Perspectives: Sheldon Gartenstein

In 1986, when I joined National Cooperative Bank (NCB), the co-op market was in a frenzy. Conversion of rental properties to co-ops was at its peak, with more than 300 conversions in a single year. Converters were making fortunes and tenants were buying not because they wanted to be homeowners, but to benefit from a constantly rising share market. It was a time not unlike the recent IPO craze in internet stocks. People bought first, lenders lent first, and both only asked questions later.

But like the stock market in 2000, the co-op valuation bubble burst in 1989. And, in the next three years, the New York co-op market underwent a depression in share values. For recently converted buildings with more than 30 percent sponsor ownership, it was almost impossible to finance the purchase of a unit. For the co-op corporation, lenders were scarce for new underlying mortgage financing. Among lenders, it was a time of huge losses as sponsor-controlled corporations defaulted on over-leveraged conversion properties. Some lenders, like American Savings Bank and Crossland Savings went out of business, and many co-ops faced the threat of bankruptcy.

In the mid-'90s, the storm passed and the co-op market stabilized. Prices came down to earth and many co-ops restructured their debt to reasonable levels. One positive outcome of the financial crisis was the realization that owning a co-op was much more than paying maintenance. It required an understanding of the physical, legal, and financial complexities of managing cooperative real estate. During this phase in the evolution of the co-op market, the need for educating co-op residents, officers, and board members became paramount. Organizations like the Council of New York Cooperatives and the Federation of New York Housing Cooperatives were increasingly relied upon to address this need.

Since 1997, co-op market values have accelerated sharply. The boroughs started to experience a return to pre-1989 prices and the threat of defaults vanished. Neighborhoods like Washington Heights and Harlem have surged to never-before-seen values. For Manhattan's traditional co-op neighborhoods, values have more than doubled with even a tripling in price not unusual. Ordinary one-bedroom apartments are selling north of $400,000 while humdrum three-bedroom units often sell for more than $1 million. No one seems to have any difficulty in finding financing. In hindsight, 1989 teaches us that when prices grow sky-high — as they are now — co-op buyers should be cautious.

In the world of lenders, consolidation has been the byword. In the past five years, banks like Bayside Federal, First Federal, Republic, The Dime, and Jamaica Savings have been acquired by bigger institutions. While smaller in number, lenders today are both healthy and aggressive in seeking financing opportunities. With interest rates at 40-year lows, this is surely a good time for shareholders and co-op corporations to refinance their debts.