Tightening Their Belts

As the economy continues to swoon, businesses across the city – and around the world – are being forced to tighten their belts. Co-op and condo boards are not immune to this trend, but they should remember that in this, as in most things, there are right ways and wrong ways to do it. You don’t want to cut off your circulation by cinching your belt too tight; and you certainly don’t want to leave it so loose that you get caught with your pants down.

An array of co-op and condo board members, property managers, and lawyers across the city agree that figuring out just how many notches you should tighten your belt can be a tricky balancing act. The answer will vary from building to building, but it is widely agreed that all boards should remember a simple mantra.

It goes like this: before you economize, you need to prioritize and scrutinize. In other words, these tight times demand a soft heart and a hard nose, long-term vision and microscopic scrutiny of expenses, and an ability to be tough and flexible at the same time. Here’s how a handful of boards around the city are trying to strike this delicate, seemingly impossible, but absolutely essential balance.

Putting On a Wedding

Diana Pons has been president of her 50-unit Murray Hill co-op for 20 years. She’s a writer, so perhaps it’s only natural that she sees co-op life in metaphorical terms. “I’ve always felt that running a co-op is like putting on a wedding,” she says. “Everyone has a different idea of how things should be done.”

But this post-World War II building’s board was united about one thing. When economic storm clouds began gathering last year, the board decided that a major roof repair – and accompanying assessment – would have to wait.

“We don’t know what will happen to our shareholders,” explains Pons. “Some might get laid off their jobs, so this is not the time to assess. If three to five shareholders lose their jobs, that could create a serious problem for us financially. Our roof needs to be replaced, but the cost is prohibitive and it would require a major assessment. And we don’t want to pull money out of our shareholders’ pockets right now.”

So the board decided to get the roof inspected regularly and put off the major repair. “We’ll refinance our mortgage in 2012,” says Pons, “and we’ll build funding in so we can do projects that need to be done, like the roof, or that we want to do, like hallway carpeting and stairwell lighting.”

Meanwhile, the board has been scrutinizing expenses and taking forward-thinking steps to make shareholders realize that they need to be a part of the belt-tightening process and not leave everything up to the board.

“I would advise other boards to see exactly what their management company is spending money on,” Pons says. “I would also turn to shareholders for ideas and suggestions. We’re posting a list of recommendations on our bulletin board on ways they can cut personal expenses and save money.”

These include: canceling premium cable TV channels that are seldom watched, which Pons did to the tune of $58 in monthly savings; keeping freezers full of food, or filling empty space with bags of water; and unplugging computers and appliances when not in use. The board has also resisted the seductive temptation to keep maintenance artificially low in these tight times, a method of economizing that frequently backfires.

“Generally, we prefer to raise the maintenance a couple of percentage points a year, whether there’s a recession or not,” Pons says. “This year, in January, we raised it five percent, a little bigger than normal. Our thinking was that fuel costs are not going to stay as low as they are right now, insurance is going up, and you never know what the city is going to do with taxes.”

In other words, planning for a rainy day is important even in rosy economic times, and it becomes absolutely vital during an economic downturn like this one. Unfortunately, raising maintenance as a buffer against unexpected expenses is not always an option. In one of the city’s oldest co-ops, located in Brooklyn’s Sunset Park, the belt simply can’t get any tighter.

“Nobody wants to pay one more penny,” says Carol Carson, board president at a 16-unit walk-up building that was erected during the First World War and converted to a co-op in 1922, when Finnish immigrants in Sunset Park were pioneering the city’s fledgling co-op movement. “We have a higher maintenance and assessment than anybody else in the neighborhood, so it would be hard to sell an apartment right now. Yet we’re borrowing from Peter to pay Paul all the time. The shareholders can’t afford to pay any more than they’re paying.”

When Carson, a retired nurse, moved into this working-class building in 2001, she quickly learned that it was a “seat-of-your-pants” operation. The underlying mortgage had been paid off in the 1940s. Capital improvements were either not getting done or were routinely assigned to the lowest bidder, and they were always paid through an assessment. There was never a reserve fund. Maintenance was rock bottom. Physically, the building was in distress.

