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AUTHORBarry Korn, Barrett Capital
Once a co-op gets entangled in city bureaucracy and the court system, things can get ugly. Though your company is in the finance business, I understand you got caught up in this. Tell us about it.
An HDFC low-income co-operative in the Bronx was run by a president who was believed to have dementia. As a result, she never took any action on communications between the city and the co-op. The result was that the co-op owed a couple of million dollars in back taxes, and the city entered a foreclosure proceeding against the co-op. The action began in 2015, and in 2018 the co-op finally got a new president who was on the ball and knew what he was doing and went to seek a traditional commercial loan to pay off the taxes. But because of their poor financial situation, they were unsuccessful. We specialize in difficult loans, as well as underlying mortgages, and were able to help them. We got them a bridge loan to pay off the taxes in full.
So the taxes got paid off?
Well, that's what we thought we would do, but unfortunately the city's attorneys were very adamant about following the rules. And these rules said that the co-op had only four months subsequent to the filing of the judgment to redeem that judgment. They didn't do that, obviously, and so the city refused to accept payment. Even though they had a lender who was willing to pay, the city would not accept payment.
While this poor president who had dementia was at the helm of the building, were the other board directors paying attention?
It doesn't seem that way. It seems that everybody was AWOL, and nothing was happening until one of the residents took over in 2018.
Where does the situation stand now?
After the city refused to accept payment, the co-op filed for bankruptcy under Chapter 11, and as a result they received a stay that prevents the transfer of the property to the city. The coronavirus situation has been delaying things, and there is presently a scheduled hearing for a judge to rule on the issues. The issues are complicated in that the co-op maintains that the city has not followed proper legal procedures in terms of the interpretation of the statutes.
If you had to guess what the outcome's going to be . . .
I think the co-op will ultimately be successful. Certainly it's the right and moral thing to do. The alternative would be to turn the property over to what's called a third-party transfer situation. And in that case, the city is willing to totally forgive 100% of the taxes and turn it over to a nonprofit. The result of which would be wiping out the equity of the shareholders and turning them into renters, where their rent is probably going to double. So it makes absolutely no sense whatsoever from a moral or financial point of view, and we just can't understand why the city is acting the way it is.
What would be your takeaway for other boards?
Board members and the community need to pay attention to what's going on. If they see that nothing is going on, they need to question the board. They should expect financial statements on a yearly basis and have annual meetings. And if they don't, they should request them so that things like this don't happen.