Reading #18 Co-op History/Discussion Club Dec 19, 2010 [The following excerpt is taken from the masters thesis written by Howard Kaplan in 1959. Kaplan's whole thesis is Part III of the "75th Anniversary Story of a Coo-op: The First 75 Years". This section adds information on how the Amalgamated Cooperative survived the last great depression.] IV - Crisis & Solidification, 1932 -1947 The depression and war years are grouped together because that period saw only slight expansion by the Amalgamated. Instead, attention was paid to questions of internal finance and administration. In 1930, only 2/5 of the heads of families in the Amalgamated were fully employed. By 1932, the garment industry was slack and many persons were unable to meet their rental payments no less installments to the Amalgamated Bank on their stocks. At this point, the chief danger inherent in any cooperative appeared. When part of the community is without financial resources, the corporation may fail to meet its fixed obligations and thus be foreclosed upon. When this happens, non-delinquent individuals are deprived of their investments. The administration of the Amalgamated had a serious dilemma. Should it ignore the human element and eject those who could not pay their rent in order to protect the others? Or should it take the risk of carrying many tenants who owed money to the corporation, particularly when many of these were members of the union, which sponsored the project to begin with? A medium course was selected. Those who were suspected of willful nonpayment or even lack of true effort to raise the money were asked to leave. From January 1933 to August 1934, thirty-three persons had to vacate. In eleven of these cases, legal action was resorted to whereupon the tenants left before physical eviction. This is not a high figure in view of the fact that a 40% drop in corporate revenue was accompanied by no more than a 6% vacancy rate. The 1931 audit expressed alarm at an increase in rents receivable to $7400. Despite the call for stricter collection, this figure climbed to $32,000 by 1932 and a peak of $156,000 in 1936. The original financing of the Amalgamated had made no allowance for vacancies. Persons to whom lenient treatment was accorded eventually paid their past debts in full, no money being lost on this account in the long run. They expressed a universal gratitude to management for this leniency and they were Kazan's most loyal supporters in the semi-political struggles that took place in the late 1930s within the houses. The repurchasing of the stocks of those who left the development during the depression was a related problem. The corporation had covenanted to cause ACW Corp. to repurchase the stocks that tenants had covenanted to sell. It feared the damage that a marked-down sale of some stocks would do to the rest. Kazan felt that should this take place, "the reputation of the cooperative would suffer an irreparable blow." The first moves of the stricken corporation were toward a reduction in operating expenses. For a period of 1932, cooperators did voluntary janitorial work. Management attempted to minimize electrical costs, and educational campaigns were carried out to reduce the number of service requests by cooperators such as for plumbing and carpentry work. The Amalgamated tried to reduce the fixed costs of mortgage interest and amortization. Metropolitan, upon 1932 consultation with Kazan and Aaron Rabinowtiz, agreed to a one-year waiver of amortization but refused to lower its interest rate. Such mortgagees also had a difficult balance to strike. They desired immediate cash as stipulated in their contracts and wanted payments while their mortgagors were able to make them. But they feared that strictness might drive struggling debtors into bankruptcy whereupon they could not expect to recover their investments in full. They certainly did not want to have rental real estate on their hands at this time. Nevertheless, in 1933, the Metropolitan insisted upon amortization payments being made since it was upset by the large amount of unpaid rents in the Amalgamated. To this effect, they succeeded in forcing a somewhat stricter policy upon the administration of the Amalgamated. Kazan called for a policy of eviction where it was felt that there was no chance of collection. In late 1933, the N.Y. State Legislature enacted a moratorium on mortgage foreclosures for default on principal payments. Realizing the critical nature of the situation and in view of the law, the insurance company demanded no amortization payments until 1937. Another influencing factor at this point was the Metropolitan's desire to avoid the unfavorable publicity that would come from harsh treatment of a non-profit corporation. After a series of conferences with the Deputy Comptroller of the Metropolitan, Kazan announced in June 1936 that the interest on the mortgage loan would be reduced to 4 %. In return for this he agreed to pay an added 2%, or $25,000, of amortization on August 1, 1937. Despite the inducement of an $11,000 saving in interest, the Amalgamated was unable to meet this payment. Although it threatened an interest rise to 5%, the insurance company later agreed to 1937 and 1938 extensions of the reduction in return for $7,000 - $8,000 in added amortization. The period of 1937 to 1945 was marked by constant and hard bargaining over this rate. Later reductions in interest to 4% saved the corporation an annual $20,000 over the contractual