Quandary in Queens

When Larry Grubler became board president of The Estates at Bayside in 1990, the 479-unit co-op in Queens consisting of 24 two-story brick buildings, he knew nothing about cooperatives. But being deputy director of a large mental health institution, he knew something about organization and, as far as he could tell, that skill was seriously lacking at the co-op.

"There were no policies or procedures in place. We didn't know how to contact or use a manager. There was no maintenance schedule. No organization," he says.

So when he was asked to join the board 12 years ago, he saw a group of people not getting along, with fierce dissension and operational chaos. There was also the not-so-small item of the lender, Connecticut Mutual, threatening to foreclose on the property. The owners feared they were going to be losing their investments.

It doesn't sound like an appetizing invite, but Grubler agreed to run for the board and, after a tense election, won a seat. Then he went to his first meeting and, much to his surprise, was voted president.

Shortly after that, he got his first taste of the glories of the position.

"We had a part-time manager who sat at the meeting and screamed at me the entire time. Screamed! 'You need to take action on this!' 'You need to take action on that!' But none of the things she was yelling about were emergencies, like the gutters were attached wrong to the leaders. I didn't even know what a leader was and here was this person yelling at me like no one since my father had."

Grubler, who has a degree in psychology, doesn't rile easily. In fact, he says he can count the number of times he's been angry enough to yell on one hand. This wasn't one of those times. He told the manager to relax and calmly informed the board that they had to deal with the important issues first. Among those, it would turn out, was getting a new managing agent; a full-time onsite manager. The biggest task, however, was getting rid of the giant black cloud hanging over the property: foreclosure.

The Estates, built in 1949 and converted in 1987, was roughly $23 million in debt to Connecticut Mutual. There was also a sponsor who owned 250 units that were losing $240,000 a year (pushing it into default); a large arrears problem; and $2 million to $3 million in repairs needed on the property. Consequently, there seemed little hope owners would recover anything.

"It was a hairy time," remembers Stephen Day, the president of the board since 1998. Day bought his unit in 1990 and was also soon troubled by the dire situation.

A GAME OF CHICKEN

Desperate to try to work things out with Connecticut Mutual, the board hired Alchemy Mortgage Finance, a mortgage broker, and Abbey Goldstein, an attorney. Things heated up quickly.

Shortly into negotiations, Connecticut Mutual decided to flex its muscles. Goldstein, who has a reputation for being tenacious in these deals, was beginning to annoy the lender. According to Joel Breitkopf, president of Alchemy, he and Goldstein were simply laying it out for Connecticut Mutual in black and white.

"We knew that they were not making money on this. We showed them a financial analysis that said we figured the debt was probably actually $10 million, and that they had already written off part of the loss. We offered $11 million then, telling them at the same time that if they were really interested in keeping the property they would need to give us $3 million for capital improvements."

Connecticut Mutual's response: it told the board that it either get rid of the attorney or lose the property. The answer must have surprised the lender, as well as anybody who knew Grubler: he yelled. He recalls: "We were dealing with a multi-million dollar company. I had no idea what you could or couldn't do, so I said, 'Just do it. Go ahead.'"

Grubler then brought out a stack of letters that the board had prepared. Addressed to politicians and media alike, the letters basically stated: we tried to work something out with this company. All of these owners have a financial investment, which they are about to lose because they won't work with us. We need intervention.

"I wanted to ruin their credibility in New York," explains Grubler, who, at one point, even walked out of a meeting with them. "I think they expected us to get scared, but we were already prepared to lose everything. We just wanted to do anything we could to support the professionals we'd hired."

"Larry was a formidable opponent," recalls Breitkopf. "He showed fearlessness in the face of foreclosure and played chicken with them."

The ploy worked. Big time. Connecticut Mutual walked away from the property in August 1995 with an $11 million settlement. In addition, because of the sponsor's default, the co-op ended up owning 176 apartments. At the same time, the co-op was able to receive an $11.45 million mortgage from the Community Preservation Corporation.

There was still the matter of the multi-million-dollar repairs that were needed. Where would that money come from? It had to come from the sale of the apartments, but the reputation of the property was so poor that no one was buying.

TO MARKET

The answer: go to market. Under the direction of the brokerage house Alchemy Properties (the sister company of Alchemy Mortgage), word got out to the local community that things were turning around at The Estates. In addition to contacting newspapers with the story, Alchemy arranged for individual loans for buyers. Seventy-five apartments would eventually be sold, which helped pay for repairs. The market itself was turning around, too, so the value of units was increasing fast. A reserve fund was established and the property was finally stable.

All told, the effort cost the co-op $80,000 in legal and consulting fees and $114,450 to the broker. Grubler, for one, thinks they got their money's worth. "We had truly exceptional professionals. Sure they made money, but I felt like they had our interest at heart. I trusted them."

That trust made the difference, notes Breitkopf. "We had their unconditional support and trust and that was critical to getting this to go smoothly. It really was a team effort." Sometimes, this can backfire for boards if they choose the wrong person, he adds, but that illustrates the importance of due diligence.

Grubler sold his unit in 1998 for a $30,000 loss to move into a house with his wife and three kids. He says he misses some aspects of co-op life and working on a board. Since leaving, he's tried to serve on other non-profit boards but hasn't had the same experience as he did when he was at Bayside.

"You get on these boards and you don't do anything. Co-op boards are different. You have a chance to make the quality of life better for people. And not just now, but in the future. That is what it is really about. It's not so much what you are doing right this moment but how you are setting things up for the future. That is the major accomplishment — securing the future of the co-op."

That is what Grubler helped to do. According to Day, the property is in excellent shape, with a healthy reserve fund and a handful of completed capital improvement projects, including roofs, waterproofing, and replacement of six oil tanks. The reason for the success, he agrees, was a strong board and strong professionals.

"A board's mandate is to do the best you can for the shareholders," he observes. "We take this responsibility very seriously, so if that means we need to take a firm hand in something, we do. Some boards are nonassertive and just go with the flow. That can get you into trouble. Larry was a remarkable leader."

Grubler prefers a more modest assessment. "I didn't have the knowledge of what I was supposed to do, but I had the skills to put things together, to organize. I knew who to trust and when to lose my temper and when not to."