Co-op City in Crisis

The problem: a 19.5 percent maintenance increase in the city's largest co-op that none of the 55,000 residents wants but that most everyone agrees is necessary. On the firing line: the Co-op City board of directors and their managing agent, Marion Scott Realty. Are they responsible for holding back on preventive maintenance, allowing the physical plant to deteriorate to the point where it's affecting the quality of life? Or is it just, if you'll pardon the pun, a failure to be cooperative?

The huge Co-op City complex sits on a large tract of land in the East Bronx, a short bus ride from the head end of the No. 6 train that heads on to Manhattan's East Side. According to an article in The Columbia Gazetteer, Co-op City is "a gargantuan Mitchell-Lama project built 1968-1970 on 300 acres of filled marshland owned by the Port Authority of New York. [It is] the nation's largest cooperative apartment complex [and] includes over 15,000 apartments in 35 buildings, 236 clustered two-family houses, 5 schools, a power plant, 3 shopping centers, 8 parking garages, and a fire station; there are about 55,000 middle-income inhabitants.

Construction of the project coincided both with the decay of Brooklyn's older neighborhoods and the destruction of neighborhoods in the South Bronx and parts of the central Bronx caused by Robert Moses' drive to complete the Cross-Bronx Expressway. Co-op City functioned as a cheap, safe escape from neighborhoods that were coming apart, socially and physically; although originally built to house whites fleeing the decay of the South Bronx, today the complex is racially mixed."

Pamela Bracken, a single professional in mid-career, may be the typical Co-op City resident. She works for a labor union and understands the hopes and needs of New York's civil servants - the transit and postal workers, teachers, police, and firemen, to name a few - many of whom live in Co-op City. Bracken pays $679 a month for her two-bedroom apartment, gas and electric included, which she has lived in since 1995. She likes where she lives.

"Co-op City is convenient for shopping and public transportation. If you don't have a car, you're in the right place," she says. But Bracken has never been to a shareholders' meeting, and she doesn't plan to attend one anytime soon. "The meetings are a facade," she adds. "You come and speak your mind, but the big guy just does what he wants. It's just like last year's transit fare hike. The public supposedly has a say - but then they do what they want anyway."

In February, the Riverbay Corporation, run by the Co-op City board of directors, began a series of public meetings making the case for a 19.5 percent maintenance increase over the next three years. Under the corporation's proposed revenue enhancement plan, an existing 5 percent fuel surcharge, first imposed last March 1, will continue. A February 1, 2004, increase of 4.5 percent follows, then an April 1, 2005, increase of another 4.5 percent. Riverbay's plan calls for another 4 percent on April 1, 2006, and a further 1.5 percent the following April 1, if they are needed.

CRUMBLING WALLS

The increase is something Bracken is against, believing that the huge hike is a consequence of poor management by the board and its managers. But she's well aware that costly repairs must be done, even in her own unit, and she's also aware that there hasn't been an increase in maintenance since she moved in.

"I have moisture building up on the walls in all of my rooms," she notes. "The walls are crumbling around the bottoms of my windows."

To an outside observer, the most visible marks of deterioration are the 35-building complex's parking garages, four of which have been closed, one reportedly on the verge of collapse. The resulting lack of parking has forced Riverbay to pave over one of Co-op City's quality-of-life signposts, the green park in the center of the development, called the Greenway.

"It's disturbing to me because the Greenway was a nice green space in the concrete jungle that we live in," Bracken says. "They used to have festivals there. My biggest fear is that [management] won't return it to a green space once the garage situation is rectified."

But the 19.5 percent hike is only part of the story. New fees for the transfer of apartment shares are in the offing, as well as higher move-out fees, appliance and hall closet charges, new garage charges, and higher booking costs to use community space for private events. Fliers put up by Cooperators United, a dissident group of shareholders that includes board member Alan Berger, drew a standing-room only crowd of over 500 angry cooperators to a "Town Hall" meeting at Co-op City's Barstow Center on Wednesday, February 4.

HISTORY LESSON

As the middle-aged, multi-ethnic crowd gathered, Carmen Howell, herself a professional property manager for 23 years and also a clergywoman, gave a brief history lesson on Co-op City. She first noted, however, that, three days before, she had resigned from Riverbay's 16-member board in "utter frustration and disgust." She told of how the huge Mitchell-Lama cooperative, home to 55,000 people in 15,372 residential units, was built, beginning in 1968, on land originally purchased by private developers to be the home of a theme park called Freedomland USA.

"They bought the site," she said, "knowing Freedomland would fail, knowing that then they would then own the land to build Co-op City and they could sell it to the state of New York. Co-op City was built on a lie," she proclaimed, walking down the 300-foot length of the meeting room's central aisle. "There's been greed, corruption, money under the table. But we have been able to survive because of a remnant that fought to keep it alive. You have a choice to accept the truth or accept lies. The Riverbay Corporation told us that they will recommend a raise of 10.5 percent. But it's really 19.5 percent. They lied. You have been complacent for much too long. You can no longer be ignorant or apathetic. You must be involved.