figure of 5%. In addition to conserving existing funds, the Amalgamated tried to raise additional revenue. Many six-room apartments were divided into more rentable three room units, and efforts were made to attract tenants. They were admitted on a low investment basis while all available capital was applied to reserves for the repurchase of stock. Tenants joined the corporation in trying to repay the debts owed to the Amalgamated Bank on the loans which had enabled them to buy their stocks. Cooperators also contributed to a voluntary fund for mutual assistance. A cooperative usually cannot offer similar facilities at varied costs without causing great resentment among those paying higher amounts. But during the crisis of the 1930's, survival was the question of prime importance to all of those who had invested in the Amalgamated. They realized that vacant apartments meant less revenue, and that less revenue might spell disaster. Therefore, there was little objection when Manager Kazan first brought up the subject of renting vacant apartment at reduced equities when full investors could not be found. Three plans were adopted which sought to encourage persons to enter the development, pay funds to corporate treasury, and if possible assume eventual cooperator status. They are lettered for convenience. Plan (A): Here, stock was transferred to the tenant's name on the corporate books although the corporation kept the stock as collateral for amounts owed upon it. The tenant initially invested $100 per room and paid a flat rental which was gauged to be equivalent to comparable private accommodations. This included the normal Amalgamated rent, a surcharge of $5 to $10, and 4-1/2% interest on the unpaid balance of the stock. This surcharge was meanwhile credited against the stock debt in the event of the balance being paid, so that payment of the difference would result in full cooperator status and rent. A tenant who left without full stock payment forfeited all surcharges that he had paid up to that time. As more surcharges were paid, the principal debt and thus the interest upon it decreased, and the part of the flat rental attributed to surcharges rose. This aided the tenant who might receive eventual credit for the surcharges, while the interest was treated as corporate revenue. Monies paid for these initial subscriptions were treated as normal stockholder equity in the event of the tenant's leaving the project or the corporation dissolving. The subscriber received no guarantee of any prior payment. Either party could refuse to renew the lease after 2-1/2 years. In order to avoid the practice of persons paying their full equities in order to then leave and demand the repurchase of stock at par value, no one could receive any paid surcharges back if he left within 2-1/2 years of full payment. Up to five years from then, subscribers received 1/2 of their surcharges and after that, the full amount. But in any event, they were entitled to have the initial $100 per room returned. During the full period of their stay in the community, subscribers had the voting rights of fully paid stockholders as they took the risks of shareholders insofar as the money initially invested was concerned. Plan (B) - Guaranteed Subscription: Under Plan (B), tenants also invested $100 per room, and paid rent plus a surcharge and interest. They received, however, a prior guarantee by the corporation of the return of the $100 per room in the event of their leaving or the project failing. As stockholder risks were not taken, voting rights were denied. Here again, surcharges paid were credited against the final payments for the stock. Plan (C) - Straight Tenancy: Under this plan, no capital investment was asked of tenants, and a private-level rent was paid. But if and when such tenants became full stockholders, no prior surcharges paid were credited against the cost of the stock. Such tenants could not vote in community elections. These plans met with great success and were a major factor in the survival of the cooperative. By 1935, 19% of all residents were "non-cooperators" which means that an annual $10,100 in rent was salvaged from vacant apartments while over $2,280 in surcharges and interest was available each year for the purposes of the corporation. It is estimated that these figures rose during the later depression years. Moreover, most of these tenants and subscribers later became cooperators either voluntarily or by compulsion when the plans were abandoned following the Second World War. Desirable apartments were offered as an inducement for full investment during the 1930's. Mere tenants were held evictable when stockholders were available to replace them. No reserves for stock repurchases were provided for upon the organization of the Amalgamated despite authorization to do so in the 1926 law. Stock repurchases were handled by the ACW Corporation, without the aid of a revolving fund. This sufficed so long as new applicants stood ready to purchase additional stocks. But when investors became rare, ACW Inc. was unable to pay more than a token amount on account to each departing stockholder. This led to a danger of speculation or even worse a "run" by persons seeking to salvage what they could of their investment before other persons beat them to the till. In 1933, this function of ACW Inc. was assumed by a Housing Fund. This was an independent group run by a Board of Trustees, which was made up of three persons from the