”
But for longtime shareholders, the mere suggestion of a buyout felt like an assault. “July 26, 2014 – that day is burned in my brain,” says Ann Romanello of the date she received the board’s letter. “I felt like somebody took a two-by-four and punched me in my chest.”
By August – a full month before the shareholders were scheduled to meet and discuss the three options for the co-op – Farricker’s firm, Exit Partners Realty, had set up a tent by Dreamy Hollow’s pool. There, representatives met with interested residents to discuss the terms of a potential buyout by Norpost Properties, the entity set up by the would-be buyer Farricker had enlisted, Belpointe Capital.
The base offer would be $60,000 for a one-bedroom, $70,000 for a two-bedroom, and $80,000 for a three-bedroom apartment. Those mortgage-holders who were underwater would have their mortgages paid off in full. Sellers could also stay at Dreamy Hollow for nine months rent-free, followed by a period of fixed rent for those who wished to stay on. Those residents who agreed with the terms were encouraged to sign acceptance letters consenting to sell their shares.
Romanello and others, many of them seniors, felt strongly that the board should have held a meeting to discuss a buyout before signing with Farricker. “They started picking off people one at a time,” Romanello says, “starting out with the people who had the most shares.”
Eagan says the board talked a lot beforehand about how to approach the subject of a buyout, and that authorizing Exit Partners to begin looking for a buyer before discussing the options with shareholders was simply an attempt to be proactive.
“In the 10 years I was there, we were constantly hearing of the problems the co-op was facing, but there was never an offered solution,” Eagan says. “So nothing was ever done. We decided to send a letter out so we knew everyone had heard it. And we needed to give options so that people would finally make a decision.”
When the September meeting took place, board members say it drew about 30 percent of the shareholders. While neither Eagan nor Levy recall the exact vote count, they do remember the outcome. An overwhelming majority of those who showed up, as part of an organized effort, wrote in a fourth option: DO NOTHING.
Opposition to the buyout was further stoked by growing suspicion about the players and their interests. In March of 2014, Salvatore – the lawyer who brought in Farricker – had been convicted of mortgage fraud in an unrelated matter in New Haven. By the time the September meeting was held, Salvatore was unable to offer any professional advice or even attend: her law license had been revoked in June, and in September she had just started serving two years in federal prison in Danbury. And Farricker? He had received unfavorable press coverage in 2006 for his work for a New York firm trying to force out rent-protected tenants in order to redevelop the buildings.
Eagan says she saw nothing shady in Farricker’s interactions with the board, but admits that “had I not been so involved in coordinating this with Frank, I would have also said, ‘This just doesn’t look right.’ ”
Exit Partners continued to sign up potential sellers, while buyout opponents succeeded in gathering enough proxies to hold a special meeting, at which they voted out board members whom they perceived as buyout supporters. The new board, now represented by attorney Robert A. Pacelli Jr., filed a lawsuit in state Superior Court. The complaint charged Salvatore with providing faulty legal advice to the board, and colluding with Farricker to get the co-op into the hands of Belpointe on terms detrimental to shareholders. It also alleged that Farricker, Salvatore, and Brandon Lacoff of Belpointe Capital knowingly misled the cooperative and its shareholders in an effort to coerce shareholders into selling their shares at reduced prices.
Eagan and Levy say the accusations were patently untrue. They maintain that the lawsuit was intended to tie up the co-op in court long enough for the majority shareholders’ signed sale contracts to expire.
The case never went to trial. Belpointe used its new clout – it had obtained a majority of the shareholders’ proxies – to regain control of the board. In May, Pacelli notified shareholders in a letter that a settlement had been reached. It allowed for revised purchase options that offered slightly less money upfront in return for an extended period of discounted rents and phased-in increases following the discount period. The new offers were good through June 1. “After that date,” Pacelli wrote, “shareholders wishing to sell will receive inferior deals from Norpost, assuming Norpost is even willing to enter into any further transactions at that time.”
“The bottom line,” says Farricker, “was that the co-op was in tatters.” As of February, Belpointe had closed on all but seven units. The company was hoping to fully dissolve the co-op in April and begin some $5 million in improvements. “We feel we did residents a great favor,” says Farricker.
But Romanello will never be convinced. To the contrary, she says: “They divided and conquered us.”