The Art of Increasing Maintenance

Barbara Stein, with an accounting degree and a job in retail finance at Macy’s, knows about managing money. And she has had to offer bitter pills to her 90-unit Manhattan co-op over the last two years: a seven percent maintenance increase in 2004 and an eight percent one in 2005. But she feels it wasn’t because of poor planning. Even though it was built in 1925, the West End Avenue cooperative had been well-maintained, so its infrastructure was in relatively good shape. And, until two years ago, the building was without an underlying mortgage. To potential buyers and others, it was known for its low maintenance.

Things changed, however. “We had to do some capital work,” observes Stein, who became president in 2005 after serving for years as the treasurer. “A couple of years ago we needed to put a mortgage on the building [because we needed money] to do a roof renovation that cost $2 million. So we have a new ten-year mortgage. And we had to do a maintenance increase because we had to service that debt. We have another capital project that we’re trying to embark on as well: an elevator renovation that is going to cost about $500,000. But we didn’t want to extend the mortgage or assess for that.”

In addition, fuel prices, real estate taxes, and insurance costs all went up dramatically, and the building had to pay increased rates for its staff’s pension and health plans. Finally, two apartments, which the co-op had rented, were kept vacant in anticipation of potential sales and, says Stein, although “they are going to get sold, hopefully imminently, the maintenance income on those apartments is far less than the rental income we used to charge. We have to make that up in day-to-day maintenance.”

Sigh. It’s going up, folks.

Welcome to the pricey world of cooperative and condominium finances, where everything is on the rise – including maintenance and common charges. And it’s not just a matter of announcing an increase and moving on. There is still the matter of selling the idea to your tenancy, the ones who will have to pay for it. Doing it the wrong way can create dissent, perhaps slowing or stalling the process. Doing it the right way means finding foolproof ways to break the news – and soften the blow – to owners.

Convincing the Board

The first job falls on the treasurer, who must convince the directors that an increase is necessary. Usually, if there’s a budget that’s out of whack, that’s easy. “It’s pretty simple,” says Gene Bernstein, a board member at a 213-unit building in Hudson Heights in upper Manhattan. “The expenses are going up and, particularly in the last year or two, the costs for real estate taxes and fuel have really jumped up quite a bit.”

“We base it on the budget,” observes Aymara Cardenas, president at her 108-unit Westchester co-op, which she says is made up of “working-middle-class” people. “We start preparing it in September, then, in November, we decide whether there should be a maintenance increase based on whatever deficit we may have.” She notes that her building usually increases the maintenance every two years.

But sometimes boards can be reluctant to raise the maintenance/common charges, thinking that no increase is a good increase.

“I know that my board is resistant to it,” admits Marleen Levi, president of a 75-unit Brooklyn co-op that raised maintenance in 2004 by five percent, its first increase in five years. “We were told, actually, to do a higher increase [by our accountant] but we contained it because we felt we still had the benefit of [20] unsold units [owned by the co-op] that we could sell and use to keep costs down.”

“Our maintenance hasn’t been raised in 11 years and it just got to the point that, with the costs going up for everything – insurance, water, all of that – we had to,” explains Ted Whittling, president of a Manhattan co-op in Chelsea, who cites the tax requirement that only 20 percent of a cooperative’s income can come from non-owner sources as a factor. “We only have 52 units, so 80/20 really starts coming into play in a case like this – and we were just skirting that line. It was getting scary. We also had to upgrade certain electrical systems in the building. So we had to bite the bullet.”

Some boards actually try to lower the maintenance. At the 110-unit Chelsea Mews in Manhattan – which had incurred a series of regular increases to keep the reserve fund healthy and to perform capital repairs – many on the board felt that the maintenance had gotten too high and was actually hurting resale values. So the board, after much internal debate and disagreement, refinanced its mortgage and lowered the maintenance.

“Our maintenance was stratospheric,” recalls Harry Feigenbaum, a longtime board member. “It really was high. I look at the ads and I see that [apartments in other Chelsea buildings] sell for significantly more if the maintenance is low. That seems to be the crucial factor. So we came down three percent and we’re hoping to either keep it the same or perhaps reduce it a little more. We’re temporarily running a surplus each month. My feeling is that a lot of buildings around here are in for some sharp increases because people have deferred [capital work and increases]. But we should be able to hold the line.”

