A Bronx Co-op Gets the Worst Possible News
190-unit co-op on Wallace Avenue in The Bronx
Oct. 9, 2015 — It was a few years ago — when Michael Williams was board president at the 190-unit co-op on Wallace Avenue in The Bronx — that he got "the call."
It was from a vice president at Marine Midland Bank, the holder of the building's underlying mortgage. The banker had grim news: he reported that "the sponsor was not paying the mortgage and the building was in trouble." For Williams and the rest of the board, it was "a wake-up call." Indeed: if the building defaulted on its mortgage and went into foreclosure, shareholders could end up losing their only assets and still be responsible for their personal mortgages. It would be, in the words of a veteran real estate lawyer, "the worst of all possible worlds." As one distraught shareholder at the co-op put it: "You don't want to lose your investment, your future, your children's future."
After bruising negotiations with officers from Marine Midland, a solution was reached and disaster avoided. The term of the mortgage was extended; the sponsor agreed to auction off his apartments, and any that failed to sell would become the property of the co-op; the sponsor gave up his seats on the board and his role as managing agent; the sponsor paid the mortgage arrears and agreed to contribute $300,000 to the co-op's reserve fund. A new management company was brought in and new board elections were held. Some of the sponsor's apartments sold. Shareholders were hopeful that a new day had dawned.
Then, some time later, Williams got "the call" — again. It was a vice president from Marine Midland and what he told Williams this time was tantamount to a sentence of death for the troubled co-op. Many of the former sponsor-held units had gone into serious arrears, forcing the board to foreclose on a large number of apartments with unpaid maintenance. That had swelled the corporation's holdings to 63 mostly unsalable units. A co-op has the right to rent foreclosed apartments — which generates much-needed income — but that doesn't advance the campaign to become a building with a majority of owner-occupied apartments.
The bank, claiming the building had too much debt and too few resident-shareholders to pay it off, had decided to sell the co-op's underlying mortgage to a new "sponsor" — actually an investor — who was buying it with the intention of eventually turning the property into rental apartments. That was a nightmare on a par with foreclosure — the end for any co-op.
How the building got into this fix — and how it got out — is an object lesson in what happens when a board becomes complacent, a sponsor has too much power, and circumstances work against you. How do you find your way out? Is it even possible?
Photo by Jennifer Wu