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Banking on a white knight: Jersey City co-op turns around

Real Estate Weekly, August 18, 1999 by Allen M. Turek

In contrast to an economic cycle in which residential real estate continues to flourish, the story of Gregory Park, a 770-unit high-rise, limited equity cooperative complex in the heart of Jersey City, is a reflection of how best intentions can sometimes go wrong. Fortunately, it is also a story of a dramatic rescue through the combined efforts of skilled professionals, government agencies, a white knight and a proactive financial institution.

In 1997, having read a story I'd written in a residential trade monthly, the board of directors at Gregory Park contacted me to deal with a number of pressing issues and, ultimately, help orchestrate a plan to save the cooperative. In addition to the property being in serious disrepair for years, the cooperative was millions of dollars in arrears to the Department of Housing and Urban Development (HUD), which held the mortgage.

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Gregory Park was built in the 1960's as a rental property with financing through HUD, and when the developer defaulted in the early 1980's, HUD foreclosed and became the owner of the property. Shortly thereafter, the tenants rallied to convert it into a limited-equity cooperative with the assistance of a not-for-profit organization based in Connecticut. HUD agreed to the sale of the property and took back a new underlying mortgage at the time of conversion.

But these new shareholders, most of whom were first-time equity holders, were undermined by a series of circumstances that included a lack of organization and the tools to be an effective, self-governing cooperative corporation. Moreover, because of the way the conversion was structured, the cooperative had the right to terminate a shareholder's interest in the event of nonpayment of maintenance charges, but lacked the remedy: The courts in New Jersey required a Uniform Commercial Code lien in order to wipe out a shareholder's equity.

When the market collapsed in the mid-1980's, many of the shareholders simply defaulted, and the cooperative was neither effective in recovering the shares, nor the missing income. The shares that were recovered - usually by forgiving maintenance was lost to the cooperative. In addition, the board refused to raise maintenance charges to make up for the lost income and, subsequently, ceased to make necessary repairs. It also fell woefully in arrears on the mortgage, owing in excess of $20 million on an initial principal of $10 million to HUD.

Over the years, HUD tried to resolve these issues with the different boards. But after arrears in exchange for the surrender of the apartments - were rented to tenants, many of whom eventually stopped paying rent because of the state of disrepair the buildings had fallen into. As a result, about 40 percent of the income stream, which should have been derived from these apartments, so many attempts without success, HUD decided to foreclose on the property and set a date for an auction, which would ultimately leave 420 shareholders and their families without any recourse.

By the time I arrived, HUD was no longer willing to discuss a workout and, since it is not required to go through the formal judicial process in order to foreclose, these shareholders were about to lose their homes, their investments and, in many eases, their life savings. But thanks to the concerned efforts of Jersey City Mayor Bret Shundler and U.S. Congressman Robert Menendez, HUD agreed to meet with the board and its counsel in late July 1998, just days before the scheduled foreclosure sale.

Then, through a series of logical procedures and several other small miracles, including a bankruptcy filing that stayed the auction and locating a "White Knight" with an ingenious plan, the comatose giant cooperative was given a second life.

A Recent History

Concurrent to our "White Knight" search, in 1997, the board agreed to retain Insignia Residential Group because of its experience in managing mega-sized properties. Through Insignia's efforts, missing records were recovered, rent rolls increased, and vendor contracts were re-negotiated to save the cooperative in excess of $200,000 annually.

In 1998, following an extensive search for an investor, the board overwhelmingly voted on George Filopoulos, the 30-year-old president of Metrovest Equities, Inc., a real estate investment and brokerage firm based in Queens. His insightful plan included renegotiating the debt with HUD and implementing massive improvements, such as curing facade violations, installing new elevators and windows, and renovating the common areas and vacant units. At that time, approximately 420 apartments were owned by shareholders, 170 were rented, and 180 apartments remained vacant.

Another important component of his plan included holding the maintenance payable by shareholders at existing rates and reallocating the number of shares commensurate with unit size and location in the buildings. As a result, Gregory Park would reorganize as a restructured unlimited equity cooperative, and shareholders in good standing would receive new stock certificates and proprietary leases. In addition, the by-laws and certificate of incorporation would be amended to give the cooperative the ability to enforce the collection of future maintenance payments.

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Banking on a white knight: Jersey City co-op turns around

Real Estate Weekly, August 18, 1999 by Allen M. Turek

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