"Last night," she continued, "the board approved an emergency resolution hiring Marion Scott Realty for a new 18-month term." There were a few groans from the audience. "In order for us to survive," Howell said, "we've got to get this board out of here."

To Herbert Freedman, who speaks for Marion Scott Realty, the February 4 complaints from Cooperators United - which included picking apart Riverbay's proposed $228 million construction repair and power plant upgrade plan - are an attack that is part and parcel of being management.

"In every housing management company, no matter what you do, 10 percent love you and 10 percent hate you," he says. "The other 80 percent don't know you're there. The only problem is, in Co-op City, the 10 percent who hate you are 5,000 people, and they make a lot of noise. And this," he points out, "would be the twelfth-largest city in New York State if it were a municipality."

To the question of what would happen if Riverbay's new refinancing plan were rejected, Freedman will only say, "I don't know what happens, and I don't think anyone does. It will not be pretty."

ANATOMY OF A DEAL

The financial arrangement that the Riverbay board is recommending in the informational meetings, which will culminate in a shareholder vote is a state-backed refinancing of $475 million, of which $228,500,000 is set aside for capital projects including - most prominently - repair of garages and balconies. New York State's Housing Finance Agency (HFA) and the Division of Housing and Community Renewal (DHCR) are issuing bonds to finance the deal. The refinancing pays off the existing first mortgage of $192 million, and goes on to cover past mortgage arrears of $153 million with a credit package that is contingent on acceptance of the new capital plan. After all is said and done, Co-op City will have new debt of $475 million, and will also face the need to pay back another $57 million to the HFA, over a 20-year term, interest free, beginning in November 2014.

Riverbay's board presents the refinancing as the deal of last resort, stating bluntly in a February 6 options paper that, "no other lenders would consider a loan to us in Mitchell-Lama except HFA." Addressing a widespread rumor that a better deal was possible before, Riverbay's options paper adds that, "claims that there was an earlier [private] financing which was possible are simply not true."

One manager of a large city cooperative comparable to Co-op City, who does not want his name mentioned, calls Riverbay's refinancing proposal "an excellent deal which retires a significant amount of debt." He says that one difference between Co-op City and other huge cooperatives is that "the others were very mindful of their infrastructure. They kept up with large capital projects and upgraded when they had to."

The 35-year history of Co-op City includes a paralyzing one-year "rent strike" in the mid-1980s over dramatic maintenance increases. "The place wasn't even finished, and the state almost doubled the rent," recalls Howell. The result was a dramatic exodus: 2,000 units emptied out, with many shareholders taking their accumulated maintenance monies - which were supposed to have been placed in escrow - along with them. Cash flow ground to a halt. According to shareholder activist Ruben Berkowitz, mortgage arrears, at $114 million after the rent strike, grew steadily to reach today's figure of $153 million.

Herbert Cooper-Levy, formerly executive director of the National Association of Housing Cooperatives, and currently director of a major non-profit housing group, says the problems at Co-op City started early on. "When it was first occupied, there wasn't much in the way of member education," he recalls. "The rent strike was completely illogical. It caused the co-op to default on its mortgage, and that in turn caused the New York State Urban Development Corporation to go into default. It's my sense that in those days, a significant number of people there didn't understand cooperative life, didn't understand that they themselves were the co-op, and that withholding income from the co-op was harming themselves.

"To my knowledge," he adds, "Co-op City is the largest single cooperative in the world. Even in the days when the Soviet Union said it had cooperative housing, none of their co-ops had as many units in one single entity. It's as large as a major town, but the people are in a much more intimate relationship than they would be in a town."

A sense of anarchy is pervasive. Routine preventive maintenance, says Alan Berger, who first served on the board during the mid-1990s, was scheduled but never actually done. This was so, he says, since the co-op's founding. "They figured [the buildings and garages] would last forever," he says. Berger criticizes the biggest item on the new capital agenda, Riverbay's plan to rehabilitate the unsafe garages, saying they should instead be razed and completely rebuilt. "The garages were built in 1969, when everyone had only one car, and there weren't any SUVs. My feeling is, that if we rehab these garages, ten years from now, we're going to go through the same thing again. We need bigger garages with more capacity.

"When Marion Scott came on in 1999," Berger says, "we had a balanced budget. Our reserve fund has now disappeared, and we have a $50 million deficit. Four years have passed. The fences, which were put up to allow construction and repair on our terraces, are still there today. Money was wasted on repairs to Garage 2, just a patch-up job. Four million dollars was spent to pave over the Greenway, and it will cost $2 million to put it back."

Freedman, the manager, says that of Co-op City's eight parking garages, four have already had extensive repairs and that these have been cost-effective. "We are being told that, for a total of $10 million we will be able to repair them all, so that they will last another 40 years. The other four garages are a clean slate. We're looking at the cost of new garages, but you should recognize that Co-op City is built on piles, because the land was originally swamp, and so extensive piling work would be necessary. A judgment on costs and benefits will be made," he concludes. "Nothing is etched in stone."

