The Face of Financial Fitness

In 1990, the board at 28-30 West 74th Street felt like it was looking down the barrel of a gun. More specifically, it faced two issues that were threatening to have a catastrophic impact on the small brownstone co-op. The building’s J-51 tax abatement was set to expire in July 1994 and, just a few months after that, the underlying $1.1 million, 10.25 percent mortgage would meet the same fate.

Kate Lawton, who has served on the board since 1990 and is currently president, says the twin issues were the only ones in all her years that had “the ability...[to] have been really bad [financially].”

Eventually the board decided to tackle the two issues simultaneously: refinancing the mortgage to net some funds to compensate for the expiring J-51 and, at the same time, levying an assessment to earn the $100,000 needed to pay a prepayment penalty on the old mortgage.

If the board had not come up with its innovative plans, it probably would have had to take a second mortgage or send maintenance fees skyrocketing, says Michael Wolfe, president of Midboro Management, which has managed the building since 1987. “What they did was not permanent, it did not incur any additional debt services,” Wolfe says. “It was very prudent.”

Lawton even went one step further when imagining gloom and doom. “Some people in the building probably would have been forced to move,” she says.

And that would have been a shame, particularly because the building is a tightly knit community of residents, many of whom have lived there for decades. Lawton can quickly tick off the names of two couples that have lived there longer than she has, and she has been there for 17 years.

The building started out with 25 apartments and is now down to 19 because residents have combined units, which Lawton says has tied people even more to the landmark brownstone co-op.

“There is a core group of people who have lived in this building for a long time, and I don’t anticipate we have any idea of leaving any time soon,” she notes. She also attributes residents’ longevity to a unique combination of what she calls “high-end brownstone living,” a quiet street, good locale, and a building and board free from “drama.” She and her husband recently combined two apartments and the new space has reportedly been appraised at more than $2 million. “You don’t see many apartments in brownstones that are at that level,” she says.

After the resolution of the J-51 and the mortgage issues, things were rosy at 28-30. Thanks to the refinancing, maintenance fees went down about 60 cents a share per month and those rates didn’t rise back up to pre-refinancing levels until February 2002.

“We actually ran along in pretty good shape for a number of years,” she says. “Because of the J-51, we had built up a pretty big reserve, and we could ease up on our maintenance increases every year. It all kind of worked out okay until we hit some big-ticket items.”

With the reserve tapped, the board went back to the assessment route to raise the funds to complete the projects that arose. One assessment – 45 cents per share per month – ran from July 1998 through January 2003, earning about $112,000 for a host of projects, including an elevator modernization and exterior repairs required by Local Law 11, the city ordinance passed in 1998 after several notorious wall failures. Another came from October 2004 through June 2005, raising $30,000 at 75 cents per share per month to replace the building’s cooling tower. Yet another assessment ran its course from June through December of 2006 at $1 a share, netting $31,000 to fund a series of upgrades, including repainting and recarpeting the interior and some exterior ironwork.

Lawton says no one is ever happy to pay more money, but the board thought assessments were the most balanced option. “I think it’s easier for the board to go to the shareholders, because in a short period of time, people can see the results of the project,” she says. “They know ‘I’m paying this amount for six months to upgrade the interior of the building. We’re okay with that. We want that.’”

Lawton says the board would have loved to pay for the recent upgrades upfront, but that the reserve fund wasn’t sufficient. That lack of reserve, plus the knowledge that some projects were round the bend led the board to consider refinancing again around 2003, when mortgage rates dipped.

But in the end, the board decided to stick with the mortgage obtained in 1994 – a $1 million 20-year self-amortizing loan at 7.5 percent interest. “By 2013, they’re going to be down to zero and the mortgage will be paid off,” notes Gary Ziprin, chief financial officer at Midboro. “They decided against putting more debt on the building.”

The refinancing worked in 1994 because the twin pressures from the expiring mortgage and the J-51 were so great that no other option was viable. This time, Lawton notes: “We could stagger the projects on a five-year plan, do them little by little, year over year, increasing maintenance and using selective assessments rather than paying the prepayment penalty.”

A J-51 abatement has also again been granted to the building – albeit in a much smaller form. In April 2005, the co-op received another J-51 for improvements, including waterproofing, roof resurfacing, and the elevator-modernization project, says Sandra Lozano, Midboro account executive, who has worked with the property since 1996. This J-51 will expire in another nine years, netting about $41,300 in tax breaks over that period. “It hasn’t had a great impact,” Lozano says. “It’s very minor compared to the last time.”

Looking to the future, Lawton says: “We’ll slowly build our reserve up using our maintenance for the next several years, and then we’ll use assessments for the big projects until our mortgage comes off.”

And are there any more biggies looming now? Roof? Boiler? Windows? “We’ve got no big projects now,” observes Lawton, who adds: “Knock on wood.”