The Co-op/Condo Report 2007

Listen to THE major media and you’d think the only benchmark for New York residential real estate is sales. But apartments do not exist unto themselves. The well-being of the buildings of which they are a part is a more important indicator of our economic health. How co-op.condos grapple with finance, planning, and governance issues – although not as sexy as what the real estate paparazzi dish out – is the canary that delivers a warning in New York’s real estate world.

What is the canary chirping about now?

First and foremost, the “duh” factor: living in a co-op.condo costs more each year. Apartment owners are dipping into their pockets to pay for increasing month-to-month stuff – like fuel, taxes, and insurance – but alarmingly, boards are not creating long-range capital plans to control spending.

Although greening is on everyone’s lips, co-op.condo buildings have barely stepped up to the plate. By far, the biggest initiative taken has been to switch incandescent lightbulbs for compact, energy-saving fluorescents.

Everyone wants to look good, but as with buying a set of new clothes, you have to be smart about how you pay. Here, more buildings are purchasing good looks by using their day-to-day operating accounts instead of money they’ve set aside. Maybe this is a part of the “thou shalt not look very far ahead” planning, but most real estate experts find this a troubling trend.

So, in the end, what is the state of our co-op.condo world? Precariously healthy. Money is flush, meaning tough decisions don’t have to be made. But hit a bump – say, a broken elevator, a leaky roof, or unexpected Local Law 11 work – and healthy could easily turn into horrible. Bottom line, governing well means planning ahead. And no excuses will cover up the absence of that.

What kind of housing association do you live in?
Co-op 87.7%
Condo 8.9%
Cond-op 0%
HOA 0%
HDFC 2.6%
Other 0.9%

How many units in your building or complex?
0 to 10 9.4%
11 to 25 10.6%
26 to 60 20.9%
61 to 100 22.1%
101 to 160 13.6%
161 to 250 9.4%
More than 250 units ..............................................0.9%

Physically, is your property a...
Single-apartment building 59.2%
Apartment building complex 26.6%
Single-garden apartment 1.3%
Garden apartment complex 4.3%
Combination of apartment
buildings/garden apartments 3.0%
Other 5.6%

How is your property managed?
Management company 75.0%
Self-managed, we have a super 10.2%
Self-managed, no building staff 8.1%
Other 3.8%
On-site manager 3.0%

What is your board or management position?
President 37.0%
Vice President 8.9%
Secretary 7.7%
Treasurer 23.8%
Property Manager 4.3%
Other 18.3%

Finances

Long-Term Planning:
A Must (Not). Future shock is in and crystal-ball gazing is out – at least according to our survey. J. Brian Peters, senior managing director at Rose Associates, says he was “surprised and concerned” that “more than two-thirds of the respondents indicate that their building does not have a long-term capital plan.” Peters notes that “a board cannot effectively operate without such a plan. It provides a target for maintaining and enhancing their asset.” Without it, he says, a board is just “shooting in the dark” when it comes to making major financial decisions.

Agrees Abe Kleiman, an accountant and partner at Kleiman & Weinshank: “It is troubling. This means that when an expensive repair or improvement is needed, sufficient funds may not have been set aside to pay for it. The board may have to impose a special assessment, borrow the funds, postpone the repair or improvement, or come up with an alternative means for raising capital.” Large assessments may be a burden, he argues, while borrowing means added costs that can ultimately lead to maintenance hikes. And postponing or neglecting needed repairs and improvements is no answer: “That ultimately costs more, results in a poorly maintained property, and may result in decreased property values.”

Maintenance Increases: Wrongly Ignored? Peters cites another concern: costs are rising but the maintenance/common charges aren’t in many buildings. “In each of the past two years, at least 30 percent of the responding buildings have not had a maintenance increase. Regular annual (and hopefully modest) increases in maintenance charges are a highly effective strategy for boards. They make it much easier to keep the operating budget in balance and generate operating surpluses that can be applied toward the capital costs.”

“It seems remarkable that 13.2 percent had the ability to live within their budgets and did not need to raise additional funds,” says Ira Meister, principal of Matthew Adam Properties. Quite notable, he says, considering the high price of heating fuel and utilities, the increase in interest rates, and the overall increase in operating expenses. With that in mind, it’s equally curious that the percentage of cooperatives relying on a maintenance jump went down in 2007 as compared with 2006 – even as costs rose.

