Manhattan Co-op getting foreclosed by Jamaica Savings

Real Estate Weekly, July 10, 1996 by Lois Weiss

The building has a $13 million balloon mortgage that is coming due in March 1997 but the lender, Jamaica Savings Bank, has begun foreclosure proceedings.

The proceedings were commenced 14 days after the board of directors, on advice of counsel, decided not to pay the mortgage last November 1995, in order to try to get the bank to renegotiate.

"They said as long as the loan was performing they wouldn't talk to us," claimed Sheila Grosnoff, board president at 407 South.

On the advice of counsel, the building did not send in its mortgage payment. Fourteen days later, moments after the board's attorneys left the bank's offices after attempting to renegotiate, the bank had its attorneys begin foreclosure procedures.

Grosnoff believes the building is being foreclosed because if it reverts to a rental, the bank has already determined it could sell the property for upwards of $17 million.

Nonsense, says Donald David, a partner with Dreyer & Traub that is representing Jamaica Savings and at one time represented Peter Kalikow, the original developer and sponsor of the building who no longer has any interest.

David says the bank cannot get any more money than its mortgage, and could even get less at an auction foreclosure sale. In fact, he noted, if they could get more than the mortgage, the shareholders would split the excess.

Jamaica Savings Bank also has stockholders, noted David, and the building was asking them to take a loss.

"The mortgage had over a year to run," said David, "and they specifically stopped making payments to try to force the bank to renegotiate. They asked the bank to reduce the principal and interest and extend the term. These are people who borrowed money, and in essence who now say, they don't want to repay it. We told them that we expected them to continue to make payments."

David also said he would never advise his client co-ops to stop making payments to a lender, "because then they lose their homes and it's your fault."

The attorney said either the building will come up with the money or the bank will foreclose on the property.

"There have been very few buildings [foreclosed], but where do the rents go if the people are wiped out," asked Peter Hauspurg, chairman of Eastern Consolidated Properties, that handles building sales. "There is no definitive law on where the rents get set."

A Division of Housing and Community Renewal (DHCR) spokesperson said they are still working on the policy on where rents get set after a foreclosure. There have been few foreclosures and in each case, the circumstances were different. But in several cases, rents went to market for the area.

David Singer, who manages a family portfolio of rental buildings believes if DHCR sets a policy, and it has rents go to market, "it will make it easier to foreclose because people will be aware of the upside."

At the Ascot, rents before the conversion were high as it was a new building, constructed in 1984 and converted in 1988. But it sits across from the Prince George Hotel that was at one time a notorious hangout for prostitutes.

The building's financial problems are compounded because the shareholders pay the highest maintenance charges in the city, according to the Council of New York Cooperatives survey.

The maintenance is so high, Gutoff says, because of the large mortgage being paid at 9.25 percent; the end of a 421a tax reduction and the end of a write down on a $3 million letter of credit that Peter Kalikow provided as part of the conversion plan.

The high costs have stemmed co-op unit sales as well, says the building's manager, Andrew Hoffman, a principal in Hoffman Management along with his brothers, Steven and Mark.

"Nobody has been able to sell for quite some time because of the high maintenance," said Hoffman, noting it amounts to about $25,000 a room. The next highest tab in the city is about $19,000. "The building had to relax its sublet policy."

He says the shareholders stopped paying the mortgage because when the letter of credit ran out in October, 1995, additional maintenance increases would be too much for shareholders. "We were getting individual foreclosures," he said. "We have many banks that own apartments."

The co-op's attorney, Yvette Harmon, a partner with Ross & Hardies, said the co-op would have had to raise its maintenance payments by 25 percent last fall, and 25 percent again within a few months.

"The co-op board made the determination that the rate of default would increase," she said.

The co-op had been trying to obtain a loan with many other banks but was told they could only get $7.5 million to $8 million. "The banks' ratio of loan to debt is much higher these days," noted Harmon.

She says they found someone who wanted to buy Jamaica's mortgage and offered a proposal but the bank was not interested. "We tried to find a new mortgage, we tried to find someone to buy it, and we tried to talk to renegotiate," Harmon said. "We prepared a restructuring proposal and it was sent Nov. 21."

They met with the bank's officers on Nov. 27 and later that day, the bank's attorneys started the foreclosure proceedings. That proceeding, along with other complaints by the shareholders including one to disqualify Dreyer & Traub since the firm once represented Kalikow and his appointees to the board, are before Manhattan Judge Salvador Collazo.