Is there “Gold” in Our Basement?

Basements are dark and scary places. So are other gold mines. How many of your board members have taken an in-depth tour of your underground? If you have not, you may find that there are some hidden assets buried behind some of those locked doors.

Stake Your Claim

The first order of business is to accompany your superintendent and managing agent on an in-depth tour of the basement. Do not allow any door to remain unopened. If the superintendent does not have the key, then demand to know who has the key and gain access to that room. In the extreme case, drill the locks! It is your building.

Once all the rooms have been examined, compile a list of the approximate dimensions of each room (also pay attention to overhead pipes, support beams, etc., and watch for possible leaks that could impact the ability to use the room) and determine the best use for each of the rooms. Boards have created laundry rooms, gymnasiums, rainy-day play rooms, meeting rooms, and other creative uses. One of our buildings duplexed the ground-floor apartments into the basements.

The uses can be very creative. While reviewing the potential, the board will have to decide which room is best for the superintendent’s workshop. Although there is no legal requirement to have one, this workshop can be a significant asset to the professional services offered by your building staff to the residents. One typical use: basement storage. We will discuss that because it is easy to undertake, it provides a useful service and welcome income – and because our editor limited us to 750 words. (So come to our next lecture and we will talk about the other uses.)

Squatter Rights to Your Gold Mine & Claim Jumpers

Once you have identified sufficiently large spaces for a storage bin facility, you must start planning its construction. If you discover that there are residents who have been using parts of the basement for personal storage, you will need to consult with your attorney to determine the legal requirements for the continuing obligation to provide storage space to these residents. If the residents using space are rent-regulated tenants, then you may not be able to evict them from the storage room, or, if you do, you may be obligated to find them alternative space. Most offering plans stipulate that the board of directors/managers cannot diminish the services provided to rent-regulated tenants. Terminating the occupancy of a storage room may be doing that.

Assaying the Asset

Once the board determines the potential rooms that can be vacated to create a storage room, it is time to figure out how many storage bins can be constructed in each room. The easiest and least expensive alternative is to ask a professional storage bin company to survey the room(s) and submit a proposal. There is no cost associated with this proposal and the storage room company will prepare a layout of how many storage bins can fit in each room and the size of each bin. Rooms that are too small for storage bins can be used to build bicycle racks or to store air conditioners during the winter. In addition, bicycle racks are another source of income for your building and help eliminate obstructions and violations on the fire stairs and hallways.

Now that the board knows how many potential bins can be constructed, it is time to survey your residents. This is where the economic theory of “supply and demand” comes into play. Depending on the maximum number of bins that can be constructed and the response of the survey, the board will be able to determine the price to charge for each bin.

Hiring a “Mining” Company

There are two alternate programs that the board can pursue for storage bins. You need to determine if (1) you want to use an outside contractor to build and rent the bins or (2) hire a contractor to build the bins on behalf of the building and have the co-op then lease the bins directly to the residents.

Typically, an outside storage bin vendor will construct the storage room at no cost to you. They will not only handle the construction but will also handle the leasing collection of the storage bin rents and supervision of the facility. In exchange for paying for 100 percent of the costs to construct the storage room and handle all leasing procedures, the vendor keeps 75 percent of the total revenue and the rest goes to the building. This agreement generally lasts 10 to 15 years. Whether or not the board gets to keep the storage bins at the end of the lease term so that it can operate its own storage facility, is the subject of negotiation with the vendor. If 50 bins were constructed and rented at $50 per month, the vendor would receive $22,500 per year and the building would net $7,500.

If the board wants to receive 100 percent of the revenue ($30,000 per year in the example), then it must hire a contractor to construct the room. If every apartment is going to receive one bin, then the reserve fund is a fair source to use for costs since every shareholder/unit-owner is reaping equal benefit. However, if there are not enough for all, then it is not fair to use the building’s funds. In that case, a fair compromise is to have a lottery to determine who gets the bins and ask the lottery winners to pay an amount up front towards construction.

In the $50 per month example, if the total cost of construction comes to $600 per bin, you can ask the lottery winner to pay $600 at the time they sign the storage bin lease. That payment is treated as a prepayment of the first 12 months’ rent and then they pay $50 per month to the building beginning in the second year. This allows the property to defer laying out any cost toward the construction of the storage room and reap 100 percent of the proceeds after the first year.

Avoiding “Mining” Disasters

A new amenity such as a basement storage facility is a double-win for the owners in the building. It provides a desirable additional service and a new source of income at very little cost to the cooperative or condominium. However, it can also be a source of problems. Certain materials cannot be stored in a residential building. These include the obvious combustibles such as propane tanks for barbecue grills, paint, and gasoline but also ordinary flammables. Concerns about moisture should be addressed (not only the periodic flood but also seepage and even high humidity levels). Do not delay addressing this issue. It is easier to remediate a water problem before the bins are constructed. Construction of the bins may involve dealing with friable (or potentially friable) asbestos-containing materials, water or steam pipes, and other site conditions. Address these also before starting the work.

The board should have its counsel prepare a form of storage bin lease. It must contain certain essential provisions:

The lease cannot survive a sale or transfer of ownership of the apartment that is tied to it.

There must be insurance coverage for contents and a waiver of subrogation.

There needs to be a strict prohibition about storage of prohibited substances.

There has to be a cross-default provision to tie proprietary lease defaults to the right to use the storage bin.

There must be a right to inspect.

Your lawyer, of course, will insist on many more provisions. A storage facility also requires the board to address several practical problems:

If there are less bins than apartments, is a waiting list to be maintained? Can one owner lease more than one bin?

Can a buyer of the apartment also acquire the right to the bin?

How will the storage area be accessed? Who controls the keys? What are the hours of access?

Can rent-regulated tenants lease a new storage bin? Can a free-market subtenant use a bin rented by the owner?

Who is responsible for maintaining the lighting, etc., in the storage area?

For most of these issues, there is no single answer. However, the board must establish these policies before beginning operation of the facility and before a controversy arises. The policy should be adopted before a contract is signed. Happy mining!