“I’m concerned that instead of increasing maintenance charges to keep up with increasing operating costs, many boards are imposing assessments,” says Kleiman. “Assessments seem to be more acceptable because it implies that it is for a limited time. In fact, though, they replace a needed maintenance increase.”

Flip Taxes: Earn Now, Not Later. If you’re flipping out over not having a transfer fee in place, don’t. The so-called flip tax, which half of all buildings used to collect extra income, won’t be such a cash cow if the economy goes south and sales drop off (or prices go down). That is especially true if fees are based on a percentage of sales profit or total sales price, as over 70 percent seem to be. “It is generally disadvantageous to pass a flip tax based upon a percentage of the profit,” Meister notes, “as market fluctuations provide a large influx of extra revenue during the up market and potentially none during a downturn.”

Adds David Goodman, director of management at Tudor Realty: “It is surprising that almost half of those who responded did not have flip taxes in place. We have found that the flip tax is not only one of the most painless ways to raise money in a co-op, it is relatively easy to establish. Most reasonable shareholders understand that having a flip tax does not negatively impact their ability to sell, and it ultimately is a fair way to assess those who have enjoyed the benefits of living in the building.”

More Refinancing, More Worries. While it appears that many buildings refinanced within the last five years to take advantage of competitive interest rates, the refinancing picture concerns Kleiman. Looking ahead, slightly more than half of responding buildings will have to refinance their underlying mortgages within the next nine years. Kleiman warns that “interest rates will no longer be at the low rates we experienced in the past several years, and the co-op’s debt service costs will increase dramatically.”

Taking from the Wrong Fund. Knowing which fund to dip into for capital repairs is crucial, says Goodman, who observes: “Some of the respondents indicate that they have paid for specific improvements from operating funds. We believe that the operating budget is strictly for the funding of operations. If there is a surplus it can be put into reserves, and those funds used for improvements. There is a risk when operating funds are used for capital work. You can lose track of actual expenses, while discounting the need for capital assessments or other reserve account funding.”

Energy and
Greening

LightBulbs In,
Cogeneration Out. How energy-efficient is your co-op.condo? Well, most are balmy over bulbs. More than half of those polled have been involved in energy-saving initiatives, with the most popular being the replacement of incandescent lights (cheap) and the least popular being cogeneration (pricey). “Everyone is doing the bulb thing, it is too easy to miss, and with a one-week-to-one-year payback, it’s silly to ignore it,” observes Andrew Padian, director of multifamily services at Steven Winter Associates.

Energy Audits Are Up. While no one may like an IRS audit, the survey showed that many are trying out energy audits. “It’s good that 20 percent of the respondents are pursuing or have pursued energy audits,” observes Luke Falk, project manager of the Residential Energy Affordability Program at the New York State Energy Research and Development Authority (NYSERDA). “However, it’s important to understand that audits themselves don’t save energy, they’re just a tool to guide decision-makers. Follow-through is the important thing.”

Russell Unger, executive director of the New York chapter of the U.S. Green Building Council, adds: “The vast majority of buildings started with the no-brainer of replacing incandescent lighting. However, many buildings also took additional steps, such as getting an energy audit and undertaking more substantial retrofits like changing boilers and windows. It’s not too surprising to see that most of the emphasis was on saving energy, given the financial savings involved and the connection to climate change.”

Windows: More
Installs, But… A touch of glass is not what it used to be – meaning that replacing windows is not the cost-saver it seems. Falk, noting that 25 percent said they replaced windows, argues that this could be a misconception: new windows do not save as much energy as people commonly think. “If the existing windows are single-paned and in very dilapidated condition, then a replacement may have significant energy-savings potential,” he says. “But if the existing condition of the windows is not so bad, even low-e, argon-filled replacements will have a hard time being cost-effective. Weatherizing windows, ensuring proper air-sealing and caulking around the frame, and applying a low-e or reflective film all tend to be cost interventions to save energy.”

Tom Sahagian, manager of the energy division at Power Concepts, was equally down on some so-called “energy-saving” steps: “Some of the measures listed under ‘other,’ like fuel-switching or radiator-valve replacement, probably don’t actually save energy. No one listed low-flow showerheads, weather-stripping, or other low-cost items. Few listed boiler/burner tune-ups. I’d be interested to see if the one solar [power] installation actually saved any energy.”

