Mind the Gap

The history of the maintenance increases at the East 72nd Street co-op between York Avenue and the East River reads like a short story without an ending. There was an increase ten years ago. Then there was an increase two years ago. And now there was an increase just three months ago.

It isn't bad fiscal planning. It's called minding the gap. As in the gap between what you have and what you need to spend to be a fiscally responsible board. And it keeps changing almost every week.

Confronted with an 18.5 percent property tax increase, rising insurance premiums in the wake of the terrorist attacks of September 11, planned increases in tax assessments come June, and the rising cost of oil, co-op and condo boards are huddling over their annual budgets, trying to figure how to make up the shortfall without gouging owners.

"Doing more with less" is pretty much the mantra these days of the Bloomberg Administration, and, with that in mind, several co-op boards have come up with unique ways of holding the line on costs and meeting shortfalls while trying to keep the shareholders happy. But it hasn't been easy, as co-op presidents will be the first to report.

"This year was very disruptive with insurance policing doubling and tripling and [Mayor Michael] Bloomberg going up to 18 to 20 percent on real estate. It threw the budget right out the window," says East 72nd Street board president Wyn Grant. "We had to decide whether to go for a full increase or meet it halfway."

To prevent shareholders in his 240-unit complex from going into sticker shock over their maintenance bills, the directors of the co-op decided to split the difference on their operating budget, increasing maintenance 6.5 percent and setting an assessment that matched penny for penny the abatement checks each family received this past January.

In a clever move that other boards could benefit from, the East 72nd Street co-op also decided to split the refund of the abatement into two parts, paying out half in January and the second half in June, thereby holding onto the cash for an extra period of time, to meet any emergencies that could arise. The board is hoping that the maintenance increase and assessment will be adequate.

So how loudly did the shareholders kick and scream when they saw the maintenance increase? Not at all, reports the president. The board sent out a letter before the maintenance increase explaining what was going to happen; and with each shareholder feeling some kind of insurance pinch and also reading about the mayor's tax increases, no one protested. Grant said that it was important that people understand and approve the decision.

For this East 72nd Street building, a maintenance increase of 6.5 percent is below the norm, at least according to attorney Bruce Cholst, a partner in Rosen & Livingston, who says most boards he has talked to are reporting increases of 8 to 10 percent. And Cholst adds that many buildings are tapping into the same technique as the East 70s co-op, levying an assessment for the amount of the abatement, a budget tactic that will work only as long as the state continues to give co-ops and condos an abatement. The abatement, begun in 1997, was only meant to be a temporary measure to ease the tax burdens on co-ops and condos while the real estate property tax law was streamlined. Something that has yet to happen.

In Cholst's own co-op, the savvy directors made a smart move this past summer, taking advantage of a dip in the interest rates to refinance their building's mortgage, saving $140,000 "on the spot," says the attorney.

Other co-op boards would be wise to try and do the same. "I mean, who anticipated an 18 percent increase?" asks Edward Howe, senior vice president of the New York office of the National Cooperative Bank. The NCB, based in Washington, D.C., has seen a marked jump in mortgage refinancing, and boards that haven't looked into it would be wise to do so. What a lot of co-ops are doing is refinancing their existing debt and dropping their mortgage payments by 30 to 50 percent.

And now is an especially smart time to look into mortgage refinancing, points out Howe, because not only are interest rates at a 40-year low, but the low interest rates are being fixed for the next 10 to 15 years, which means board's budgets will also be fixed for the next 10 to 15 years. That's one of the nice things about the current financing.

On the other side of Central Park, the directors of the co-op at 175 West 73rd Street have commissioned a study to see where they can shave costs. According to board president Michael Lorimer, the board is looking at everything from putting in energy-efficient light bulbs in the hallways and comparison-shopping on garbage bags to hiring a tax certiorari attorney to see if the building's assessment can be reduced. The board of directors is also looking at converting common space in the building into residential space to increase maintenance income. Says Lorimer: "We are taking a look at everything."

So far, the building has been in the enviable position of not raising maintenance to meet a shortfall. Instead, the board is closing its budget gap two ways: relying on an assessment levied in 2001 for work needed to be done on the building's façade; as well as continuing the practice of meting out an assessment each year equal to each apartment's tax abatement. The two practices together "provide us with a cushion," reports the president, which so far has prevented maintenance increases.

But there is a third way to help buildings save money in these times of economic uncertainty, and several board presidents say it is time for the city to push hard on the issue: a reevaluation of the 80/20 law which controls how much income co-ops can make from their non-shareholder tenants. Under the 80/20 regulations, only 20 percent of a building's operating budget can come from non-shareholder tenants. If the 80/20 were based on square footage, rather than shareholder status, it would free up buildings to pull in thousands more dollars a year.

"That would make a tremendous difference, especially in a building like ours which is 16 floors," Lorimer observes. "That's the kind of thing that needs to be worked out."