Inventive restructuring puts The Howard back on top

Real Estate Weekly, Oct 21, 1998 by Kathryn B. Quinn

When BREL Associates XIII, LP first began looking at The Howard a few years back, we encountered another victim of the moribund co-op market of the early '90s. Converted from a rental in 1992, The Howard sold 201 units in its first two years before the market sputtered and sales stopped. With two more years of inactivity and 282 units left unsold, the Rego Park, Queens complex faced certain foreclosure by 1994.

However, a comprehensive analysis left us believing that there was great value in the units at The Howard. The real problem, as we saw it, was found in the huge underlying mortgage and prohibitive maintenance fees, which left the units virtually unsalable - a problem exacerbated by the fact that because less than half of the units were sold to resident owners, banks were unwilling to provide end loans to new buyers.

A creative plan was needed to alleviate those factors and put the complex on stable financial footing. After purchasing the unsold units, we began by attacking the coop's $22 million underlying mortgage, which escalated monthly maintenance fees to $385 to $986 on average, about $60 to $196 more than fees on comparable apartments in the area. We refinanced the mortgage at a lower interest rate and reduced it to $14 million by making a payment of $8 million. BREL immediately paid off $5 million, our proportionate share of the $8 million.

Then, in a highly atypical maneuver, we shifted the balance of the $8 million necessary for the pay-down to the 201 resident shareholders in the form of a second loan on their shares at a favorable interest rate.

As a result, monthly fees were reduced to a competitive $335 to $857 on average. The restructuring is also providing nearly $500,000 in additional annual revenue to pay for maintenance on the common areas that had been previously put off.

The crux of the plan was educating the shareholders, who were not financial experts, that their debt wasn't increasing with the second loans, but that their financial responsibility was simply being transferred from the underlying mortgage to their shares.

As part of the deal, we arranged for the bank making the second loans to agree to forgive the second loans if existing owners sell their units at or below their original purchase prices. In addition, if the co-op fails or if the owner walks away, they are not personally liable for the second loans.

The result: activity at the three 12-story buildings along 66th Road just off Queens Boulevard has taken a dramatic leap - 27 sales since The Howard's grand opening in the spring. Spurred not only by the renewed strength of the co-op market, but of the renewed financial strength of The Howard.