Reserve Funding

Reserve funds are important – if a roof leaks or your boiler suddenly expires, you should have emergency money available. That’s 101. But there’s another reason to focus on reserves: banks, the federal government, and others who make loans, have been rattled by the credit crisis and are zealously rewriting, tightening, and strictly enforcing rules.

One of them is the requirement that co-ops and condos keep a certain amount of money in reserve – usually at least 10 percent of the annual operating budget or annual income from maintenance. Fannie Mae and Freddie Mac will not provide federal mortgage loan guarantees in buildings that fail to meet the 10 percent threshold. NCB, which makes mortgage loans to some five billion co-ops nationwide (and then sells some of them to Fannie Mae), requires that co-ops keep a reserve fund equal to no less than 10 percent of the annual income from maintenance. When the amount falls below that, co-op boards can expect to hear from the bank.

“We send out a letter asking them to provide a budget and give us ways they’re going to increase the reserve fund,” says Matt Wehland, a senior vice president at NCB. “Nine times out of 10, by the time we receive year-end financial statements, they’ve already budgeted an assessment or a maintenance increase to build [the reserve fund] back up.” Failure to do so can result in termination of the mortgage by the bank.

In short, today’s lending climate makes a healthy reserve fund a necessity. So, maybe it’s time you examined how you can restock your reserves.

Turning to the Highest Bidder

Remember that old joke about living in your car because monthly garage rent cost as much as a studio apartment? At Sunnyside Towers in Queens, that’s no joke. The 158-unit co-op recently auctioned off its third parking space for a remarkable price. The first space they auctioned in the first quarter of 2008 went for $43,000; a less-desirable space went for $30,000; and the third one, in March 2009, went for $50,000. “In the middle of a recession,” marvels Nadir Maoui, the vice president of the board.

The auctions had begun as an experiment, explains Maoui, staged after the co-op found that it was facing expensive Local Law 11 work. The board polled the building and learned that residents were interested in the idea. Although parking is at a premium – there are 35 spaces for 158 apartments – “we didn’t expect there to be such a demand,” says Maoui. “We were in shock – but happy also.”

The 25-year-old co-op had long had the ability to auction off spaces by an agreement with the sponsor, who stills holds 17 percent of the shares in the corporation. When one of the original renters vacates the apartment and it is sold, the parking space attached to the unit reverts to the board, which then auctions it off to the highest bidder.

“The only rules we placed on the auction were you had to be a shareholder and you could not bid on a spot if you already had one,” says Maoui. “That’s basic fairness.”

The original deal was engineered by the building’s longtime attorney Arthur Weinstein, who says anyone with legitimate garage spaces can do it – provided there are no roadblocks in the proprietary lease – and that it is a great way to raise money for the reserves.

“The IRS [Internal Revenue Service] code says that all the shares allocated to a garage must become part of the shares allocated to the shareholder’s apartment,” Weinstein explains. “It’s just as though you had an amenity like a fireplace: the apartment gets more shares because of that amenity. That means you could never sell garage shares allocated to a shareholder to a non-shareholder. That’s very important because the non-shareholder would be owning shares that were independent of any apartment and that would be violating the IRS requirements.”

Weinstein adds that it is “an effective way to raise money because in a building with 10 garage spaces you can raise as much as half a million dollars.”

To do it in your building is relatively simple, on the practical if not the political side. When a parking space lease or letter of agreement comes up for renewal, the board replaces it with a lease of sale. Generally, a straight up-or-down board vote is all that is needed. The hard part comes when you have to deal with the “political question”: taking space away from people who have it now.

Weinstein says that the same approach can be employed with storage units: a co-op could easily change them from being rentals to being owned, again selling them by auction. “That could bring a significant amount of capital from people who like extra space in the building,” he notes. “People who have been renting that space for $100 a month now pay a one-time fee of $30,000 – and perhaps $20 extra a month on the additional shares allocated. So the co-op gets more maintenance a month – plus the one-time hit of $30,000 for the reserves.”

