After Horn was blocked, the co-op, represented by Clausell, offered to buy the block of apartments for $8 million. Birchwood accepted, but there was one major problem: the co-op didn't have the funds for the purchase price. It could, however, get the money if it refinanced its underlying mortgage. The co-op did just that and, under Clausell's guidance, borrowed $12 million from the National Cooperative Bank (NCB), paying off its $3 million mortgage early (incurring a hefty prepayment penalty and additional transaction costs of nearly half-a-million dollars). NCB made two loans of $6 million each. The second loan, according to Mindy Goldstein, senior vice president at NCB, allowed the co-op to sell the apartments and with the proceeds, reduce its principal without penalty. The first mortgage closed in October 2007 and the second five months later.
During this period, Clausell says he began to worry that the co-op would violate its tax status if it owned the apartments. This concern, he says, led him to create a corporation called the Empire State Conglomerates, installing the co-op's janitor as the president of it. The NCB loan documents were modified to reflect that Empire was a subsidiary of the co-op. Clausell's idea was that Empire could buy the apartments with the money that the co-op lent it. Empire would make payments to the co-op from the rents, ensuring that the co-op could meet its NCB loan payments.
In reality, though, Empire was not a subsidiary of 87-10 51st Avenue. In fact, its deal was pretty sweet. It didn't have to put up any collateral to buy the shares, and it stood to benefit from rising rents (which Clausell was projecting) and a portion of the money from apartment sales. And if things went bad, Empire could just walk away, leaving the co-op on the hook for the NCB loan.
The deal between Empire and the co-op contained a promise to contribute a total of $500,000 to the co-op's reserve fund by the end of the NCB loan's ten-year term. Clausell said that as apartment sales occurred, the proceeds would be split in several ways: 60 percent of each sale would go to buying down the NCB loan, 30 percent of each sale would go to Empire, and 10 percent of each sale would be credited to the co-op's reserve fund.
The co-op had taken a big step, and, depending on who is telling this story, it was either brilliant or sinister. "NCB was an unwitting participant in what some might describe as a fraud, what others might describe as a terrible misunderstanding," says Horn. "But whatever you call it, NCB made this loan, and although this was a big mortgage on the co-op, the co-op did not wind up owning the apartments."
By taking on so much debt, and ceding control to Empire, the co-op went from being a group of shareholders to a collection of risk-takers. Most co-ops will never cross this threshold, because the downside is too scary if things go wrong. Unfortunately, that's what happened when the co-op didn't pay its bills on time.
Clausell claims the co-op was in terrific financial shape, but reality suggests otherwise.
The co-op had fallen behind in paying Castle Oil (now Sprague Energy), its oil supplier, and Castle was losing patience trying to collect. There was a spike in oil prices in the late summer of 2007, and that put even more strain on keeping up. Even so, says Michael Meadvin, Castle's (and now Sprague's) senior vice president and general counsel, they "were not a sterling example of a good customer" and had a poor payment record. In July 2008, just four months after the second NCB closing, Castle couldn't wait for payment any longer. The company filed suit in state court for $233,214.10.
Oddly, the co-op did not respond. Clausell claims it was never notified about the lawsuit, but the court thought otherwise, issuing a default judgment against the co-op. A few days later, a restraining notice was served on the two banks where the co-op kept its funds. The co-op's bank accounts were frozen, meaning it didn't have access to its money, and it couldn't pay any bills. It took ten months to unfreeze the accounts. But during this time the unthinkable happened: the property defaulted on the NCB loan, and in June 2009, it spiraled into foreclosure.
Things kept getting worse and worse for 87-10 51st Avenue. Sometimes when you're standing at the brink, good things happen. Deals get made, you find your footing, and it looks like there is a future. The co-op is back, and to go along with its new look, it has a new name: The Continental Park.
That's the chief lesson to be learned at The Continental Park. The very essence of a co-op is that its stock is an asset, but that asset can quickly morph into an untenable liability if the co-op is led down the wrong path. It is up to the board of directors to make sure this doesn't happen, and, as in any democracy, it is up to the populace to keep tabs on the board.
Photo by Danielle Finkelstein.
Engage, enrage, ask questions and give answers with your community of board members. Submit your questions and comments here!
Co-op and condo board business broken down into bite-sized bits - 2 stories each week. Read now on all digital devices.
A free digital resource for co-op/condo board directors. Published twice a month. Read now on all digital devices.