The Right Relationship

The right relationship is everything. In the current rush by co-ops and condos to cash in on low-interest rates and renegotiate their underlying mortgages, most boards are busy concentrating on finding a bank that will give them the best interest rate possible. But when it comes to properties in dire financial straits, pulling a building out of the red and into the black means a board has to get its own house in order, and be willing to set aside differences to broker the best deal for the building.

That was the case at 9281 Shore Road. From the outside, the co-op looks like any other building on the tree-lined street in Bay Ridge, Brooklyn, six stories tall, with enviable views of the Verrazano Narrows Bridge and New York harbor. It looks like the kind of place any shareholder would be thrilled to call home. But just a few years ago, it was co-op on the verge of a financial meltdown.

The problems started in the early 1990s, when the board, on the advice of an attorney since disbarred, stopped paying the interest on the wraparound mortgage, which was coming due. The attorney had promised that the payment stoppage would force the sponsor to the table to negotiate the rising interest rate. Instead, for the next seven years, it battled the co-op in court.

"We had a nightmare on our hands. We were in bankruptcy, we were in foreclosure," recalls resident Fran Klyne. Near desperation, the board started to make changes. An election was held, and Klyne was tapped president. The co-op fired the attorney and hired mortgage broker Stuart Bruck to find a bank that would be willing to renegotiate the mortgage. Bruck went to M&T Bank, which knew the sponsor and knew the neighborhood. The decision paid off. In 1999, the bank awarded the co-op a $4.7 million mortgage.

"They were able to look beyond the problems of the co-op and make a sound real estate decision, because they recognized the value of the property," observes Bruck. Based on the building's location, and its good physical condition, "they were willing to proceed with the loan - where other lenders would see a recent bankruptcy and say it was too difficult or too hard."

Part of the lender's willingness to deal was the board changeover. The new president "was very comfortable and easy to deal with," recalls Gardner Semet, the bank executive who negotiated the loan. Klyne "was very with it and very anxious to get all the bad stuff behind her and the sponsor was someone we knew for a long time. I don't think people really wanted to take it to the mat." Neither the co-op nor the sponsor wanted to face foreclosure.

In 1999, when M&T Bank loaned the $4.7 million, the sponsor owned almost 50 percent of the units. Today, 9281 Shore Road is more than 75 percent shareholder-owned, with a solid reserve fund and well-functioning board. Klyne, who has retired as president, remembers vividly the precipice the families were standing on before they reached a negotiated settlement with the sponsor.

"What finally pulled it out was the fact that the board and the sponsors were finally able to put aside their differences and move forward to saving the building," she notes. "Because if we didn't, we would have gone under. Fifty-seven families would have gone under."

Relationships matter. So does understanding how the system works. "Banks are in the business to lend money," points out Patrick Niland, president of First Funding Group, a mortgage brokerage. "They are governed by all kinds of reservations, they are usually overworked, they have a lot of different applications, and they really don't waste time sitting around trying to figure out how to get two basis points out of the co-op." So co-ops that are busy arguing among themselves or "come in with a chip on their shoulder - they will irritate the loan officer and lose cooperation."

Niland knows. Back in the mid-1990s, Executive Towers in the Bronx was a mess. The building was leaking like a sieve, and each time bricks were removed to locate the source of the leak, more internal damage was discovered, recalls Larry Vitelli, senior vice president and managing director of Residential Management Group (formerly Insignia Residential Group), which manages the building. "There were repairs that needed to be made and we were spending a fortune fixing apartments, and we didn't have the money to make repairs to main systems, like the sidewalks and the roof. There was a high percentage of sponsor apartments and, at the time, the market wasn't very good."

As the problems in the building mounted, more and more shareholders fled the co-op, making it difficult to raise money for the repairs. When the building approached First Funding for a new mortgage, Niland was skeptical. The co-op had a lot of problems, as well as a low owner-occupancy rate. But the board, and its managing agent, Vernon Grant, persisted. Finally, Niland took the story to the Community Preservation Corporation (CPC), a nonprofit mortgage lender focused on making loans to buildings in trouble, as a way to increase the number of affordable housing units in the city.

The moves worked. The shareholders put their trust in the board, acquiesced to a maintenance increase, and CPC in turn made the first of a two-part construction loan that paid off the building's mortgages and provided $3.5 million in loans for repairs. Today, the 24-story building with 455 residential units is almost at full occupancy.

"CPC is a perfect organization for that type of situation," explains Niland, "because they have a mandate from their shareholders - large banks and insurance companies - to make loans that they [the shareholders] might not make directly."

CPC and manager Grant (since retired) were "the salvation of Executive Towers," adds Niland. Not only was Grant smart, "He's hard- working and he really cares about that building. And you had a very dedicated board: hard-nosed, serious folks."

"We're out of the red and into the black - finally," says a relieved Halona Patrick, the new board president. The building has been in a good financial condition now, consistently, for a few years, she reports, "which is something that we worked very hard on at the board level. Our responsibility is to ensure the health of the corporation - it's not just an investment for us, it's our home. It makes it that much more important that all aspects of the building and the corporation are healthy."

While CPC's approach is to seek solutions to the problems that can plague a co-op, such as high sponsor ownership, deferred maintenance payments, or renovation work, the nonprofit mortgage lender has from time to time turned down a building's request for a loan based on problems inside the building, reports CPC's president and CEO Michael Lappin. And while the problems are frequently resolved with a loan, "We occasionally have made the decision not to move forward with a project due to serious conflicts within the co-op board."

But when a co-op is ready to work hard, the results can pay off, and handsomely. This past April, Nagle Apartments, a 110-unit co-op in Inwood refinanced its mortgage, taking out a $2.7 million self-amortizing mortgage that, in 20 years, will leave the building debt free. The new mortgage pays off the old wraparound mortgage and an existing line of credit of $450,000 and leaves the building with $50,000. Not bad for a co-op that started the 1990s nearly bankrupt.

Rita Jensen, the president, recalls the hard work in 1997, when the co-op was first looking for a loan to renovate its garage and then to purchase the sponsor-owned apartments. "We needed someone to [buy out] the sponsor. We needed a construction loan for repairs, and the only possible way we could get NCB's attention at the time - because we were in such a terrible financial straits - was that our lawyer Theresa Racht [a partner at Rosenberg & Estis] was able to persuade [NCB loan officer] Mindy Goldstein that the leadership of the building was strong enough that we really would be capable of turning the building around." The combined efforts of Jensen and Racht worked. The co-op got the first of two lines of credit, and this past April, a new, $2.7 million mortgage.

"Years ago, when they started they weren't a pretty picture," admits Goldstein. "What helped me was that they were hands-on - you like to do deals, but you also like to help," and the board's commitment to improving the building made NCB feels as though it was helping the co-op reach its potential.

"We had solid leadership," agrees Jensen, "and a real plan and we could get this done." This past April, when the board refinanced its mortgage and paid off its line of credit, the building's managing agent, Mary Hack of Blue Woods Management, called the refinancing the "crown jewel" in the building's portfolio. "It's an amazing building," she observes. "And it's really an amazing board."