Ascot co-op faces foreclosure.

Jamaica Savings Bank has obtained summary judgement and is proceeding with the foreclosure of the over $18 million present value mortgage it holds on The Ascot, a 147-unit building at 407 Park Avenue South. Within 90 days, and if the co-op board's legal maneuvering does not succeed, the bank expects to be selling the valuable 1980's property as a rental building.

Since the State Supreme Court Judge, Salvator Coilazo, was recently removed from the bench, the coop now has actions pending to reverse his summary judgement. It is also seeking to have the last two years of the building's financial statements released too, so they can seek another lender.

Still, the case presents many issues for public policy wonks. If the cooperative is foreclosed and de-converted, rents for the units will have to be reset and the building may revert to stabilization. Resident cooperators would have new rents and could remain in the apartments, but those that have subleased, including residents who could not sell and were forced to sublease, as well as investors with free market-rentals, will probably !use their entire investment, as the unit is not their primary home. But will the sub-tenants be allowed to stay and cut new rental deals with the new owners?

The original 421a benefit has also been eliminated, and many units are already near or at decent Manhattan market rents. Therefore, the prize property will be coveted by investors because of the steadily increasing free rental market. Whether the residents could be coaxed through a condominium conversion or another cooperative offering is yet another story, particularly as many unit owners will still have their original co-op loans to pay off through their individual lenders. In fact, some of the "investors" are other lenders whose unit owners walked away because of the high costs associated with the building.

Lying on the northeast corner of 29th Street where Park Avenue is midway between Gramercy Park, Turtle Bay and the improving Madison Square, the modern tower property had been developed by Peter Kalikow in 1984, and then in I988, sponsored for a conversion.

While it sits across from the Prince George Hotel, that was at one time a notorious hangout for prostitutes, the area is now booming, as the Midtown South/Madison Square moniker is taking on prestige and shedding its former shabby image.

According to Donald N. David, of counsel to Fischbein*Badillo*Wagner*Harding, who is counsel to the lender, the co-op's own "poison pill" is what killed it.

The board claims it tried to renegotiate its $13 million loan for nearly two years, but the bank declined to discuss it. In November 1995, and well before the loan was due in March 1997, the board stopped paying the mortgage 'to get the bank's attention." That led not to negotiations, but to the court action that has now resulted in the summary judgement.

David says the original balloon loan has now expanded to $18 million "plus another $250,000 in interest charges each month." The ultimate price will depend on when the sale actually takes place and whether or not the bank buys back the loan at the auction, or sells the note early.

There are about 30 sponsor units under rent stabilization and about 50 that had been sold to investors that are at market rents. The remaining units are owner-occupied.

Conservatively, if at market rate, the residents can pay an average of $1,500 each. The rent roll will be more than $2.5 million a year. At five times rent roll, the building could bring in $12.5 million at sale, but brokers say investors are paying eight to ten times rent roll for certain properties - and this could be one of them.

"There's a buyer for it for sure," said Richard Baxter, a broker with Insignia Capital Finance Advisors who handles many large property sales. "Some of the universities are in the market for housing, so it would be a great buy. It will be a bidding frenzy."

The deconversion problem is also an issue in the outer boroughs, where market rents of $700 to $850 have been achieved on sponsor-owned units that used to have a negative carry. Investors have already purchased the note on one Queens property with an eye on foreclosing, said the board's attorney Abbey Goldstein, partner in Goldstein & Greenlaw.

"The investor can foreclose with impunity," said Goldstein. "They don't have to worry about us picketing in front of the bank."

Still, only the sharpest operators will be able to puff up rents from the current residents, who are still litigious after fighting sponsors and lenders for many years.

Although pre-conversion rents for the stabilized apartments at the Ascot were relatively high for the times as it was a new building - some one-bedroom units are currently bringing in $2,200 - any investor will carefully have to weigh the potential rent rolls at current market versus what action the New York State Division of Housing and Community Renewal might take.

"The law is uncertain as to what happens," said David. "As far as this bank is concerned, the building will be sold at auction and it will be somebody else's problem."

Any monies obtained at auction over the value of the mortgage plus interest will go back to the shareholders.

Courts in the past have allowed rents to be negotiated at fair market rates, but the Manhattan market has so exploded, it might be questionable as to what could constitute a "fair" rent, and no investor wants to face 147 holdovers on a rent strike - even if they do have to deposit the money in court.

The Ascot's financial problems were compounded, those familiar with the property say, because the shareholders were paying the highest maintenance charges in the city - about $25,000, or $6,000 more than the next highest in the city - according to a Council of New York Cooperatives survey last year. There were no sales taking place, the board had to relax its sublet policy, and several shareholders defaulted, resulting in other banks owning the units.

The maintenance was high because of several factors: the mortgage interest was being paid at 9.25 percent, the 421a tax reduction ended, and the building was near completion of a write down on a $3 million letter of credit that Kalikow had provided as part of the original conversion plan. That letter of credit ran out in October, 1995.

Goldstein says not paying the mortgage was typical when the market was bad because the boards felt the banks could not do anything with the units anyway, as most in the early 1990's had negative carries. But as the rental market has boomed, the lenders have seen the properties would be more valuable. "Theoretically, the building could use their last dollar to pay the mortgage, but if you raise the maintenance 25 percent, you just get more shareholder defaults."

That scenario was already occurring at the Ascot when the board made the decision to stop its payments.

"Our office tries to be aggressive and vigilant when it comes to sponsor causation which is lending itself to a foreclosure," said Jonathan Beyer, who heads the New York State Attorney General's Real Estate Financing Bureau. "However, where the sponsor is not responsible and there is no fraud or misrepresentation involved, our office does not have any legislative authority to interfere in the financial authority of lending institutions."

Mary Ann Rothman, executive director of the Council of New York Cooperatives, who has been watching this matter progress through the years, said "It's very sad when people lose their homes. All eyes will be on this building as rents are set, and they will have impact on the way bankers review future loans."