New York's Cooperative and Condominium Community

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Unidentical Twins

Co-ops, it turns out, have something in common with books: you can’t judge them by their covers. Consider the two seemingly similar buildings that flank 123rd Street on Madison Avenue in upper Manhattan. They were both built in the late 1990s, they both have handsome brick skins, and they both gaze out on Marcus Garvey Park. They also both started life as affordable co-op housing under the umbrella of the city’s Housing Development Corporation (HDC) and department of Housing Preservation and Development (HPD). They even have similar names: Maple Plaza and Maple Court.

But don’t be fooled by superficial similarities. These two co-ops have taken sharply different paths in their decade-and-a-half of existence, and today, despite their original similarities, they could hardly be more distinctive. Maple Court recently refinanced its HDC mortgage and continues to live by the restrictions and protections that come with it, including real-estate tax abatement and limits on shareholder income and resale prices, and even on the types of tenants eligible to rent the building’s commercial space.

On the other hand, after an internecine battle for control of the board, Maple Plaza decided to break away from its affordable-housing origins and pursue life as a conventional co-op. Here’s the tale of what drove these boards to take two very different paths.

Maple Plaza: Changing Course

When Carole Holland moved into eight-story, 155-unit Maple Plaza in 2012, she quickly learned two things: the building was plagued by shoddy construction, and the seven-member board of directors was dominated by original shareholders whose dealings were less than transparent. In keeping with the building’s mission, original shareholders had purchased two-bedroom apartments for about $7,000 – but the co-op was saddled with a $16.7 million mortgage that carried a stinging 6.25 percent interest rate, along with two smaller loans. “It was a typical board drama,” Holland says. “There was a lot of infighting.”

Holland got elected to the board in 2012 and eventually helped get rid of the original management company. She brought in Halstead Property to begin addressing a host of problems, including unpaid bills, a pair of chronically balky elevators, water leaks, faulty thermostats, and more.

“Changing to Halstead put us on the path to financial solvency,” Holland says, “and that made us attractive to a private bank.” That was crucial for Holland and like-minded shareholders, because they wanted to get out from under the HDC mortgage and the accompanying HPD regulatory agreement.

“We realized we were not benefitting from HDC,” Holland says. “We had outgrown that program. The benefit of a commercial bank loan would not just be money, it would be the freedom to run the co-op the way we wanted.”

An HDC mortgage and accompanying HPD regulatory agreement have advantages and disadvantages. On the plus side, a co-op enjoys a 421-a real estate tax abatement for 21 years, when a five-year phase-in begins; and income restrictions and resale profit taxes tend to thwart speculators looking to cash in on cheap apartments.

Maple Court: A Well-Worn Path

These considerations were enough to convince neighboring Maple Court to refinance with HDC recently, according to sources. (The board president at Maple Court declined repeated requests to be interviewed for this article.) On the negative side, Maple Court’s underlying mortgage carried a $103,000 monthly charge, subletting was forbidden, the pool of potential commercial tenants was restricted, and the co-op had to cover the expense of HDC’s mortgage insurance and various fees.

Some background: HDC was set up in 1971 to provide New Yorkers with affordable housing – a perennial hot-button issue that helped get Bill de Blasio elected mayor in 2009. The HDC issues bonds that allow it to provide subsidies and loans to develop affordable housing – and keep it affordable. However, an HDC mortgage comes with numerous restrictions, including what amounts to a stiff flip tax, a way of keeping maintenance and other costs low for residents who choose to remain in the co-op or condo.

Shareholders in Maple Court and Maple Plaza faced a basic philosophical question when their HDC mortgages began to approach the ends of their terms: should we stay with HDC or should we go get financing from a commercial bank? As Thomas Thibodeaux, CFO of New Bedford Management, frames the question: “Do I want to keep the HDC restrictions and keep the building affordable? Or am I more concerned about increasing the value of my individual property?”

Thibodeaux is not affiliated with either building, but through years of experience has a keen understanding of the issues involving HDC housing. “The pros and cons are that a private bank has deposits on hand, so they can lend money for a mortgage at a lower rate,” he notes. “The HDC, on the other hand, sells municipal bonds to raise the money to lend to co-ops and condos, so the interest rates are higher. But the HDC also has a vested interest in the success of the property, so they can be more flexible on the payout of the mortgage. If it means keeping the common charges low and keeping the property affordable, HDC will stretch the term of the loan.”

