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Still a co-op crusader.

As a new partner with the law firm of Wolf Haldenstein Adler Freeman & Herz, Frederick K. Mehlman is continuing his representation of co-ops in a quest for justice that began when he was chief of the Real Estate Finance Bureau of the New York State Attorney General's office.

This time, however, he is not just their friend in high places, but their hired trench fighter.

Being a good and scrappy litigator is what brought the young attorney to the newly elected Attorney General Robert Abrams' office in 1979. As a litigation associate with Proskaur Rose Goetz & Mendelsohn, Mehlman was frustrated by being pigeonholed as a litigator while not having the glamour of the courtroom. He found himself more times than not searching through cartons of subpoenaed documents to find the papers his bosses needed.

A friend set him up for an interview with Abrams and Mehlman was set loose to litigate, eventually becoming chief of the litigation department. It was with some surprise, in 1985, that he found himself being offered the role of chief of the Real Estate Financing Department - an area he knew nothing about.

"You'll learn," was Abrams retort, assigning Mehlman the task of babysitting the blooming and controversial co-op and condo craze.

Mehlman was there for the bursting of the conversion bubble when Francis Greenburger walked in with hat in hand, in 1989, notifying the office that it wouldn't be long before he could not meet payments on his many buildings. While he has good things to say about Greenburger, Mehlman said he recognizes the financial problems were something that should have been foreseen.

"You had the great real estate pyramid scheme which has started to collapse," he said.

The worst problems occurred, he said, where sponsors sold at or near the minimum number of units - 15 percent. For example, in a 50-unit building, some conversions only require eight subscriptions to declare the plan effective.

"By the time closing takes place, two or three of those have dropped out," Mehlman recalled, "and the sponsor is retaining 90 percent or more of the units. At a minimum, create a co-op that is a co-op.

"That is a song the Attorney General was singing to Albany for the last seven years."

Mehlman is continuing to work for legislation proposed by Abrams through the New York State Bar Association. One law would require sponsors to post some financial security, credit or escrow to secure its obligation for a period of time. Mehlman suggests that if sponsors want to start selling in this market, they should do this voluntarily and use it as a marketing-tool.

He also believes there should be a resident shareholder on the board from day-one "so that the sponsor is not running the cooperative as a fiefdom" and the period of sponsor control is reduced to two years from the current five years.

If the sponsors were compelled to better negotiate with the tenants groups, so during the conversion period there was more interest and more sales, Mehlman said, there would not be control problems down the road because it would be a building that was more of a cooperative.

There are still sponsors who are not paying their obligations because they can't, Mehlman said. One of the reasons they can't, he said, is that they have put big mortgages on the building, maintenance payments are high and they still own 75 percent of the shares. "What do you expect?" he asked rhetorically.

The bankruptcy court is beginning to be a more active venue in the co-op area, he said. Many sponsors and coops are filing for bankruptcy and this is a trend Mehlman believes will continue into next year with co-ops trying to fend off foreclosure by the banks.

This is an option co-ops should be extremely wary of taking, he said. "I'm concerned bankruptcy is permanently going to mar the reputation of a building," he explained. "There are thousands of co-ops; do you want to buy a co-op in the |bankrupt building?'"

Trying to sort out where the co-op stands is making for some interesting litigation right now, he observed.

There are problems sorting out how much liability the lenders have when they step into the shoes of the sponsor and yet another "story" when the lender goes under. "There are parallels in the attorney general's office and life outside is not all that different," he said.

The last case Mehlman worked on at the Attorney General's office was against the Resolution Trust Corporation when they attempted to evict rent-stabilized tenants. That suit was recently decided against the RTC.

Recently, he represented a co-op whose lender, American Savings Bank had been taken over by the FDIC, which had seized $29,000 that was uninsured in a mortgage escrow account. The FDIC backed down and that money will now be offset against other payments.

"Many of these deals now involve the RTC or the FDIC which really complicates things tremendously," he said. "You are dealing with two agencies that don't understand coops and don't understand the New York real estate market and I'm not sure want to understand the New York real estate market or co-ops. "

Other problems Mehlman sees include co-ops managing the ending of their J-51 tax abatements when large payments kick in; and the low level of condominium reserves at the same time the courts have ruled the lenders have a first lien on common charges and individual owners are increasing defaults.

"Chances are the person defaulting has also defaulted to the bank," he said adding the legislature must act to give the condos a limited form of first priority.

Mehlman foresees his own private practice growing in the representation of co-ops and condos, sharing his particular expertise with lenders particularly for workouts, and advising on Federal regulatory problems.

He still believes there is an opportunity for occupied tenants to purchase now at very good prices and obtain an equity position in the housing market. "It's a deal they might want to consider," he said. "There are some very good deals out there in the co-op market in general. Prices are low, interest rates are low."

But he sees lenders creating a problem since they will not lend now that sales prices have dropped and more than 30 percent of the sales price is attributable to the mortgage. He believes they should start looking at co-ops as the individual buildings that the are.

"There are buildings that are 60 percent sold out that I would lend, " he noted, "and there are buildings that are 75 percent sold out where I would not lend were I making those decisions at the bank. There are factors other than sponsor presence."

Recalling his days in the Attorney General's office, where he is proudest of the "absolute integrity" of the office, Mehlman said there was a common pattern used by the "sleaziest sponsors." These are the sponsors, he said, who collected money due on a wrap-around mortgage and did not pay the underlying mortgage.

"They put the co-op at risk of foreclosure and because the sponsors controlled the board, the co-op never knew."

Mehlman said the sponsors in these cases could not say, |I never had the money,' because they took in more in wrap payments than was due on the underlying mortgage; and yet, he said incredulously, they didn't pay. "That is to me the one inexcusable result, because that has nothing to do with the bad market, nothing at all, it just has to do with greed," he said

Mehlman's new private office is smaller but quieter than the controlled chaos in which REW met with him last during the height of the co-op crisis. At that time, suspected problem amendments were piled a foot high all over their own table. While his new desk is not clear, and his agenda is full, Mehlman is awaiting new artwork from his two young daughters to decorate the clean white walls.
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Title Annotation:profile of Frederick K. Mehlman, law partner with Wolf Haldenstein Adler Freeman & Herz
Author:Weiss, Lois
Publication:Real Estate Weekly
Article Type:Biography
Date:Sep 9, 1992
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