From Horror to Harmony One Co-op Bounces Back from Sponsor Default

Neil Goldstein flashes a look of genuine surprise when a resident kisses him hello on the cheek in the lobby of The Harmony, an Upper East Side co-op where he is board president. Other residents trot by with friendly waves and call out, How are you doing, Neil? A couple seated on the lobby couch look over floorplans, obviously waiting for a broker to show them an apartment. An elevator opens to discharge a small child who totters toward the doormen, who know the kid by name. Clearly touched by the environment, Goldstein rubs the spot on his cheek and breaks into a satisfied smile.

When he's asked if it was always like this at his co-op, Goldstein laughs and says, Oh, it was just a bit different. He elaborates: You might as well compare night to day. The Harmony, previously named One Harkness Plaza, was the victim of a sponsor default that brought the co-op to the brink of disaster. Back in 1990, The Cooperator told the story in a special report on the consequences of sponsor default. But today, after renaming itself The Harmony last March, the building is solidly on the road to recovery.

A Building Divided

Built in 1980, the 276-unit 26-story building was converted from rental to co-op in 1985. When the sponsor defaulted on a $22.4 million loan from Silverado Savings and Loan Association, the bank took him to court and gained control of 148 units as part of a legal settlement. When the savings and loan crisis hit, Silverado went under, and by 1989, the shares were in the hands of the Federal Deposit Insurance Corporation (FDIC).

Goldstein, who first became a board member in the mid-1980s and was elected board president in 1990, describes the co-op as a building divided during this time. A practicing lawyer for 25 years, nothing in his past prepared Goldstein for the depth of hostility he felt in the co-op at that time. He remembers shareholder meetings reduced to screaming matches, people desperately afraid for the future of their homes and a general cloud of anxiety and fear that hovered over the co-op. Goldstein can still recall the endless inquiries from shareholders, What about our homes? There was one share-holder who tried to create conflict in the building. He held phony elections to elect a new board in order to take control from us and sent out notices for special shareholder meetings. He had some residents paying their maintenance to him and his board instead of us. It was a real mess. It amounted to a lot of conflicts and litigation, says Goldstein.

Diane Kane, a shareholder at the time, also remembers what it was like. People were putting leaflets under everyone's door. There were tremendous accusations going on. Residents became worried about their homes and wanted to know why the values were going down. No one wanted to ride up in elevators together. There was a lot of hostility in the building. It was terrible.

Taking Back Control

With growing legal expenses, a $22 million dollar mortgage coming due in July 1991 and over 40 shareholders not paying their maintenance, Goldstein saw no other choice but to raise maintenances and enforce special assessments. In 1989, the board commenced litigation against the sponsor, demanding he pay the rent on his commercial lease and any unpaid maintenance owed to the co-op. We won the case and an interim order directed the sponsor to pay rent or be ejected, explains Gold-stein. Unable to pay, the sponsor withdrew. With him gone, we took back control of our own destiny. It was the start of the turnaround, says Goldstein.

The next step was to stabilize the building's finances. Goldstein approached the John Hancock Mutual Insurance Company, which held the underlying mortgage for the co-op. In January of 1990 I approached Frank Harvey at NYUS (New York Urban Servicing, John Hancock's mortgage division), says Goldstein. I explained to him that we needed a six month deferral and he asked why. I told him very simply the building had no money. I conveyed to him our needs and he came through for us. On the strength of Goldstein's no-nonsense approach, Harvey conceded the deferral.

I met with Neil and found him to be one of the most hardworking board presidents I have ever worked with, says Harvey. If he says he'll do something, you can count on him doing it. Neil convinced me to go along with him and I did. There's a pause before Harvey continues, All you heard five years ago was the horror story that was the Harkness. Neil and his board have done a wonderful job. He adds, I describe the Harmony as a phoenix rising from the ashes.

Getting Back on Track

With the deferral obtained, the board now had the breathing room to collect all the outstanding maintenance payments from shareholders in arrears. Once again Goldstein demonstrated the mixture of fair and tough leadership that residents have grown to admire. We gave them every opportunity to do the right thing. When they saw we meant business, most fell into line and paid, says Goldstein.