About 10 of the 130 properties New Bedford manages have HDC mortgages, Thibodeaux says, and residents’ sentiments are frequently split on whether to stick with HDC or break away. At a 140-unit condo in Harlem, for instance, an informal survey recently revealed that a majority of residents wanted to shed their nearly paid-off HDC loan and seek financing from a private bank. The robust state of the current real estate market was surely a factor in that decision.

“For someone who wants to sell their apartment,” says Thibodeaux, “the HDC regulations can sharply curtail the value of the apartment.”

Meanwhile, at Maple Plaza

Juma Waugh, the Maple Plaza board’s vice president, works as a compliance officer at a major bank. When he moved into the building in 2008 and got elected to the board the following year, it became immediately apparent to him that the HDC mortgage was the co-op’s enemy.

“Our mortgage payments were ridiculous,” Waugh says. “We were hamstrung by our debt, and we couldn’t address the physical problems in the building or plan for the phase-in of real estate taxes, which are scheduled to begin in 2021. One of our motivating factors for refinancing was to prepare for the future.”

So the board, with Holland, Waugh, and their allies now in the majority, turned its attention to refinancing the mortgage. A committee, including people with financial backgrounds, was put together to canvass lenders. They brought in 10 mortgage packages, including one from HDC with an interest rate and other terms that were not competitive with the commercial banks.

“We could not accept HDC’s terms in good faith,” says Waugh. “It would have kept us tied to them for another 30 years – to their benefit, not ours.” He makes no secret of his opinion that the building’s numerous construction flaws should have been addressed by HDC before the first residents moved in – instead of becoming a source of ongoing inconvenience and expense for the co-op.

Shareholders were presented with the three best mortgage options and encouraged to offer their preferences. Finally, on Oct. 15, 2015, the co-op closed on a $13.5 million mortgage with National Cooperative Bank that cuts the interest rate from 6.25 percent to 3.95 percent, a savings of $600,000 a year on debt service alone. The mortgage also established a $1 million line of credit.

While the board was elated, some shareholders were not thrilled by the co-op’s shift in direction. “Some people look at HPD and HDC as a backstop,” says Waugh. Adds Holland: “There was a group that fought the refinancing and was angry about it.”

The divide in these matters usually comes down to old vs. new – original shareholders who want to preserve affordability vs. shareholders who moved in after 2008, when the nine-year moratorium on sales was lifted and prices began to rise.

“There was a lot of politics,” says the board’s attorney, Geoffrey Mazel, a partner in the firm of Hankin & Mazel. “Some of the original people paid far less for their apartments, while some new people are paying $350,000 and up. There are different considerations when it comes to spending money. It’s an interesting kind of friction.” Love it or hate it, Mazel says, “Maple Plaza is now a step closer to being a traditional co-op.”

A Long Way

But there’s still a long way to go. While the financial relationship with HDC has been severed, the HPD regulations remain in place until their prescribed expiration in 2021. That year, the co-op will begin a five-year phase in of real estate taxes, beginning at 20 percent the first year and increasing by an additional 20 percent annually for the next four years. The sublet ban and income restrictions remain in place, as do restrictions on commercial tenants and parking space rentals.

Holland says the board is looking to end their HPD aggreement sooner than anticipated, adding, “We’re hopeful.”

Mainly, though, the co-op has taken a major step toward controlling its own destiny. The “let’s-save-a-ton-of-money-by-getting-a-commercial-mortgage” strategy, as Mazel only half jokingly calls it, has freed the board to tackle endemic problems that have plagued the building from the day the first residents moved in. “The past year was putting out fires,” says board president Holland, “and this year is going to be planning for capital improvements.”

Now that the elevator mechanicals have been replaced, using money from the reserve fund, the board is preparing to attack a list of projects that include replacing the roof, fixing the non-functioning thermostats, redoing the laundry room, completing mandated Local Law 11 façade work, and installing energy-efficient plumbing and lighting fixtures. The board also hopes to add a playroom for kids and a gym.

“One of our motivating factors for the refinancing was to prepare for the future,” says board vice president Waugh, “to set aside money for real estate taxes and tackle the building’s structural issues. I understood that even if we refinanced we would not be able to take advantage of market prices right off the bat. My concern is that future boards don’t have to feel the crunch, the stress and strain of the financial picture we had.”

“I feel extremely positive about the direction we’re going,” Holland adds. “I think the building is going to realize its potential. We’re going to show the direction for other HDC co-ops that want to become traditional co-ops.”


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