Assessments vs. Increased Maintenance Charges

Correction- I've seen a few condo buildings where the monthly maintenance charge has increased very slightly each year in the past 5-10 years.

Also is $200,000- $300,000 enough money to have in a reserve fund for a condo building which has 30-50 units?

Yes.

The reality is that it's more prudent financially to pay for ALL capital improvements thru assessments. The problem is that people prefer "forced savings" because of their lack of ability to control their spending habits.

When you sell a unit, special assessments are generally considered to be deductible from capital gains so it is better to have these than raise maintenance from a tax standpoint. The amount in reserve should roughly equal a minimum of 6 months operating expenses of the building.

David and Kyle, thanks once again for your help. RE doesn't seem as complicated when the people who post here have both of you to answer our questions.

30 years and Kyle - Question for you both (and anyone else who cares to answer)...

I have a friend that lives in a coop and the board is discussing the long range capital plan and how to pay for it. He is in favor of assessments and not in favor of increasing the maintenance, borrowing from their line of credit or any of the other "creative" options they are considering for financing (selling super's apartment, garage rights, public offering, etc)

Do you have any ammunition that I could give him to support the case for assessments versus other options?

There's not an easy answer. If the capital project is a major undertaking, like $2MM facade repair for all sides of building to comply with Local Law 11, no special assessment that is affordable will pay for this. Nor (arguably) should it since the benefit of the facade work will extend far into the future at great expense that is better shares with owners over the next 20 years. Bank financing for something of that magnitude will likely have to be used, perhaps in combination with an assessment to limit the amount borrowed. But at record low interest rates, a loan may be a good idea.

For a more manageable project, there are two advantages of a special assessment versus a maintenance increase: (1) When selling a unit, owner cannot deduct from capital gains any portion of maintenance payments over the years for reasons I won't go on about here unless pressed to; therefore, you are better off with a 24 month special assessment which you can later deduct 100% than with a maintenance increase you can't deduct at all. (2) Units with lower monthlies than comparable buildings attract more buyers, retain value in a down market better, and sell quicker.

Among the downsides of maintenance increase for capital projects is, of course, the maintenance will never go back down. In practice it just never does. By the time the project is done, some other need for the money invariably appears (e.g., fuel/labor increases, a new project, higher RE taxes). With the money coming in, boards find a way to "need" it to continue flowing in. With a special assessment that expires, the board cannot get addicted to the funds and has more incentive to continue to control spending.

Maintenance can do more damage to values than a logical formula may suggest. Yes, $600 in maintenance is about equal to $100,000 in apartment cost--stated another way, at 6% interest, you can afford $100,000 more apartment for every $600 lower a unit's maintenance is since it costs the same to pay a mortgage on $100K as it does to pay $600 maintenance. (I didn't say that very elegantly.) But buyer's I see struggle at times to find money to afford a place that's a bit more costly--but they pucker their faces and scowl if the maintenance is relatively high even if the price is lower. They don't care that the price is lower--the ugly maintenance makes them walk away.

As for creative one-time financing "gimmicks," it depends. Some may actually be prudent--others not so good ideas. If there's an old water tower on the roof that isn't used and someone wants to buy it, why not? Sell the beast with a zillion liability waivers and enjoy the money for what had been a non-working asset. But force the super into a basement studio instead of a 2nd floor one bedroom? That's kind of self-defeating. With help, you get what you pay for. Making a super miserable is not a good idea.

Be careful with doing assessments for every little thing. Save them for truly important and necessary upgrades and repairs.

I know of one board president who tried to do an assessment of between $600 and $1000 per apartment for an arguably overdue paint job of the halls and stairways. Shareholders fought back, however, saying that in this economic climate, in addition to facing increased maintenance, $1000 for a freaking paint job was just over the top, and for that kind of money the walls were just fine, thank you.

Pick your battles.

If the capital improvements, i'm guessing you're talking about that, will cost a significant amount of money, the assessment could go on for years or can be very dramatic. I was in a coop that did the assessment for the boiler that lasted 7 years. It was not a lot of money due to the term, but if they wanted to pay it off in 1-2 years, it would hurt many.