“When I look at numbers like these,” remarks Falk, “it makes me wonder if building owners and managers understand that their buildings’ energy costs are not fixed. Proactive and savvy energy management can reduce operating expenses significantly.”

Adds Sahagian: “It’s good to see that energy occupies some mindshare, however small. Mostly, what the data reveals is that spending money to reduce energy use is still not a priority, even though it is typically one of the top three budget items. And it is one of the very few major budget items that can actually be reduced through judicious investment.”

Greening Projects: Big Talk, Little Action. Falk is surprised at the low numbers for environmentally conscious projects. “Although green is the buzzword among the public, it seems that there isn’t all that much green activity being pursued by the respondents of this survey,” he notes. “Most likely, that’s because the green building craze has mainly been focused on new construction projects. But things like low-VOC paint, panelized low-VOC carpeting, and green cleaning supplies can easily be incorporated into existing buildings and typically have no or very little additional cost.” Padian adds that the most telling response concerning green initiatives and co-op consciousness was one in which a respondent asked, “What’s NYSERDA?”

Amenities

What Was Done. Whether it is a new lobby or a storage room, everyone agrees that amenities add value, and not surprisingly, nearly half of the respondents improved their spaces in the past year. One building installed a wrought-iron fence around a garden, created a bicycle room, and added a small storage room. Another installed a new front door, laid down a bluestone sidewalk, and added new interior and exterior lighting. The majority of those responding – just over half – renovated their laundry rooms, which seems to indicate that cleanliness is still next to godliness, at least in some people’s eyes.

Increasing Market Value, Liabilities. All that work, says Michael Wolfe, president of Midboro Management, shows that boards are increasingly more aware of the economic trends and are trying to look down the road at how an initial investment may save money over the years. “Boards are becoming better educated on balancing their financial resources between aesthetic upgrades and structural/operational upgrades,” he observes. There are caveats, however. With a large number adding courtyard and rooftop gardens, Wolfe warns: “Although these are wonderful amenities, they are also liabilities. Corporations and condominiums must recognize their possible liability for roof injuries, fire codes, and other hazards that can often go unenforced. Therefore, it is imperative that they produce and circulate detailed guidelines.”

Funding Them: Cash Concerns. Where the cash comes from is another concern. “The amenities survey results are in line with what we have been seeing in the industry,” asserts Lynn Whiting, director of management at Argo. “Boards and shareholders want amenities to improve their quality of life and enhance their investment.” Still, she found it unusual that nearly 26 percent funded the new amenities either in full or in part by a maintenance increase. “In our experience, these building improvements are typically not funded by a permanent maintenance increase since they are a one-time expense.”

Gerard J. Picaso, president of Gerard J. Picaso Inc., also says that such funding is an issue. “I find it disturbing that 44 percent paid for amenities from the general operating funds. Usually projects of this type are considered capital or one-time expenses and are funded from the reserve or capital accounts. The operating fund is used to run the building each year in relationship to regular or ongoing expenses that occur each year.”

Policies and Rules

Ignorance Is (Not) Bliss. Some of the respondents expressed frustration with their residents over the question of rules. “In our new condo,” reports one, “few owners appear to have even read the governing documents. One unit-owner wants us to be ‘flexible,’ meaning that we should let him do what he wants (i.e., put a plant in the common areas, use hallways for storage), which causes the board to work a lot harder.”

Bruce Cholst, an attorney and partner at Rosen & Livingston, notes that such problems “illustrate the classic conundrum experienced by new condominiums, where unit-owners are typically not familiar with board regulation and generally tend to feel that a ‘man’s home is his castle.’ As with any communal living situation, rules must be established and boards must, from the very beginning, be firm in their enforcement.”

Most (Un)Popular Rules. From pets and roof use to smoking bans and garbage pick-ups, the surveyed boards imposed many policies, some of them controversial. “It is interesting to note that certain issues seem to be on most cooperative and condominium ‘to do’ lists – tighten alteration agreements and policies; adopt or modify an existing flip tax; address noise, pet, and sublet issues; and adopt insurance requirements,” observes attorney David Berkey, a partner in Gallet Dreyer & Berkey. “There are many responses that indicate boards are making a comprehensive review of their governing documents, which shows a maturation of the cooperative movement over the last 25 years.”

