The Art of the Turnaround

Tell us about your experience with this troubled co-op in Queens.This 100-plus-unit building in Astoria was financially dis-tressed when we took it over. Physically, it looked great, the board was intact, but financially it was in a very tough position.So looking good on the outside but weak on the inside?That’s correct. The ultimate goal was to be able to address some major capital improvements, including Local Law 11 issues that were looming about a year or two down the road. So in order to get to that point, we had to make the building stable. We had to make sure that the books and records were accurate, that the building was no longer in the red, and that the accounts payable weren’t huge.We started on the expense side. We went down the expense list, and we looked at some large-ticket items like oil and insurance. The building was able to work with vendors that we’ve worked with before and some that we recom-mended, and we were able to get those accounts paid up as well as get the rates down on the monthly expenses.You attacked expenses first. How about income?We went through the revenue and noticed that over several years there was no increase in assessments or monthly main-tenance. We typically don’t like to go in and just increase maintenance; we prefer to see where we could save on expenses. We also like to see what type of maintenance increase the building could sustain. So we increased it a cou-ple percent, and we also adopted a policy that there would be a small percentage increase on an annual basis. We also had a couple of fees that were implemented, but nothing huge.By now, this has taken, what, a couple of years?It’s taken a least a year to two years to get to a point where we’re out of the red. So now the big step is to refinance their current mortgage. The building had a mortgage that was five or six years old, and the interest rate was a bit high. In order to address these major capital improvements we wanted to refi-nance, increasing the mortgage a bit but lowering payments, and spread it out over a longer period of time.In the refinance we were able to take out enough money to cover the major capital improvements that were coming due, and we also got a small line of credit in case there was an emer-gency in the future. We also had a little bit set aside for reserves.What did you learn from this experience?After looking at where we wanted to be a couple years down the road, we realized we needed to take those baby steps to get there, because when it was time to refinance, we wanted to make sure the building was stable. We wanted to make sure that the finances were in line, aesthetically it looked good, and we presented the building well to the markets.A lender doesn’t want to lend money to a building that’s in trouble.Correct. And a lot of times, when a building is in need of a refi-nance, it runs out prematurely to the markets, and that taints the building’s name. So in essence, we were able to use our investment experience and say: “Hey, we want to take a step back. Let’s make sure everything is in order, and then go out to the markets in the best light possible.”