When you look at building with high maintenance, many purchasers don't want to see them. If they end up putting a bid on an apartment that has low maintenance and then find out that the assessments over the past 5 years caused the actual outlay to be the same as the high maintenance, they will not buy the place.

At some point the low maintenance/constant assessments will have their maintenance raised. Using your credit line and paying it off either through assessments or increase in maintenance is a personal preference.

I would rather know that the maintenance is X and there are no or very small assessments rather then going in with low maintenance and never knowing how high the next assessment will be.

on the parking/common areas being sold, i'm all for it. not the super's apartment ofcourse.

i always thought that the parking should be sold, but the board will lose some of their power, god forbid.

ab- renting the parking to an Icon or one of those can bring in very good dollars - don't necessarily have to sell.

Thanks for all of the good information...much appreciated.

I believe that the projects in his building are long-term (over 5-7 year period) and they want to collect as much money ahead of time in preparation for the projects. My feeling was that he should tell them that, while planning for the future is wise, they shouldn't be tying up today's dollars for tomorrow's projects that may not need to be done in 2-5 years ...maybe some of their projects could hold out an additional 2-3 years beyond their estimations before they must be undertaken.

One idea they had in my building a couple of years ago was to consider extending the sponsor's lease on the ground floor retail for a lump sum payment at the time. It was vetoed (thankfully) because they believed the smarter play was for the building to regain 100% ownership of the ground floor retail in about 8 more years.

ph41, I agree about that. we had a building in the neighborhood that faced financial crisis. they rented their parking lot to a place like Icon, don't remember the name. the problem was that the people in the building were put on the waiting list with those not in the building, causing a significantly longer wait to get a parking space. the other issue they had was that the company "stuffed" the garage beyond it's intended use. the fire department came a few times and issued the building, not the company, large fines. once the building got their finances in order, they through out this parking company and started managing parking spaces themselves.

for me, a parking space is paramount. i live in brooklyn, not manhattan, and have had a car for the past 20+ years. i did have 3 train lines and 4 buses within a 10 minute walk. with kids, it makes life much easier to get them to and from places. if they are sick, i don't need to call a car service or take them on the train.

if the building can lower the cost of parking by 15%, there will be sufficient number of shareholders who will be willing to purchase these parking spots. this will allow the building to generate capital where at least some of the improvements can be made without any monetary layout.

now look at it from a resale perspective. the larger apartments with a deeded spot will usually bring in a lot more buyers. they will be willing to overlook some things in the apartment with the advantage of getting a spot immediately. if the buyer does not want the spot, you can 1 - rent it out to someone in the building or outside the building or 2 - sell it to a person who wants one.

having the board control the parking waiting list can become a pain. in my old building, there was a line of approx 15% of the building. the board started harrasing shareholders who used their apartments only during the summers and kept their cars parked. these people lived in the building for 15+ years and were older, they did not deserve it.

ab- is the parking spot sold separately from the apartment? If it goes along with the apartment, then what financial advantage does that yield to the building finances? The only financial advantage goes to the seller.

Deeded separately would give the building more flexibility, and probably greater financial flexibility. Only problem might be that you might want to have the parking spot owned by someone living in the building, not just in the neigborhood - but, bidding wars for a parking spot could be a good thing.

i was proposing to have the spots sold to current owners and cut their costs by 15%. those who would not buy would start paying market rate which was 20% higher than current rate.

depending on how the deeded parking, non voting shares, would be setup, i would expect that you would be able to rent to an outsider but not sell.

in my old coop, it would have paid for 1 - Local Law 11, 2 - New Lobby, 3 - New Roof and still have 100K+ left over. the maintenance would not have to be raised and no assessments would occur. instead, they increased the maintenance by 7%. since we were on lower end of maintenance with more amenities, i didn't mind too much. i just wanted for the board to have less control and stop harassing the 70-90 year olds who are "snowbirds".

"having the board control the parking waiting list can become a pain."

It can also become a source of favoritism and corruption.