To Market, To Market

A seed. that's the way Howard Schechter, a partner in Schechter & Brucker, describes Lincoln Guild, a 420-unit co-op on West 66th Street in Manhattan. Planted in 1960 in what was then an undesirable location, the co-op was structured as an Article V Redevelopment Corporation — low- to middle-income housing meant to increase the quality of housing in the area where it was placed. For 25 years, the property would receive a tax abatement and would be under the supervision of the city. In return, residents would pay substantially less than market value for their unit, an amount that they would get back upon leaving.

The seed grew. With the completion of Lincoln Center and the new housing, the area's desirability flourished. Unlike other subsidized properties, Lincoln Guild had few union or blue-collar workers and the demographics tended toward middle-income and Jewish. It was a hands-on group, recalls Milton Lowenstein, who bought a one-bedroom unit for $3,000 in 1961 and has been a long-time board member. As with any situation in which one party must get used to the personality of another, there were some growing pains. "We were activists and the management company didn't know how to deal with us. We couldn't get along at all."

I WANT TO BE FREE

That first management company was replaced in 1962 and a Queens company brought in. Things seemed to be working out, until checks began bouncing in 1964. The new managers were speculating on land in California and using Lincoln Guild as a source of funds, taking as much as $10,000. Upon discovering this, the board trotted over to the manager's office, picked up all their financials and became self-managed.

Self-management fit the hands-on group well and things progressed at the co-op over the next 20 years. When 1986 rolled around, the co-op board, following its agreement with the city, decided it should reconstitute. The tree was ready to bear fruit; the group who had moved into a rundown location and helped make it better was now ready to go to the next step.

"I wanted our freedom, not subservient to anybody," says Frank Castorina, a resident since 1960 and a long-time on-and-off board member. "When we started out 25 years ago under New York City supervision, it was agreed we would become free after that."

The majority of shareholders agreed. The board had surveys sent out and found that about 90 percent of the people were in favor of "reconstituting." Whatever that meant. The truth was that not even the city seemed to know what it entailed. Lincoln Guild was one of the first Article Vs to seek reconstitution.

The process could have been relatively simple — change the incorporation documents — but the secretary of state and attorney general had other ideas. They decided that, under the Martin Act, the property would have to issue an entirely new offering plan, meaning more paperwork and more time. Lowenstein says the attorney general broke out a wrench and pry bar to get it to fit. "How can a co-op convert to a co-op?" he asks.

In addition to this delay, a small group of resident dissenters jumped into the picture and started wreaking havoc. Crying that the purpose of the property would be lost in becoming market value — middle- or low-income people would no longer be able to afford living there — the dissenters also claimed that those who were currently living at the co-op would be forced out by higher maintenance and higher prices. Their voices would carry to politicians, city agencies, and newspapers. Realizing that no new middle-income housing had been built in years, these parties suddenly reached the obvious conclusion that things might change once the contracts expired.

"The biggest concern of these people was how to keep middle income housing as middle income housing," explains Schechter. "How you are actually going to keep the people being served by the housing there at affordable prices they didn't have a good answer for, though. The subsidies had run out after 25 years. There was a gradual phase-in of real estate taxes over nine years to soften the blow, but after, say, 35 years, there were no subsidies left. So you have buildings that are 35 years old that need huge capital improvements but have no source of funds to do it with. Unless you found another source of money, you would have to displace the people." So, whether Lincoln Guild left the program or not, money needed to be raised in some way.

THE FEAR FACTOR

This fear caught hold with those dissidents. "There was one guy who fancied himself a politician and he, along with about 10 or 20 others, opposed us," remembers Castorina. Unfortunately for those who wanted change at Lincoln Guild, the dissidents happened to have connections. They were able to get the attorney general involved by suing him over the offering plan. The AG immediately placed an injunction on counting the votes of the referendum to reconstitute.

In the meantime, following instructions, Schechter and Andrew Brucker, the property's attorneys, began and completed work on a new offering plan. A number of things then occurred almost simultaneously:

The smear campaign. Current board president Claresa Fisher, who has lived at the Guild since 1981, says the local papers took them to task. "We felt targeted, persecuted, hurt, and the morale here just slid. Some people didn't talk to each other anymore. We weren't that smart to come up with something so clever as what they were saying. We were just doing what the law said we should do. It was very annoying."