Amalgamated Board of Directors and two from the House Committee. It was originally financed by voluntary local loans of $9,926.59. In order to increase this Fund, the corporation issued rebates on the condition that 50% would be contributed to the Housing Fund. A similar procedure was followed by Amalgamated Dwellings. In this way, the corporations were not taxed on any surplus yet reserves could be accumulated. The 1935 report of the Housing Fund expresses a need for a more formal legal status due to its growing significance in the affairs of the community. In 1936, A. H. Consumer Society, Inc. was organized. Each stockholder of the Amalgamated was entitled to purchase one $10 par share of the new corporation. Its directors were residents of the community and were elected by the shareholders who received one vote apiece. The ACW Corporation was then terminated. This winding up further removed the Amalgamated from its union roots as officials of the Amalgamated Union had been the sole stockholders of ACW Inc. Like its predecessor, A.H. Consumers Society Inc. is not subject to the control of the Housing Board. Its reserve fund now contains $430.000, which can be used only for redemption purposes. Built by the contributions of Amalgamated residents, it has been added to by all new stockholders in the corporation since 1947 by an involuntary $1 per room per month for five years and $.50 per month per room for five more years. Because of such experiences during the depression, the 1942 Urban Redevelopment Companies Law required companies to establish such reserves as the supervisory agency requires. Cooperators also attempted mutual aid by means of a relief fund in 1931. Completely voluntary in nature, only contributors could draw upon it. Loans were made in emergencies and upon the unanimous consent of the House Committee. They were for amounts up to $200 and bore 2% interest for two years. All employees donated 10% of their salaries to this fund, while administrators gave 15% of theirs. The fund was discontinued when the depression deepened and demands outgrew credit facilities. It was replaced in 1936 by the Van Cortlandt Cooperative Credit Union, which is independently run and earns a profit for its members. It received a Federal charter in 1937 and currently has assets of $108,771.49. Internally, the years of recovery were marked by bitter controversies and political rivalries. A Communist-supported group attempted to wrest control of the organization from Mr. Kazan by winning control of the House Committee and adding to its powers. This failed but led to some minor reforms in the direction of internal democracy. To this day, reform movements within the project have been stigmatized with the "red" label of this earlier group. The State Housing Board was dissolved in 1939. It was replaced by a Commissioner of Housing under the Public Housing Law. His office has since been known as the Division of Housing. Immediately upon its creation, this agency served notice of its strict intentions by demanding the right to scrutinize all Amalgamated rebates before payment. The old Board had such powers but rarely used them in relation to the Amalgamated. Within six months, five other major demands were made: 1. Reports must be submitted to it on all new applicants to the project. 2. All expenditures of over $100 had to be approved. 3. Cooperators' income must not be more than five times their rent upon admission or more than 50% above this figure at any other time without eviction resulting. 4. Approval need be secured for all rent reductions - such as the lowering of charges for an apartment that is found to have an inherent defect such as closeness to a power room. 5. $11,400 must be paid for supervision expenses since 1933. Kazan resented these demands, having weathered the depression without financial assistance from the state. He (a) dismissed the income limitations as impossible in a cooperative, (b) more fully utilized non-regulated subsidiary corporations to meet every day expenses, and (c) litigated the legality of the supervision fee by filing an amices curiae brief for another contesting corporation. When the New York Court of Appeals held for the Commissioner, Kazan asked the Division to reduce its own assessment. He argued that it was levied with reference to the construction costs of a more inflated era. His request was granted, and in 1941 an amended fee of $1.587 per year was settled upon. This saved the houses $270 a year. In the intervening years, relations with the Commissioner have improved. An official of the Division states that a thorough accounting study was made of Amalgamated affairs without revealing any undesirable practices. Upon this basis, and in view of the fact that Kazan-influenced projects have been the chief non-public accomplishments of the Commissioner's office, greater leeway has been accorded Kazan than any other developer. As an illustration of this, income surveys of tenants were ordered by the Division in 1953. In 1958, the Amalgamated became the last project so ordered to comply, and doubt is expressed as to whether individual statements from the Amalgamated will be investigated at all. In 1947, State Commissioner of Housing Herman Stichman claimed that he was "gratified with the results of the Amalgamated's expanded program" and "commended Mr. Kazan and his associates for their past successes". -------------------------------------------------------------------------