Revising We Shall Go. As for revisions of corporate documents, Cholst is “particularly heartened to see that so many boards are revising their governing documents, house rules, and building-wide policies on a regular basis. These should be regarded as ‘living documents’ in the sense that they are regularly updated to reflect and address newly emerging problems within a building.”

Attorney Stuart Saft, a partner at Dewey & LeBoeuf, agrees that revisions are a must but finds it “disturbing” that very few of the respondents have revised their proprietary leases and only 31 percent revised their bylaws and “shocking” that 73 percent are not considering amending their proprietary lease at all. “These documents must be examined, or the board, the building, and the owners may be placing themselves at great financial risk” because the law has changed drastically since many of these documents were written.

Still, Saft is pleased to note that 73 percent of the respondents have revised their house rules “because the rules should be constantly reviewed and updated to make certain they accurately reflect the manner in which the building is being operated and the standards that should be met.”

Personal Insurance Required? No one is risk-free, so attorney Geoffrey Mazel, a partner at Hankin, Handwerker & Mazel, points to one “item of interest” with alarm: only 40 percent of the respondents said that they required their shareholder to maintain personal insurance on their units. “I find this figure to be extremely low, in light of the tremendous benefits the cooperative as a whole receives when its shareholders maintain their own insurance policies. It provides an extra layer of protection for everyone and should be required by more boards.” Open Board Meetings Down. Mazel feels that another surprising result was that only 15 percent of those responding have open board meetings. “In my opinion, open meetings are a double-edged sword – the desire for transparency with the shareholders versus the need for the board to operate in an efficient manner, without outside pressures.”

Smoking Bans Up. Smoke may not be getting in some people’s eyes much longer. Mazel cites as significant the 10 percent that had instituted smoking bans. “This is a red hot topic in this era of expanded smoke-free environments. Nonsmokers can spend all day in a smoke-free environment and then go home to their apartment and be subjected to secondhand smoke from a neighbor. Clearly, the case law is evolving in this area, and there are lower court decisions that require boards to take affirmative steps to protect their shareholders from secondhand smoke. How far a board can go on this issue is still unknown.”

board Power can Create a better home. Berkey feels that the overall data in this area reveals that “board members realize that they do have power to control the quality of life in their buildings and are acting upon that realization. We see many amendments to house rules, which are within the board’s power to amend without the need to obtain shareholder/unit-owner approval. We see many efforts to amend proprietary leases and bylaws to deal with flip taxes, insurance, alterations, and other important issues.”

As for the future, Berkey notes: “The issues that most boards report to be of major future concern are predominantly financial – how to deal with costs of Local Law 11 compliance, rising taxes, salaries, etc. Boards will have to budget carefully, understand that deferred maintenance is likely to result in major future repair expenses, and not be afraid to raise maintenance or common charges, where required. Boards will have to be diligent in collecting arrears and also think of creative ways to add income to the cooperative’s bottom line. Shareholders and unit-owners prefer a proactive board that anticipates and acts to prevent problems, rather than a reactive board that deals with problems as they arise.”

How we conducted our survey

We sampled 420 co-op.condo buildings throughout the New York area to find out what was happening in four key areas: finance, energy/greening, amenities, and policies/rules. Board directors of these buildings, selected because we had their e-mail addresses, were contacted to participate. Using SurveyMonkey, a web-based survey application, our response rate was 58 percent. The survey was designed, compiled, and written by Habitat’s Carol J. Ott and Tom Soter. The data was interpreted by industry professionals David Berkey, Gallet, Dreyer & Berkey; Bruce Cholst, Rosen & Livingston; Luke Falk, NYSERDA; David Goodman, Tudor Realty; Abe Kleiman, Kleiman & Weinshank; Geoffrey Mazel, Hankin, Handwerker & Mazel; Ira Meister, Matthew Adam Properties; Andy Padian, Steven Winter Associates; J. Brian Peters, Rose Associates; Gerard J. Picaso, Gerard J. Picaso Inc.; Stuart Saft, Dewey & LeBoeuf; Tom Sahagian, Power Concepts; Russell Unger, New York chapter of the U.S. Green Building Council; Lynn Whiting, Argo; and Michael Wolfe, Midboro Management.