HPD pressure. Lowenstein recalls the New York City Department of Housing Preservation and Development (HPD) representatives calling the board "unethical and immoral" for their proposal to go to market value. To try and thwart it, they demanded that the board be replaced and that they appoint the new one. "If they pass a law that says X and then don't obey their own law, that's what is immoral," says Lowenstein. (A lawsuit would eventually resolve this in favor of the board.)

A growing estate. With rumors of reconstitution and market value in the air, estates that owned apartments stopped selling their units, waiting until after the "conversion." Brucker estimates that about 20 percent of the units were in this position. Again there was pressure from HPD, this time to get the estates to sell the units. The co-op was forced to institute a lawsuit against the estates, which it lost. The irony here is that the suit delayed the process even more, meaning estates now owned more units.

The switcheroo. The secretary of state, halfway through the process, changed his position and declared that the co-op would be able to simply amend its certificate of incorporation. Rather than step back now that the change had become an internal one at the property, usually not the purview of the AG, the attorney general continued to pressure the co-op and continued to assert that an offering plan was needed. The move made no sense to the co-op's attorneys. Observes Brucker: "There were no more shares going to be sent out to anybody, distributed or sold or anything, but the attorney general kept saying we still have to do this. You have to disclose all of this to the people. The people knew. They wanted this. The government was trying everything in its power to make life miserable for us."

In 1991, the court ruled in favor of the co-op and, under a new AG who allowed the co-op finally to simply amend its certificate of incorporation, the vote was at last taken in the fall of that year. A whopping 92 percent of the shareholders voted to switch to market value. In February 1992, the co-op at last became private, six years after it had started the process. The board could now look to raise some money for repairs.

WINDFALL THAT WASN'T

As part of the reconstitution, the board put in place a $500 per share flip tax and reaped the benefits, collecting about $4 million, $3 million of which was spent on repairs around the property, including window replacement, a new mail room, roof replacement, lobby and corridor rehabilitation work, and sidewalk repair. Fears about a large increase in maintenance were scuttled as the reserve fund took in money from the flip tax. The co-op has been free of debt since it paid off its $6 million mortgage in 1986.

But what about the windfall? Lowenstein, who still lives in the same unit he bought 40 years ago, says that it really didn't happen. Because so many units had been held, prices didn't get as high as some had hoped. A one-bedroom went for around $90,000. (He says his unit now is worth about $300,000.) The demographics at the co-op have changed, though, he notes. Besides a wider range of occupations and ethnicities, many of the older tenants have moved out. Families with children are moving in. About 150 original residents still live there, though.

Fisher, 47, who started on the board last year, finds herself straddling the fence between the new residents and the older ones. The older ones bring to the table a lot of experience at the property and a certain way of handling problems, while the newer residents bring in new ideas and new needs. It's a balance, she says, but it is important to maintaining the community. "You can fall into old patterns easily. A board can drift in these conditions," she notes, "and this one started to, I felt." To handle both the newer and older residents, the co-op developed a senior citizens program, which eventually became a prototype around the state, and made the community room available for families to use.

Overall, the boards at Lincoln Guild have remained hands-on, taking lessons from their predecessors. The most important lesson, according to the attorneys: teamwork. Notes Brucker: "They were an extremely studious and intelligent board. Everyone had something to contribute. No one was along for the ride."

"The board, which has included Lowenstein and Castorina as well as Adrian Peters and others who played vital roles, was very level-headed and oriented toward accomplishing what they thought was the right thing to do," adds Schechter. "They asked for advice, they listened, they reached a consensus and they followed it. And fortunately, everything worked out."

While the story at Lincoln Guild has become much less raucous, the argument about what effects going to market value will have has not ended. Other Article V properties and eventually many Mitchell-Lama properties will face the same dilemma and rumors still persist that the older residents will be getting the boot. Lincoln Guild, however, has overcome many of the legal roadblocks. The ethical argument? Lowenstein looks at this way. He has a friend who paid $20,000, years ago, for a place on Fifth Avenue that now goes for more than a million. "Appreciation occurs everywhere," he concludes.