Back From the Brink of Disaster: Inspiring Financial Turnarounds

Back From the Brink of Disaster:

Co-op and condo boards, together with their professional managers, are responsible for their properties' financial well-being. Every financially-challenged property faces the same perils: an inability to meet ongoing expenses, the consequences of unattended capital improvements, the danger of plummeting sales prices and even the dire possibility of foreclosure. When a property is in financial jeopardy, it falls to the board and management to do everything possible to pull it out of the red and into the black. Here are the inspiring profiles of three properties that stood on the brink of disaster and turned that situation around. Here, also, is expert advice on how to ensure your own property's financial success.

Headed for Trouble

In early 1995, Forest Hills Inn Apartments, Ltd. was headed for trouble. The 97-unit Queens co-op had only $180,000 in the bank, a mortgage at 11 percent which included the stipulation that the property could not refinance until August of that year, high shareholder arrears andamong other physical maintenance issuesfaulty drainage gutters that were causing costly repeat damage. A vicious cycle was also in play: A high number of shareholders were subletting, making unit financing difficult to secure. And because prospective buyers couldn't get loans to buy into the building, values were dropping and more and more shareholders were opting to sublet.

So it went until Guy Bergeron assumed the board presidency two years ago. Bergeron's priorities were to secure a new mortgage and impose blanket restrictions on sublettingan unpopular move considering how hard it was for shareholders to sell. Nevertheless, once the property was able to show lenders that it was undertaking a deliberate course of corrective action, the property did find a willing lender at eight percent. But just as closing was imminent, the co-op got hit with a $380,000 water bill. We had gone to metering in 1989 and from that point on, no bills had been issued, recalls Bergeron. Our then-new managing agent, Queens-based Kaled, got busy contesting the bill, and, after negotiations, the lending institution was willing to move forward if we would escrow $173,000.

There were a lot of sleepless nights, Bergeron adds. But eventually the property closed, reducing debt service by $32,000, and getting subletting under control. This accomplished, the property was able to turn its attention to increasing revenue and quality of life. Revenue-generating basement storage bins and an in-house gym have been installed; the co-op has secured less expensive insurance coverage and reduced arrears to less than one percent; units are selling at increased sales prices with no financing problems; a five year plan including new windows, intercom upgrade and sidewalk repairs is in place; and reserves have increased to more than $400,000. Bergeron credits Kaled, board treasurer Paul Anop, past board member Ruth Vosbourgh, and his fellow board members for the turnaround.

A Disaster Averted

Management company John B. Lovett & Associates, Ltd., located in Queens, was instrumental in the turnaround of LeHavre On the Water in Whitestone, Queens, a 30-acre, 32-building complex with 32 units in each building. In 1988, when we came in, the co-op was suffering financially and physically, says company president Ken Lovett. There were no controls with respect to purchasing, and no system of service charge-backs to shareholders. There were over 900 parking spaces and no one knew who was parking there, or how they were being charged. Worse yet, the sponsor was defaulting on payments to both the lending institution and in maintenance payments on more than 400 units.

Because of a complicated situation involving several lenders, in which two of those lenders failed during the course of negotiations, (introducing both the RTC and the FDIC into the mix), Lovett says the property was on the eleventh hour brink of disaster. There were a couple of showdowns with respect to payments, and hairy situations dealing with the federal government. Also, there was the issue of the psychological effect of all this on the people who live in this complex, he explains. Eventually, however, Lovett was able to eliminate the wrap-around mortgage and settle more than $1 million owed to lending institutions and vendors. Today, the remaining unsold shares are owned by an investor who makes regular payments. In addition, years of deferred capital improvements are now being addressed.

We found that many of the things that were previously contracted out to vendors could be done by re-training staff, says Lovett, who is currently working with the property to realize an expansive capital improvements program that includes roof and boiler replacement, surface repaving, health club renovation and hallway redecoration. The property is now both financially and physically sound; and, with the help of a professional public relations firm, Marcus Communications, Inc. in Manhattan, sales are active.