Cost-of-Living

The first step in reducing the pain of a budgetary climb is to be consistent: many experts suggest a regular “cost-of-living” increase every year. “I’m a proponent of having small incremental increases on a yearly basis rather than getting walloped once every three years,” explains Dan Wurtzel, chief operating officer of Cooper Square Realty. “You lull people into a false sense of security when you don’t raise maintenance regularly and you wait until the last possible moment. Not doing that puts stresses on a building, especially if they are running in the red during the year. It gets harder to meet certain expenses in a timely manner.”

“I have found that buildings that put up resistance to maintenance increases are the ones who do big ones every few years and people tear their hair out, [saying,] ‘It’s ten percent, how are we going to do that?’” Adds accountant Mark Shernicoff, a partner in Zucker & Shernicoff, “Well, if they would have gotten two percent a year for four years, it wouldn’t have been a problem. Another $10 a month or $20 a month, or whatever it is depending on your maintenance level, is much easier to swallow than another $150 a month.”

Many boards have mixed feelings about such an approach, however. Although she admits they might work elsewhere, Levi thinks that the shareholders at her Brooklyn co-op wouldn’t stand for regular increases: “The board was resistant [to the idea] because it’s just working-class, middle-class people here, and it would be a financial hardship to increase it on a regular basis. And, certainly, we can’t go near double digits; that just wouldn’t be doable for our building.”

At a 202-unit Queens building, the board president is aghast at the suggestion of regular increases, warning that the tenant-shareholders would “kill us if we did that. I don’t think they’d be happy at all. No, we really need to be able to point to something and say, ‘This is what we’re dealing with.’” Instead, the board has relied on a flip tax to keep maintenance low. But operating costs are rising and it has just implemented a seven percent increase, its first in many years.

Still, some acknowledge regular increases are prudent. “We might have had an increase two years in a row and then nothing before that for three or four years,” says Bernstein of the Hudson Heights co-op. “But actually I’m not too keen on [that method] myself. I’m more in favor of having a modest steady increase each year, sort of a cost-of-living-type thing. People can anticipate it coming and make plans.”

A long-term plan can help sell regular increases. If you have one, you’ll know that, in five years, you’ll be facing the loss of J-51 benefits or increased mortgage payments, and can budget appropriate increases accordingly. And, even if you don’t need an increase one year, experts note that it is wise to have a minor one anyway.

Boards can get into trouble by deferring increases as long as they can and relying on irregular revenue like flip taxes or apartment resales of units owned by the corporation. For instance, Levi’s co-op, which has financed operating expenses in the past partly through the sale of units it owns, is contemplating another increase this year, after already implementing a five-percent increase in 2004. The board would rather rely on ad hoc income than to regularly raise costs for the owners.

“Last year, we had a sale on one of our 20 unsold units,” Levi notes. “So that helped us with our operating budget. We’re more unique than other buildings [because we have apartments to sell]. Right now, I have an empty apartment of somebody who just passed away, an elderly resident. That will be sold, so we will get a cash influx from the sale. Of course, we’re using that to fund whatever we need to do with the building.”

Selling It

A board can illustrate the need for higher maintenance in a number of ways. The first thing to do is educate the tenancy on the economic realities of the building.

“There are five categories that make up 80 percent of the budget every year,” Shernicoff, the CPA, notes. They are:

(1) Real Estate Taxes. These are based on the city’s assessed value of your building. Last year, for instance, Stein’s Manhattan co-op raised maintenance by seven percent “because the real estate [tax] went up in the city ten-and-a-half percent,” she notes. “So part of the problem this year is that the building’s value was assessed higher. It wasn’t so much that the rates they’re charging grew – the base value of the building went up by $300,000.” For the co-op, that meant another increase – this time, by eight percent – in 2005.

(2) Mortgage Payments. Unless your mortgage is up for refinancing, payments are fixed for the life of the loan.

(3) Staff. There is not much you can do about labor, unless staffing is too high. You can review items like overtime and get them under control, but once that’s done, costs are fixed. If you have a union staff, you’re locked into regular wage increases. You can’t pay a doorman less money or less sick pay, nor can he go without a uniform. In addition, Stein’s building, like many others, faced increases in its staff’s union pension and health plans. “They put in a pretty stiff increase in the premiums,” she notes. “For our coming year that means another $40,000 or $50,000.”

