Before 1989, during the height of the real estate market, shareholders were buying and selling apartments at an accelerated rate. But when the recession hit the market, between 1989 and 1993, co-op sponsors (holders of unsold shares) couldn’t sell their units and began renting them instead. As a result, shareholders felt trapped; they were tied to co-ops that because of the low percentage of owner-occupants, could no longer meet the standards necessary to obtain mortgage financing. Dara Gardens is one such property that was caught in this predicament.
A Case Study
Dara Gardens is a 534-unit co-op in Kew Garden Hills, Queens, that was in turmoil until earlier this year. The sponsor and successor investor groups owned 78 percent of the apartments, and were running the community as a rental property. One management company wore two hats: managing the co-op, and managing the sponsor or investor groups’ rental portfolio. Renters’ lack of concern for the property they were merely renting, coupled with a large turn-over rate, increased wear and tear on the common area and grounds. The manager was directed to use the building staff and co-op supplies to renovate these unsold apartments, thereby neglecting the common areas and leaving the buildings looking tired and worn. Adding to this disaster, a huge underlying mortgage ($16 million) was expiring, and with the co-op operating at a deficit, the options for refinancing the mortgage seemed dim. As a result, the shareholders’ investments were diminishing, causing them to be hostile toward the sponsor and subsequent investor groups.
The shareholders’ biggest grievance was that the sponsors had not created a sales program. By not selling, genuine potential buyers for the shareholders’ units were regularly turned down by every lender when they applied for a purchase mortgage (an end loan). The banks told prospective buyers who were credit-worthy that "the project [Dara Gardens] doesn’t meet our lending criteria." Residents of the community found it difficult to obtain end loans.
There has been much speculation and hope that some legislative act or lawsuit could force sponsors to continue selling their units. But, despite the lobbying, articles and appeals for such actions since 1997, a new solution still seems slim. The only option for Dara Gardens was to discover the most efficient way to meet the required standards for financing.