And how do you deal with the political problem? “By saying, ‘If it’s not this, it’s an assessment,’” notes Weinstein. “In these times, the need for funds is generally well-known.”

Assessments-R-Us

The co-op board at 347 East 53rd Street in Manhattan went the conventional route of assessing shareholders – but with a twist. Five years ago, the board decided it would kill two birds with a pair of similar stones.

“The reserve fund has never been over $100,000,” says Jim Williams, a commercial banker who has served on the board since moving into the building in 1993 and is now its president. “In 2005, we put in an assessment of two dollars per share for five years so we could build up the reserve fund. We had $80,000, but we wanted to have $250,000.” (The 42-unit co-op has a total of 25,000 shares and annual income from maintenance of about $500,000.)

But the board didn’t stop there. A previous board had refinanced the underlying mortgage in 2000, taking out a 10-year, $1.3 million mortgage with a 20-year amortization. In 2005, when it put in the $2 assessment to buttress the reserve fund, the board also levied a $35 per-share assessment for five years. The goal was to be able to pay off the mortgage when it comes due in March of this year.

“The other thing we did,” Williams adds, “was we said that if you sold your apartment [before March of 2010] you had to pay both assessments when you sold. The buyer would not face any assessments.”

Predictably, all the shareholders in the post-World War II building were not thrilled. Williams responded to the board’s critics with a banker’s logic. “I’ve been threatened and told we can’t do this,” he says. “My response is that the corporation is doing it, and they have the right to do it. We only have one employee, so our major expense is our mortgage. We’re paying $125,000 in interest, principal and debt service per year. Since the early 1990s, the value of our apartments has gone from roughly the low hundred-thousands to the mid-five-hundred thousands. So, it makes sense for the individual shareholders to take the corporation’s mortgage onto our balance sheets. It’s a smarter alternative if everybody can do it. The fact that the value of apartments more than tripled made this possible.”

Regardless of how shareholders feel about the assessment to retire the mortgage, there has been little argument that the assessment to build up the reserve fund was prescient. The assessment boosted the reserve fund from $80,000 to $280,000 – and not a moment too soon.

The co-op had to install $100,000 worth of handicapped access. It was also hit with a $50,000 water tower replacement. Thanks to the healthy reserve fund, maintenance did not have to be increased to pay for these unpleasant surprises. Williams expects maintenance to go down by 10 percent once the mortgage is paid off.

“We would have had to borrow money if we hadn’t built up the reserve fund,” he says. “You want to have at least six months’ worth of revenue in reserve. What made it possible for us to fix our reserve fund was the rising value of apartments from 1993 to today. That, plus capturing the value that was walking out the door whenever an apartment was sold.”

Williams disagrees with people who claim that keeping 10 percent of the building’s annual budget in reserve is overkill. “I think 10 percent would be a rock-bottom bare minimum,” he says. “Today, if something goes wrong, we fix it. This building’s like a ship: impeccable. In order to do that, you need cash.”

Camera-Ready

Some boards have earned money by letting film and video crews shoot interiors and the exterior of the building (and residents can profit personally by allowing crews into their apartments). Although this is a catch-as-catch-can method, Richard Hobbs, a location scout who works throughout the tri-state area (his website is nyc.locationscout.us), says boards can generate a healthy income by allowing extended shooting on a major movie project.

But Hobbs, like several other location scouts, hesitates to provide specific dollar figures, stressing that the money will depend on the building and the movie’s budget. “The eternal question is: what to charge?” he says. “The right fee to charge is what feels right for the building and what the production company can afford.”

If a production company approaches your building looking for a location, Hobbs advises boards to visit the company’s website to get a feel for the kinds of projects they’ve done. Variety and Shoot, two trade magazines, sometimes have production information, and it’s wise to call the New York City Office of Film & Television, to find out if they have more information.

