While the real estate market today is going strong, there are still buildings facing financial troubles. Many of these are victims of the collapsed real estate market of the late 1980s and early ‘90s. The market may have dropped after the conversion of a building, and subsequently the sponsor was not able to charge the rents necessary to meet his maintenance obligations. Eventually the sponsor defaults. It’s then up to the co-op to make the payments, but they are in no better position than the sponsor was. With no cash to refurbish empty units for rental or to do even basic building repairs, the situation worsens. It can be almost impossible for a co-op to pull itself up by its bootstraps once it’s headed for foreclosure.
The situation may not be beyond hope, however. While the co-op itself may not have the resources it needs, outside investors with money, connections and creative deal-making abilities may just have what it takes to pull a building back from the edge, and make some profit for themselves along the way. These investors are often known as "White Knights," and here are a couple of their stories.
To The Rescue
The Orchard is a 480-unit garden apartment development in East Windsor, New Jersey that was built in the ‘70s. It has a pool and bright, airy apartments that look out over 35 acres of lawn and trees. But until a "White Knight," Jules Reich, chief executive officer of Somerset Investors Corporation (SIC) of Great Neck, New York showed up, the place was run-down, vacant units were a mess and could not be rented, and about 300 shareholders faced the loss of their equity.
Originally converted in 1985, problems arose in the early ‘90s when the real estate market took a downturn. The sponsor was unable to cover payments, and ended up walking away from the project. The co-op then tried to cover payments, but there was a shortfall, and they couldn’t increase the maintenance. As tenants moved out, they did not have the funds to refurbish and rent the 170 apartments eventually left vacant.