(4) Fuel, utilities, water/sewage charges. Assuming you have a reasonably efficient boiler and thermal windows, and you monitor heat, fuel then becomes a function of the weather (how much heat you need) and the market price. There is not much the board can do about either. Last year, for instance, fuel costs took a jump because of the war in the Middle East, forcing many properties to raise maintenance or common charges.

(5) Insurance. The big story in recent years has been the skyrocketing costs of insurance, post-9/11.

After calculating those five areas, you have about 15 percent of the budget left to deal with capital repairs and building upkeep and professional fees (accountant, lawyer, engineer, and managing agent). “If you haven’t replaced windows, maybe it’s time; maybe you can make the boiler more efficient,” Shernicoff suggests. “You can probably get some savings there if you haven’t already got it but most buildings have done that already. There’s not a lot of wiggle room.”

After explaining that to your owners, the next step in the education process is overcoming a so-called renter’s mentality, an attitude of “us against the landlord and damn the increases.” Admits Levi: “That still lingers on despite years of ownership. It’s turned around a lot, especially when people see that they’re building equity, but maybe it is still in the background – a renter’s mind set.”

A Queens building has a different problem: “owner’s mentality.” Explains the co-op’s president: “They feel like, ‘We’re the owners so we should be able to determine our own fate. So how can we be charging ourselves an increase? Let’s just tighten our belt again.’”

In fact, some resist increases unless they can see tangible results. “I’m always very good at the annual meetings about talking about costs and what things have changed and what we’ve spent money on,” observes Ruth Farrago, president of a 746-unit cooperative in Kew Gardens Hills, Queens. “I always talk about what we’ve spent money on. Unfortunately, owners don’t care that we put 11 new oil tanks in the ground. To them, it’s ‘What did that do for me?’ You know, it’s ‘I want a new bush in front of my apartment.’ Well, we can’t afford to give you a new bush. We put in oil tanks that cost $200,000 instead. They don’t get it.”

Educating your owners can mean sending out memoranda with elaborate budgetary diagrams that detail where the money comes from, where it goes, and how much is needed. At Cardena’s Westchester co-op, the board publishes a quarterly financial report/newsletter, with comments from the board. “You can see whether we are running a surplus or a deficit and we try to give them a flavor of what is ahead,” explains Cardenas. “You know, it’s what Sy Syms says, ‘An educated consumer is your best customer.’”

Some treasurers present a monthly spreadsheet with budget and forecast numbers, as well as the last three years’ actuals from month-to-month. Everyone can see what was predicted and what was spent. ‘Thanks to computers,” says CPA Shernicoff, “it’s easy to prepare budgets for boards with bar charts and graphs. Boards can visualize what the numbers represent, and I can show them where everything is going. ”

Meet the Owners

After explaining the reasons for an increase in a memorandum, the board can hold a special meeting to answer questions and address concerns. Experts suggest that you have your manager and accountant present as well. (Remember, though, the owners come to such meetings for information only, not to vote. A board’s responsibility is to manage the finances. If it holds meetings that give the residents the idea they will be approving a budget, you may be creating unnecessary expectations and problems. Logistically, you cannot bring every decision to a vote by the owners.)

“We have been very, very forthright in communicating in writing and [in holding] quarterly meetings with all the shareholders to go over the financial condition of the building. So, last year and now this year, when we’re having back-to-back increases, no one is surprised,” explains Stein, the board president. “It doesn’t mean that they’re totally happy about it. But the way we ‘sell it’ is to say that our building will not and does not operate by allowing us to have operating deficits. And our building does not have the philosophy of using any reserve funds to make up that shortfall. We want day-to-day maintenance income to cover our day-to-day operating expenses, and where we fall short, we immediately turn around and make increases.”

“What I do is, I hold a shareholders’ meeting separate and apart from any other meeting. Our accountant and I put together a 10-year spreadsheet for the bulk of our expenses that are fixed in nature,” says David Baron, president at an over-300-unit co-op in Queens, who has been on his board since 1991. “Then you start to see the trends over 10 years. It sells itself. If you just hand out a financial statement, it’s not read by everybody. The meeting helps focus people.”