After Carson was elected to the board five years ago, she got busy trying to turn things around. The board got a structural engineer to assess the building’s needs, then it replaced the oil-burning furnace. The board also secured a $200,000, 10-year mortgage in 2007 and used the money to replace the roof, repair bricks and mortar, replace all window lintels, and redo the concrete sidewalks, alleyway and courtyard. In 2008, shortly before the economy began its nosedive, the board decided to retrofit the furnace so it could burn gas as well as oil. Other cosmetic work – painting fire escapes, cleaning marble, repairing stained glass and tile floors – has been put on hold.

The mortgage necessitated assessments, and maintenance was increased several times to cover rising operating expenses. Although her own maintenance has doubled since she moved into the building eight years ago, Carson feels it’s still artificially low, a sentiment not shared by all of her fellow shareholders.

“If a pipe bursts, we’ll have to have another assessment because we don’t have any money in reserve to pay for it,” Carson says. “I would like to have a modest reserve fund of $30,000 because every time something happens, I have to juggle who to pay first. I think the maintenance should have been higher still, but you can’t ram that down people’s throats. It should be raised about three percent every year. At least that way, a reserve fund can tide you over. You have to plan ahead and know when your bills are coming due and lay some money aside.”

No More Mr. Nice Guy

Tough times demand tough actions. Ronald A. Sher, an attorney who specializes in co-op and condo law, urges boards to get hard-nosed if the economy continues to worsen and more co-op and condo residents fall behind on their monthly payments.

“Boards have to make sure they’re vigilant that shareholders and unit-owners are current in their monthly payments,” says Sher, a founding partner in Himmelfarb & Sher. “There’s no more permitting shareholders to be carried, and then collecting a late fee.”

Instead, Sher advises his clients, who are sprinkled throughout the metropolitan area, to take prompt and decisive action. “Plenty of boards wait three, four, five months before they refer [arrears] to counsel,” he says. “But boards are going to suffer hardships if they do that. There’s something inherently unfair in the concept of being neighborly and accommodating to your neighbors. By being a ‘good’ neighbor, you’re potentially being a fiscally irresponsible board member.”

Mitch Tenzer, a technology executive who serves as president of his 117-unit co-op’s board at 196 East 75th Street, is usually such a hard-nosed guy. But he has learned, first-hand, that these times also demand that board members learn to be flexible.

In an effort to instill stability, his co-op has a policy that shareholders must live in the building full-time for one year before they can sublet their apartments. Sublets can run for up to one year, with board approval, and must be reviewed annually. But when a Chicago-based couple tried to sell their pied-a-terre apartment there after the economy tanked, they were unable to find a buyer. Distraught, they came to the board asking for an exception that would allow them to sublet the apartment until the economy improves.

“For me,” says Tenzer, “it would have been easy to say no. Rules are rules. But we have a good balance and perspective on the board – an architect, an insurance executive, a lawyer, an accountant, a money manager. Someone else said we should look at this in a different light. And we did.”

By bending the rules, the board also collected a sublet fee from the Chicago couple. The lesson, from Tenzer’s perspective, is that these extraordinary times require unconventional thinking.

“The problem is that people have been losing jobs,” he says. “Some have gotten new jobs and some haven’t. They’ve come to us asking if they can sublet their apartments. We’re trying to be very, very reasonable in these times to keep assessments as minimal as possible.”

Meanwhile, the board has had to attack major structural problems. The pipes that feed the heating and cooling system in the 20-story, post-World War II building began to fail two years ago. Three major leaks sapped about $100,000 from the reserve fund – and forced the board to make critical decisions about its priorities.

“Right now we’ve hired an engineer and we’re having plumbers cut out sections of pipes,” says Tenzer. “We’ll send them to metalworkers and structural engineers. We’ve put off other capital improvements until we know how much this is going to cost.”

After redoing the lobby a year ago, just before the economy started to stagger, the board decided to shelve planned work on hallways, a roof deck and storage space for bicycles. The board scrutinizes every expense with a magnifying glass. It is constantly monitoring oil prices and debating whether or not to lock into a six-month contract. It’s considering raising the sublet fee and instituting a flip tax. It’s fighting the city’s tax assessment. And it recently cut back one of the two doormen who were on duty during heavy travel times on Friday evenings, Saturday mornings, and Sunday evenings.

“We got a lot of complaints,” says Tenzer, “but if we didn’t cut back we would have had to raise maintenance.”