AUSTERITY PLANS

Asked by audience members where budget cuts could be made, Carmen Howell pointed to a recent union contract giving Co-op City staff a three- percent pay raise. "If you're a family and the primary wage-earner is laid off," she said, "you must reduce expenses. You've got to make cuts and people have to live with it." She also said that the new capital budget includes spending on items such as malfunctioning sprinkler panels and floor repairs that should be part of regular operating expenses. Even though she was on the board when Marion Scott was writing the new capital plan, Howell doesn't trust their estimates or their ability to meet projected costs. For her and other dissidents, the credibility gap has become a precipice.

"You are going to pay for all of these items over 34 years of rent increases," she told the cooperators. "Why does [Marion Scott] need all this money? The board can't sit back and just vote 'yes' to everything that's shoved in front of them. You cut the budget before you put your hands in the people's pockets." According to Howell, board members are given information very late or not at all prior to budget votes. "People are told, we need the money, write the check. That's no way to run a multi-million dollar corporation. The board of directors is operating in a vacuum."

Arthur Davis, a management consultant based in Manhattan who specializes in co-ops and condos, doesn't buy the argument that a board can be a victim of inadequate information. "If a board doesn't take control," Davis says, "it loses control. If board members take the approach that the managing agent controls the meetings, they should be stepping down as board members. It's their responsibility to take control - that's part of their job."

According to Davis, the palpable tension that fills the hallways of Co-op City when budgets are discussed is a symptom of years of refusal to adequately communicate on the issues. "Hostility takes an enormous amount of time to build up, and it takes a dedicated focus to break down," he says. "Both sides - the board and the dissidents - need to come and look at overall goals in a much more urgent way. If the guilt and blame continue, you must deal with it, or you won't go forward. The board must spend some resources on managing the ten percent of the cooperators who vocally do not agree. It's time for a lot of reaching out, recognition, and communication. If the board doesn't deal with them, those 10 percent will cripple the 90 percent.

"You've got to create a culture of openness and communication, in which you have to be highly responsive and cut off negative momentum before it develops," he explains. "To do that, the board must provide shareholders with a continuous paper trail on issues. I'm talking about newsletters, bulletins, flyers, meetings. Either the board approaches issues with an open, aggressive, proactive stance, respecting peoples' opinions and addressing their concerns promptly, or they're going to find themselves with a very negative image." Davis recommends forming separate committees, drawn from the ranks of shareholders, to deal with key issues, which could include employee management, construction projects, or landscaping. These freestanding committees, he says, are authorized to evaluate and recommend, but not implement policy - and they give the board increased management strength drawn from the community.

Attorney Geoffrey Mazel, a partner at Hankin, Handwerker & Mazel, which represents several large HFA cooperatives including Clearview Gardens in Queens and Deepdale Gardens in Little Neck, says that keeping costs down and keeping repairs current stems from "a strong tradition of good management."

The fact that costs are going up, however, is not necessarily a sign that managers have failed. Mazel notes that, in the 1990s, many cooperatives didn't raise maintenance. With the economy strong and insurance and tax rates steady, co-ops also had abundant refinancing options. But today, with a market downturn and major increases in insurance and real estate taxes, that's no longer the case.

TRUST NO ONE?

Mazel's cooperatives have by now all reverted to private ownership, and left the state-subsidized Mitchell-Lama program. This seems to be the norm for most of the affordable housing cooperatives of the 1950s and 1960s, but it's not in the cards for Co-op City anytime soon. Arguments about privatization, which would allow shareholders to buy and sell apartments at market value, have divided the community, with some saying it would hurt the ability of new families to find affordable housing. And Riverbay's board says that the refinancing deal rules out privatization for the time being. Its February 6 options paper says, "privatization was an option, but time ran out when the garages collapsed...Co-op City can again explore this option in five years after reconstruction."

At the February 4 cooperators' meeting, shareholder activist Ruben Berkowitz told the crowd that Riverbay's refinancing plan includes language that will eventually encourage privatization. The document, he said, explicitly states that the HFA will be willing to assist Riverbay in implementing a privatization plan.

"I'm against privatization," cooperator Bracken says. "I moved to Co-op City because it was a Mitchell-Lama, and I believed that would keep the rents cost-efficient. I moved from a tiny one-bedroom where I was paying more, and I'm afraid that privatization will jack the maintenance up very high and force a lot of people out."

The February 4 audience was remarkably quiet during a lengthy reading, by Joe Boiko, of a technical document describing the refinancing, but there were groans when large dollar amounts were read out. Among the items eliciting some verbal anguish was a $702,000 annual fee to be paid by Riverbay for "servicing bondholders," as well as the $1.6 million annual management fee to be paid to Marion Scott. Manager Freedman says those charges are typical. Housing expert Cooper-Levy says that, based on Co-op City's annual operating budget of some $150 million, its management fee is not excessive.

After a mostly one-sided debate, pillorying the board and Marion Scott, a cooperator who doesn't often come to meetings, James Gorden, asked plaintively, "How do you elect a board you can trust? You can't elect someone just because of a pretty face or a flashy flier."

Answering the question was Berkowitz, the activist, who retreated to a mainstay of co-op boards everywhere: he called for more shareholder involvement as the only way to get a fair hearing and insure that promises were kept and promised work was carried out.