Birchwood House Co-op Goes on a Buying Spree

Eric Goidel couldn’t believe what he was about to tell the board at the Birchwood House, a 153-unit co-op at 37-31 73rd St., in Jackson Heights, Queens. He was bluffing, but this was high-stakes poker for the board’s own good.

Myles Horn, a developer and the holder of the unsold shares of 12 apartments containing rent-stabilized tenants, wanted to sell those units in a bloc rather than holding on to them as a rental landlord and eventually selling them piecemeal. He decided his best option was to sell them to the co-op corporation itself. The co-op’s management company at the time, John B. Lovett & Associates, and Goidel, the board’s attorney, both agreed this seemed an excellent long-term investment for the co-op, which could eventually sell the units at a profit.

“I believe that the break-even point would be around five apartments,” says Goidel, a senior partner at Borah, Goldstein, Altschuler, Nahins & Goidel. “This would mean that half of the resales would be essentially pure profit.”

But the $1.3 million price tag made the co-op board uneasy. “I almost had to shame them into buying the package,” Goidel recalls, “by telling them that if they didn’t want to do it, I was going to ask them for permission to let me put together a group to do it – which I honestly didn’t intend to do, because it would have been a conflict of interest. But I figured that was the way to get them to focus on it. If I thought it was such a great deal that I might find people willing to buy, then they should do it.”

Ed Callery, treasurer of the seven-member board, recalls with a chuckle, “You know, I actually remember him saying that.” The building had just drawn down its reserves for a mandated Local Law 11 facade project, and it would have had to take out a second mortgage in order to buy the 12 apartments. “We did what a board is supposed to do,” Callery says, “which is to be skeptical and make sure that what we’re doing is in the best interest of the shareholders.”

The board tried to gauge, over the short term, whether the rent would cover the additional debt they would take on. Turns out it wouldn’t, but that wasn’t necessarily a deal breaker. “The differential between the rent-stabilized rents for the apartments and the maintenance that would have been paid by a shareholder was not in the aggregate too negative,” Goidel says. And long-term, the board projected that the apartments’ value would rise, returning more on the investment than certificates of deposit or money-market funds.

One thing working in the board’s favor was that apartments with rent-stabilized tenants sell for less than vacant apartments. After much discussion, the board approved the purchase of the 12 apartments for $1.3 million – just over one-third of their market value, according to Goidel.

“I remember everybody being in favor of it – but with cautious optimism,” Callery recalls. “It wasn’t just the numbers, because numbers are fungible. It was a combination of the numbers and the trust that we had in our advisers that allowed us to make that decision.” In addition to its attorney and property manager, the board was guided by its accountant, Rick Montanye, managing partner at Marin & Montanye.

In the decade since, Goidel says, the board has sold “four or five” of the dozen apartments, renovating and flipping them after rent-stabilized tenants left through natural attrition. The board has gone on to buy apartments from shareholders or their estates, plus one at auction following a shareholder eviction for nonpayment.

In deals of this type, striking the proper balance is the key, according to Goidel. “Buying rental apartments has a place in terms of investment strategies,” he says, “but you shouldn’t go overboard. It’s one thing maybe to own 5 or 10% of your apartments. It’s another to own 30, 40, 50% of the apartments. That could be a disaster.”