Despite all this diligence, anxiety is still running high. “One of the major concerns of the board is that we’ve never seen apartments in our building sit on the market,” Tenzer says. “There are at least five apartments on the market now and there hasn’t been one bid. So we’re worried about resale value and maintenance. We never worried about arrears before, but now we do.”

This board’s rigorous scrutiny of its expenses is something every board in the city should do as a matter of course but especially right now, according to Lynn Whiting, director of management at the Argo Corporation. “You can’t be on auto-pilot,” Whiting says. “In these times it’s critical to see if there’s a way to reduce any expense you can. Yet it’s hard to cut expenses because so many expenses are fixed – like the mortgage, real-estate taxes, payroll – about 80 percent is fixed. So, what boards need to do is monitor the other 20 percent, expenses for supplies, services, payables, staff overtime. For instance, on a holiday that falls on a Monday, like Presidents’ Day, do you really need all scheduled employees working that day? Maybe the porter and super should be on call. Boards have to monitor those things.”

But there’s also such as thing as too much of a good thing. “If the building needs work on a mechanical system or if there are leaks,” Whiting says, “that’s a mandatory expense. If you try to put a Band-Aid on it, that’s penny wise and dollar foolish.”

Dollar Daze

Penny-wise and dollar-wise would be a fair way to describe the board at Byron House, a 132-unit co-op in Murray Hill, where good planning and a bit of good luck are helping the building weather the current economic storm.

“We’re looking at every item to see where we can cut,” says board president Silvana Vlacich, an insurance executive who was born in Croatia and has lived in the building since 1987. “Last year, we were very generous using part-timers to help the staff do things like cleaning the air-conditioners. This year, we’re saying the staff is going to have to do it themselves. We’re looking at every line item in the budget to see if we can cut it completely or scale it back. You have to control the staff and control payroll overtime.”

When economic jitters set in last fall, the board took a hard look at what its managing agent was doing to save money. The board didn’t like what it saw, so it interviewed half a dozen management companies and decided to hire Cooper Square, effective on April 1, because the company promised considerable savings on energy, supplies and insurance. The board also put off cosmetic work on elevators and external bricks.

In January 2008, before anyone was aware that a vicious storm was brewing, the board refinanced its mortgage, saving the co-op about $60,000 a year. The board also raised maintenance by eight percent this year, in the hope that there won’t be any increase next year. As a result of these prescient and fortuitous moves, the co-op now has a healthy $600,000 reserve fund.

“My advice is to do your homework on every aspect of your building,” says Vlacich. “If you’re not getting service from your professionals, or if your staff is not performing, you’ve got to fix it. It’s amazing, when you look, just how many service providers and professionals there are out there. Boards shouldn’t get used to doing the same things. Re-evaluate everything you’re doing.”

And look before you leap. Mary McDaniel, board president in the 57-unit co-op that’s housed in the former Ex-Lax laxative factory in Brooklyn’s Boerum Hill, says the seven-member board is moving with caution.

“It’s a wait-and-see attitude,” says McDaniel, a consultant for an arts organization who has been on the board for eight years. “We’re very cautious about spending down the reserve fund if we don’t have to.”

The reason is that the reserve fund, which once stood at $500,000, is now less than half as much –thanks to a $200,000 hallway renovation and various repairs to the roof, boiler, garage door and plumbing. Replenishing the reserve fund is proving difficult in this economy.

“We have a transfer tax,” says McDaniel, “but we had only one sale last year. The year before that, 2007, we had four or five sales, which gave us a nice chunk of change. Now, we have an apartment that’s been on the market for six weeks.”

The board increased maintenance by four percent this year but has not, so far, had to levy an assessment. It is taking bids on repairing the front doors and patching and painting the building’s facade. “Now we have to rethink the timing of when these things have to be done – or if they have to be done, or if we can wait,” McDaniel says. “We’re being careful, which is a good thing.”

While no one doubts that this recession is real, McDaniel is not alone in believing that it is also at least partly psychological. And she believes the news media is responsible for much of the gloom.

“Things are difficult,” she says, “but I feel the media is pushing this. It’s pushing the negativity. There’s no doubt there are problems out there, but it’s all relative to each person. Everybody has to carry on with their own life. You’re told you shouldn’t be spending, but in order to improve the economy, we have to spend.”

Maybe she’s right. Maybe this is the perfect time to give the old Ex-Lax factory that fresh coat of paint