When the sponsor at Mendicino Green, a 107-unit garden
complex 10 minutes from Jones Beach, defaulted on
his unsold apartments, the co-op took him to court.
Eventually, the co-op foreclosed on the sponsor's
29 apartments and auctioned all but 7. The proceeds
from the auction covered the cost of litigation and
the maintenance arrears owed by the sponsor. However,
the cooperative's reserve fund, and more importantly,
its reputation, were in shambles.
"The coup started
when we [the shareholders] wanted to change managing
agents, and the sponsor Ñ who owned maybe one-third
of the shares Ñ was against it," says Catherine Kelly,
Mendicino's current board president and assistant
professor of biology at Nassau Community College.
According to Kelly, the shareholders tried to get
one board to approve a change of agents. At that time,
the board consisted of three shareholder directors
and two sponsor directors. One of the shareholder
directors was also a contractor loyal to the sponsor.
Thus, the sponsor-dominated board ignored the shareholder
majority, and voted against changing managing agents.
"After that," says Kelly, "the shareholders were obviously
concerned that the managing agent could not be changed.
So we held a meeting and elected new shareholder directors
to the board."
Kelly, who was one of those directors,
explains that a new managing agent was eventually
hired. According to her, the sponsor actually called
up the new managing agent and threatened him verbally.
Then the sponsor simply stopped paying maintenance.
"This sponsor didn't have to fight us up one side
and down another," says Mendicino attorney James Samson,
partner at Bangster Klein Rocca & Blum in Manhattan.
"When a sponsor tries to bully you, by telling you
that he will always be the managing agent Ñ no matter
what Ñ you've got to fight him. Ask yourself, ÔWho
owns the building? Who has the majority?Õ"
A foreclosure
followed by a collection procedure led to an auction
in July 1994. The sponsor's 29 apartments were sold to
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subtenants of the sponsor, investors, and others
and others at prices ranging from $2,000 to $10,000.
"We started with a minimum $1,000
bid because we wanted to sell as
many of his units as possible," recalls Kelly.
"The prices at the public auction were very
hard to explain to the other shareholders. It was a
challenge."
Once the dust settled from the
auction, the Mendicino board made a clean break and
hired its present property management firm: Mark Greenberg
Real Estate in Port Washington. "The people at Mark
Greenberg have been very helpful in developing a long-range,
forward-looking plan," explains Kelly.
According to
Samson, co-ops should not allow a sponsor's personal
financial problems to ruin the co-op's finances. The
fact is that co-ops with a litigation history, no
matter what the verdict, bear a financial albatross.
Any major litigation means the accountants must put
a footnote in the financial statement. Banks shy away
from these co-ops, and the real estate community typically
follows. This is when some unofficial public relations
are in order.
"Mendicino is a great building in a
nice residential area with good schools," says Jim
Goldstick, a vice president of Mark Greenberg. "The
big reason why nobody was buying out there was because
the building had a reputation of being in poor financial
shape. Essentially, we advised them to use all of
their resourcesÑaccountants, attorneys, even the
shareholders themselvesÑto pump up the co-op's image.
We told anybody who would listen that the trouble
at Mendicino was in the past.
" A stroke of luck also
fueled the financial turnaround at Mendicino when
it was issued a real estate tax refund check from
Nassau County for $360,000. The co-op put the money
in its reserve fund to use for capital improvements
such as recent cement work, landscaping, and perimeter
fencing.
Now Mendicino Green is over 80 percent owner-occupied,
has a reserve fund of no less than $175,000, and is
choosing between offers from three banks to refinance
their mortgage at under eight percent. "Things are
good," says Samson. Goldstick's advice to co-ops in
similar situations is to try to avoid litigation if
possible. He adds: "But if you do litigate, do it
correctly and carefully. Get it behind you, and develop
a plan for the co-op's future."
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As seen in Habitat Magazine August 1997