At a 146-unit co-op on Manhattan’s Upper West Side, president Jay Rodriquez says the board members had the job of selling a fourteen percent increase for this year, after a seven percent increase last year. They were successful because “we did mailings to let them know that our budget was being reviewed and that there would be potential increases. Then we held meetings in our buildings – one time in the laundry room, another time in a hallway – where we would convey what’s going on to the shareholders. There was some initial concern, but pretty much everyone understood. They’re aware of what happens in other buildings in the city. And by and large, they know that we are a dedicated board and that we do our best to keep costs as tight as possible.”

At such informational meetings, the board can make these points:

It is trying to balance the books. Farrago’s Kew Gardens co-op went years without raising the maintenance because of concern for the economic well-being of the shareholders. “We had kept it low for a good part of the late ’90s,” she says. “Probably even into 2000, 2001, we really hadn’t increased it – which was a mistake. Throughout those years, we probably should have been doing two percent [increases] a year. It’s just that things had been so bad back then that we were trying to be kind and not hit up shareholders. But, in the past few years, with the insurance increases, and gas price increases, and increased needs for repairs, we found ourselves behind the eight ball. So, actually last year, not only did we do the six percent increase, we also did a four percent assessment. We really did need a lot of money.”

The money is being spent wisely. Stein’s board justifies its increases by using the phrase “fiscally responsible,” and pointing out that one of the conditions of the co-op’s agreement with the mortgage-holder is that the building “can’t operate on a shortfall, that the operating revenues were going to service the debt. So when we remind our shareholders that one of the bank’s requirements for giving us that loan is that we service it through maintenance increases.”

There are no surprises. Most boards that are successful in selling increases prepare the owners throughout the year with information on finances, or at least give them ample warning after the decision has been made. “I always put myself in the place of [someone] not being on the board,” notes Whittling, the Chelsea president. “I imagine I’m sitting there in my apartment, and I get the notice from the managing agent saying, ‘By the way, your maintenance is going to be raised.’ There’s no way I would do that. It’s just not right.”

Part of the task of selling is to make the shareholders feel like part of the process. To do that, and to gather information to help the board prioritize, Bernstein’s co-op conducts periodic surveys. “We’ve done surveys of what’s the highest priority. We get suggestions ranging from having some sort of rooftop garden to putting a small fitness center in the building to the long-standing one of renovation of the hallways,” he notes. “We poll them and try to get a sense of what the feeling is of the residents. We always are quick to put a disclaimer that these are not binding results. The current board president has been very good about getting out a lot of communications with the residents: newsletters and postings on bulletin boards and keeping people well-apprised of what’s going on.”

In the end, the owners will be supportive if you communicate – and show that you are doing your best to look ahead and face the unknown. “Everybody reads the paper,” says Baron. “They all read about the high cost of oil, they all read about insurance, they all have gas tanks to fill up. I don’t think you can name something that costs less today than it cost a year ago. If you bring people into the problem, they become part of the solution. Even though it’s not liked, everybody understands and it does make for a much easier sell.”

“If you really explain things to people and you give them a lot of facts and a lot of background and a lot of good reasons for why you’re doing something that they’re probably not going to like, most people will tend to accept it even if they don’t like it,” observes Gerry Fifer, board president of a 32-unit condominium on the Upper West Side of Manhattan that imposed a five percent increase in 2004. “We did that and what really amazed and delighted me was that [the owners] had no objections. I was, frankly, stunned because you just figure you’ll always get some.”

Then again there are those who find the whole process very simple. “I didn’t have any problem,” notes the board president of a 102-unit co-op on Manhattan’s Upper East Side that raised maintenance in 2004 by ten percent. “I wrote them a letter and I said, ‘Look, here’s what’s happening. You haven’t had an increase in ten years. You’ve had a couple of minor assessments. Prior to that, we had some improvements in our commercial properties but they’re on long leases and we won’t be seeing any return from them, and here’s the disparity between the maintenance and the cost.’ And I wrote them a very nice letter and I said, ‘If you have any complaints, please call me as soon as possible, here’s my telephone number, and if I don’t hear from you in substantial numbers by a week from now, we will consider that this is going to go to the board for resolution.’ And it did and it was and that was that.”

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Survey Stats

On January 26, Habitat e-mailed a survey to 471 co-op/condo board directors who are subscribers to Habitat. Of this group, 19 percent responded, representing buildings throughout New York City, New Jersey, Westchester, and Long Island. The facts and figures that make up the charts in this story are built from this group.