Another website, locationsindex.com, enables boards to list their properties so that production companies from around the world can see what the building has to offer.

While the income from TV and movie shoots can be enticing, Hobbs advises caution because the process of having a film crew tromping through your building for weeks may be lucrative but can also be intrusive.

“Boards need to consider the impact on residents,” he says. “They need to make sure their neighbors have the right temperament.”

Excellent advice, according to Cornelia O’Connor, president of the co-op board at 404 Riverside Drive, an elegant, century-old building with park and river views where a number of movies have been shot, including the Tom Hanks vehicle, You’ve Got Mail.

“Some people may complain, but it brings in a lot of money,” says O’Connor, who has served on the board of the 47-unit co-op for the past five years. “You need to be aware if people in an adjoining apartment are at home a lot. You have to keep it quiet.”

The board drew up a film policy laying out fees it charges for exterior, lobby, and hallway shots. Some of the money is paid to the doorman and super, who are present during filming and make sure the crew cleans up after itself. A contract specifies that the crew is responsible for any damage to the building.

“The money makes a difference,” O’Connor says. “If you live in an older building, you constantly have to work on the wiring and plumbing. And you don’t want to keep assessing your shareholders all the time.” According to the building’s longtime superintendent, Nick Orozco, the cooperative charges $6,500 per day for filming, $3,000 per day for set-up time, and $2,000 per day for clean-up after the shoot. The co-op averages about five shoots a year, says Orozco.

While the board at 404 Riverside Drive has made money by putting the building in front of the cameras, one board made money by putting its buildings under the cameras. “During the New York City Marathon,” recalls attorney Steve Wagner, partner at Wagner Davis, “a Brooklyn co-op I used to represent rented the roof to camera crews so they could shoot long-distance shots of the runners as they went by. And they made nice money.”

Reserve Funding Other Strategies

Here are just a few of the hidden assets that boards have turned into revenue that fattened their reserve accounts:

• Basements Underground space has been converted into revenue-generating laundry and storage rooms. Some boards have renovated unused subterranean space and rented it out to commercial tenants.

• Roofs Rooftops have been turned into terraces, with shares allocated for their use. Others have been rented to companies that install cell phone towers.

• Escheated funds When boards change management companies, minor bank accounts sometimes get forgotten. If not claimed within five years, the money in such accounts is taken by the state and kept in a trust indefinitely. It’s possible for a board to recoup this money, known as “escheated” funds.

• Sidewalk bridges The plywood facing above sidewalk bridges can be rented to companies that place advertising posters there. Some buildings have been known to erect sidewalk bridges even when there was no construction project scheduled – simply to generate quick income.

• Parking The co-op board at the 88-unit Briarcliff in the Riverdale section of the Bronx realized that it owns a chunk of undeveloped land that could be turned into additional parking spaces – and a source of income for the co-op. The board approached the local community board with a proposal, and is now refining it while trying to win the support of neighboring buildings.

“We brought in an engineer and an architect to figure out how many outdoor parking spaces we could add to our garage,” says board president Lee Moskof, a real estate broker. “We’ve been talking about this for years. It was a collective idea, without any one genius. There are only a handful of ways a board can raise money. Your options are very limited, so our board was all for this.”

• Unused space A 127-unit co-op in Lawrence, Long Island, turned an unused recreation room into a small gold mine.

“It was a ground-floor rec room that was getting used twice a year – for the annual meeting and the town hall meeting, maybe once in a blue moon for a birthday party,” says Steve Greenbaum, director of property management for Mark Greenberg Real Estate. “I brought it to the board’s attention that it was a great space that was going to waste.”

The board renovated the space and turned it into a three-bedroom, two-bath apartment. They set enough space aside so they would still have a place to hold board meetings.

“It was great for two reasons,” Greenbaum says. “We ended up selling the apartment for $600,000 and putting a substantial sum in the reserve fund. And now we get $1,200 in maintenance every month.”