At the time of the building's conversion, Anchor Savings Bank held the end-loans for a sizable number of units. When Anchor merged with the Dime Savings Bank, the loans were taken over by the Dime. After a number of loans went into default, they were moved to the workout department where Patrick Connolly, a co-op loan relationship manager, took charge of them. In the end, the bank foreclosed on eight defaults and took control of the units. The bank chose to rent out the units to balance the co-op's monthly maintenance, says Connolly. We took a M-wait and see' attitude with the co-op because the bank believed in the building's board so strongly.

Goldstein credits Connolly for having enough faith not to dump the units on the market. Connolly feels it was the strength of the board president that convinced him the Harkness could bounce back.

This building was plagued by numerous litigations with shareholders and the sponsor, says Connolly. We have seen this co-op go from having no money to now, where they have a million dollars in the reserve fund. Their turnaround has been a long time coming. Their efforts should stand as testament to what a board can accomplish with financial savvy and hard work.

A Committed Management Firm

Also influential in the Harmony's recovery was the entrance of Rockrose Development Corp. on the scene. In 1990, through a broker, the FDIC approached several real estate companies, including Colombus Limited Partnership, an affiliate of the Manhattan-based Rockrose, about purchasing their shares at One Harkness Plaza. Colombus bought the FDIC's unsold and predominantly vacant units, amounting to a 47 percent share in the corporation, for $6.8 million because they felt the co-op's location overlooking Lincoln Center would give it value.

In July of the same year, Rockrose suggested to the board that they become the managing agent since they already had a substantial vested interest in the building. The board agreed to hire Rockrose on a short-term trial basis after which they signed them on full-time. Since then, Goldstein and the board have renewed their contract with Rockrose year after year.

The Harmony's recovery has been a team effort, says Kevin P. Singleton, vice president and general manager of Rockrose. We became very involved in the building, getting shareholders to pay their maintenance. We commenced proceedings against any who didn't pay and enforced house rules for the co-op.

Goldstein is quick to praise Rockrose for their involvement: They reduced our management costs and put in a series of checks and balances. They took a large interest in us and that helped.

Ninety percent of the accolades for the Harmony should go to Neil Goldstein, says Connolly. The rest can go to Rockrose and the fact they stood behind the units. Instead of just selling them off, they stayed in for the long haul. They kept the units they controlled rented to offset the maintenance. They were a strong supporter. Neil and Rockrose used prudent board management to get that building back on track. They manage their financial affairs very closely. Other co-op boards can learn a valuable lesson from how they manage their building, says Connolly.

A Welcome Change

And where is the building now? Five years later and Goldstein notices the change every time he walks through the front door. Just look around. You walk in the building and people greet you. The building has made a complete 180-degree turnaround. Not only are we showing units, we're also selling them. Right now, the building is 50 percent owner-occupied, says Goldstein.

Neil and his board have done a wonderful job, says Martin Reingold, a former board president for the co-op and still a resident. The Harmony is now a great place to live, he says.

I have seen a tremendously positive change in this building, agrees Kane, who joined the board as treasurer in 1990. There's a much more neighborhood-type feeling to the building. It's just amazing.

You can tell there's a change, agrees Goldstein. The shareholder meetings we used to have ended in screaming and yelling at board members. Now, all we get is applause.

Ed Serken is a former associate editor of The Cooperator.

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2 Comments

  • Good article, but the Harmony is an Upper Westside residence, not East as was noted.
  • This is a good example of how a co-op should be when dealing with a sponsor. I noticed that the bank in the article rented some units to offset the maintenance. Does the sponsor who retain unsold units rent out the units to offset the maintenance or do they rent to profit from those units? The sponsor in my building is no longer in the board, yet kept the unsold units as majority shareholder tenant. The house rule is that no shareholder tenant can rent out their units except the board (only the board can rent out units while shareholder tenants, non-shareholder tenants, rent stabilized tenants and rent controlled tenants holding a proprietary lease, option-to-purchase lease, rent stabilized lease and rent controlled lease respectively can partially sub-rent their unit provided they stay in their unit and use an actual sublease) and the board may choose to sell the units if the building is financially stable. I find it a conflict seeing rental units, especially rent stabilized units, in a co-op building after conversion. If the building is financially stable, then why is the sponsor if not the bank, provided they're in the board, renting the units instead of selling them?