What Happens When a Building Defaults? Game Over

In the early 1990s, thousands of New Yorkers purchased apartments in newly converted co-op buildings; in the early 1990s, thousands of New Yorkers also watched their investments collapse. The co-op market was tanking, equity was at risk and many apartments sat unsold. As a result, the financial solvency of hundreds of buildings was in danger as well.

According to a January 1995 New York Times article, the deputy New York State attorney general—who at the time headed the state's Real Estate Finance Bureau—estimated that 10 percent of the 4,000 buildings converted to co-ops in the city since 1980 had, at that point, fallen into default—"a category that can range from one missed payment to several missed payments to foreclosure and, the ultimate—and extremely rare—nightmare for those involved, deconversion."

Hard as it is to imagine such doomsday scenarios in today's more-than-robust New York City housing market, the truth is that there are plenty of buildings throughout the five boroughs that could very well be in danger of defaulting on their financial obligations. Or buildings that have members whose financial troubles will come back to haunt the board if they're not adequately handled.

A Perfect Storm

Gary Kokalari, a former president/ treasurer of his own co-op building and now an expert in co-op financing for Merrill Lynch, remembers this problematic decade well, especially since the building he was living in was one that went into default.

"The New York real estate market started to experience problems in the late 1980s that extended into the early 1990s," he explains. "With the exuberance the real estate markets have experienced in the past few years, people tend to forget that real estate prices actually declined in value in the early '90s. I remember units in my Upper West Side co-op building declining by about 30 to 40 percent from mid '80s peak to the early '90s trough. There was a confluence of factors that caused this depressed real estate market, including tax reforms that reversed tax policies favorable to real estate assets, oversupply that resulted from overbuilding fueled by easy money, an unprecedented wave of co-op conversions, and what eventually turned to a liquidity crisis."

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