A story of our time

Real Estate Weekly, Feb 24, 1999 by David Kuperberg

At Cooper square Realty, we place considerable emphasis on long-term planning, creating five- and even 10-year plans for the properties we manage so they can anticipate major improvements and develop funding plans.

However, sometimes this business-like planning approach isn't possible when we initially take over management of a property, and a building is faced with some difficult immediate decisions. That's what confronted us in May 1998 at Gracie Gardens on the Upper East Side of Manhattan.

This story shows how to benefit from the strong current economy and how co-ops, condos and rental apartments can take advantage of current interest rates and a favorable lending climate. It also shows how a board and property manager must be opportunistic and illustrates the role of a property manager in bringing a variety of skills and experience to the property he or she is responsible for.

When Cooper square began to manage Gracie Gardens, the building had already contracted to repair leaks on the roof and facade. A professional engineer's inspection of the building disclosed considerably more damage than previously believed, particularly on the two buildings in the four-building, 272-unit co-op complex that face north and east. These buildings get hit hard during driving rain storms with the wind blowing off the East River.

The engineer estimated the repair project would be $450,000, considerably more than anticipated, and he told us that it would, in effect, be a waste of money. While the $450,000 covered the most immediate problems, the engineer said the entire skin and roof need repair at a cost of $2 million. Without the complete overhaul, other areas would deteriorate rapidly and the building would find itself repeatedly needing exterior work. Doing a job piecemeal is much costlier, requiring the continuous installation and dismantling of sidewalk bridges and scaffolding. However, the immediate work could not be postponed and needed to be completed before the winter.

Under the direction of Cooper Square Vice President Dan Wurtzel, managing agent for Gracie Gardens, and his associate, Property Manager Keith Werny, we embarked on a fast-track approach to complete the entire project. Within five months, they organized the program, worked with the engineer to develop the new specs, solicited bids, negotiated a contract, hired a contractor and completed the initial work, while looking for additional funding.

We had worked out an agreement with the contractor to do the most critical phase before the winter, and then finish the job beginning in Spring of 1999, keeping the sidewalk bridge up to contain costs. We also negotiated a clause to let the board cancel the contract without penalty if the financing wasn't arranged by March 1, 1999.

At the time, the building's reserve fund of $300,000 would not cover the immediate work, let alone the major repair project ahead. A line of credit was sought from the mortgage holder, which declined. Wurtzel quickly obtained from another lending institution a commitment for a 52 million line of credit.

He went back to the original lender, which then said it would refinance the mortgage with a larger principal amount, at a lower interest rate and reduce the onerous prepayment penalty attached to the existing mortgage. Wurtzel went out and obtained and analyzed additional proposals, but this was a period of turbulence in the commercial lending market, with many institutions hesitant to make new commitments, and the offer from the holder of the mortgage was the best. The prepayment penalty was reduced to $47,000 from $200,000 and the building refinanced its $11.2 million mortgage, receiving a total of $14.5 million at an interest rate of 6.589 percent, considerably lower than the previous mortgage of 8.625 percent. Even with the higher principal, the monthly mortgage payment was $5,000 less.

With the additional funds, the building is able to do the complete facade and roof project, upgrade the lobbies and hallways and substantially increase the reserve fund.

Taking advantage of the low-interest lending environment, we were able to make the needed capital investment in the property, while reducing mortgage costs and increasing the reserve fund and considerably upgrading the appearance of the property. We were fortunate to do so now, but this story emphasizes the need for something that we consider vitally important, developing long-term capital improvement plans to try to avoid similar scenarios.