An Amazing Turnaround

Until late last year, 33 Greenwich Owners Corp. was facing the possibility of foreclosure. The 149-unit co-op was struggling with an exorbitant interest rate on a $5.7 million balloon mortgage entered into by the sponsor with whom the board had a difficult relationship. Only 40 percent of the units had been sold since conversion in 1986, and an insufficient operating budget necessitated a maintenance increase way above market levels. Several shareholders were making late and/or incomplete maintenance payments because they couldn't sell their units and couldn't afford the monthly carrying costs. When the balloon came due in February 1992, the lending institution refused to refinance, but the co-op continued to make payments through September, when the lender announced foreclosure proceedings against the building.

Soon after, the lender itself went into receivership, was taken over by the FDIC, and eventually sold its interest in the co-op to a vulture fund (this Wall Street term describes an investment group that buys distressed debt for the sole purpose of profit). This particular vulture fund was willing to foreclose on the property and turn it back into a rental building, which would have resulted in every shareholder losing his investment in the property.

That's when the Manhattan-based financial advisory firm Chusid/Whitehead Associates, Ltd., entered the picture. Working with then-new board president Ben Barshay, the co-op's corporate counsel Allan Starr of Greenstein Starr Gerstein & Rinaldi in Manhattan and accountants William Greenberg and Jack Brennan of William Greenberg, CPA in Manhattan, Chusid/Whitehead had restructured the co-op's finances by September 1996. A new mortgage was secured which enabled a $5.25 million settlement with the vulture fund. In addition, Chusid/Whitehead, which specializes in working with over-leveraged properties, also arranged for successful certiorari appeals that yielded a $500,000 tax refund to the property and the establishment of all necessary escrows for taxes, sewer payments, etc. as well as an operating fund of about $150,000 and a capital reserve fund of $430,000.

We had to play straight up into the heart of the numbers, do it quickly and put together a team of people who understood that, says board president Barshay. Chusid/Whitehead took a practical approach and was willing to look at every opportunity. Today, sales prices are at market rates, maintenance is under control, lenders view the building as a good risk, structural and mechanical capital projects are underway and aesthetic upgrades are on the board's agenda. In short, the building is completely financially stable.

Determining Financial Viability

According to Marc Taub, a partner in the Manhattan-based CPA firm of Ellenbogen Rubenstein Eisdorfer & Company LLP, a property needs to ask the following questions to determine its financial viability: When are we able to pay our bills? Is paying bills on a timely basis a problem? Is there a problem when large bills come in? Have any maintenance activities been deferred because of financial considerations? What kind of plan do we have in terms of future needs?

A fiscally sound property has determined its future needs and has some kind of plan regarding how it's going to fund its future plans, says Taub. Solvent properties have money in reserves for emergencies. Because every property is different, boards need to make conscious decisions relative to the numbers they're comfortable with in terms of operating and reserve budgets. Looking regularly at arrears, payables, receivables and reserves relative to day-to-day operations and projected capital projects is important. Where a property is constantly making special assessments, it's possible that maintenance or common charges are too low, or that spending is too high. The regular and recurring revenue stream should be considered; we advocate that boards not rely on non-recurring revenue such as transfer and sublet fees. Refinancing is usually the cheapest and easiest way to finance major improvements. And we tell properties in sponsor default situations to try to take back as many of the units as they can and resell or rent them. In the end, we advise boards to act quickly and decisively when there's a financial problem.

Lovett agrees that properties need a capital improvement and financial plan to work from. It doesn't mean you can't change the plan, he adds. But at least you have a plan. See what your property's strengths and weaknesses are, and prioritize what's to be done first and why. It's also important for the property, its management and its other professionals to have a cohesive approach.

According to Julia Whitehead, a corporate financial expert and a partner in Chusid/Whitehead, For all our clients, healthy or otherwise, we begin with a comprehensive evaluation of the client's operating and financial structure, and the performance of the building relative to market comparables. This evaluation gives us the basis for meaningful discussion with clients regarding their objectives, allowing us to create a financing solution that addresses their requirements and offers maximum benefits to their properties.

To this end, partners Whitehead and Candee Chusid have developed and patented a co-op mortgage product to restructure and rescue distressed properties. It's important to create a situation that enables sales within properties, adds Chusid. Clients get enough money to be financially viable and encourage unit sales. That's what Chusid/Whitehead consider to be a successful restructuring.

Properties in financial distress need to know that turnaround is possible for them, concludes board president Barshay. The key is to take a realistic approach and put together a team of players who will work together to save the property. It can be done.

Barbara Dershowitz is a former contributing editor for The Cooperator.

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