Maintenance Catch-22

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It is a point of pride with many co-op board members in New York City. “We haven’t had a maintenance increase in my 16 years on the board,” says Stu Hochron, board president of the 40-unit Bond Parc Condominium in Great Neck. “This is the first year we’ve done a maintenance increase in five years,” boasts Robert DiMartini, vice president at the 404-unit Kimberly Gardens in Yonkers. “We have not raised maintenance in several years; we make every effort not to,” notes Marleen Levi, president at the 75-unit 2260 Benson Avenue co-op in Brooklyn.

Yet is this pride misplaced? Like the Republican Party’s rigid “no new taxes” pledge, is the resistance to raising maintenance an albatross that boards are placing around their necks regardless of the consequences?

Consider the sad saga of a 56-unit Queens condominium. Although the property’s longtime (and now former) manager recalls that “everything was going fine,” the secretary of the board argues that the finances were out of control. “I was overseas for two years,” he says. “When I came back in 2007, we owed $75,000 to $80,000 on our water bill. The manager didn’t pay the elevator contract. We had a special assessment for a year in 2009 that was supposed to go toward the water bill, but it didn’t.”

The vice president suspected hanky-panky. The former manager says it was actually a matter of juggling bills. He says that the building’s maintenance was insufficient to cover all the costs and that when he relayed that information to the president he was told to take care of it. That meant some bills weren’t paid.

“We see that happen in buildings we interview for or have taken over,” notes Fred Rudd, president of Rudd Realty. “Juggling funds is not a good way to run a building. You must have a balanced budget.” Rudd adds that many buildings balance the budget by raiding the reserves. “Because of that, when it comes to a rainy day, they don’t have adequate funds to deal with the problems as they arise.”

“That’s not the right way to manage,” adds David Goodman, a senior management executive at Tudor Realty. “These buildings are delusional if they don’t have a balanced budget. Because the problem does not go away.”

Maintenance Tricks

“A balanced budget” is the key phrase all boards must embrace when putting their fiscal house in order. “You should always have a balanced budget,” notes Goodman, “and if that means setting up extra storage lockers, charging for bike storage, or increasing maintenance, you have to do it.”

Using accounting tricks to keep things in check – as some boards do – is dangerous. “We’ve come across buildings that don’t have adequate funds, and we shy away from them,” Rudd notes. “We don’t use tricks to balance the budget.” The list of maintenance sleight-of-hand gimmicks includes:

• Borrowing from the reserve fund to make up a budget deficit. “Some people are so stupid that they paint themselves into a corner,” says one management executive, “and then they need to raise cash to pay their bills. They end up assessing for that, and that’s bad.”

• Passing regular assessments to cover costs. “Maintenance is for operations,” says Goodman. “Assessments are for special projects, for capital projects. If you have a problem with the roof and you don’t have the money for it, institute an assessment to raise the money to do that project. But don’t use assessments to cover maintenance.”

That advice is often not followed. At Marleen Levi’s Brooklyn co-op, the property inherited a number of sponsor units currently inhabited by rent-stabilized tenants. When those become vacant the board sells them, and uses the income for reserves and long-term capital planning. But this is an iffy proposition. When sales are flat -– as they were in 2010 – the board has passed special assessments. “Two years ago, we did a 10-month assessment that helped us stem a shortfall,” reports Levi.

• Counting on flip tax income to eliminate deficits. At Bay Terrace Cooperative Section 1, a 200-unit Queens cooperative, the board counts on its unusually high transfer fee to keep costs in line. “We’re in a somewhat fortunate situation because we have a 40 percent flip tax,” says Warren Schreiber, the president. But he admits that the flip tax is unreliable: “If we find that a deficit is building up [because there is no flip income], or we are going into our reserves too often, then we’ll discuss raising the maintenance.”

• Imposing a “temporary” fuel surcharge. Rudd, the management executive, says that a temporary fuel surcharge is “another fake way not to raise maintenance. Once you put that surcharge down, it never goes away.”

Maintenance Treats

There are things you can do that legitimately make up deficits. These include:

• Using income from regular fees collected for storage rooms, cell phone towers, sublets, and other items. “We capture the real estate rebate in April, we have laundry income, and we have some fees, relatively minor, for the bike room, storage room, and a gym. We have some rental income from an office,” reports Don Asch, president of a 375-unit cond-op in Manhattan.

• Find alternate sources of income. Many buildings are proactive in hunting additional revenue sources. “About 10 years ago, I solicited wireless communications companies, and we now have four different providers using our roof,” recalls Hochron, the Great Neck president. “That brings in close to $200,000 in additional revenue. Two years ago, when the economy went into the toilet, I told our regular contractors – the elevator company, the HVAC company – that if they didn’t lower prices, we would put the work out to bid. Everybody came through. There were significant reductions in our annual contracts.”

“We look at everything aggressively: can we get a better price? More bids?” says George Doerre, president of the 315-unit Troy Towers cooperative in Union City, New Jersey. “Our treasurer has been locking in energy prices. We’re searching for innovations. We have a cellular antenna on the roof. We have some commercial tenants.”

At Bryn Mawr Ridge, a 528-unit co-op in Yonkers, the board has parlayed 68 rent-regulated units into a cash cow. They inherited the apartments 15 years ago from a defaulting sponsor. When a unit becomes vacant, the co-op fixes it up and – depending on the state of the market – either sells it or rents it. In a soft sales market, the units have brought in hefty rental fees, reports president Michael Barbara. The money has gone into maintenance and such capital projects as sidewalk repair and window and roof replacement.

Maintenance Myths

There is a widespread feeling among boards that raising maintenance is a bad thing and somehow shows fiscal irresponsibility. Some argue that it invariably affects sales. “The market punishes boards that raise maintenance, so we have kept it very tight,” notes Jay Confino, president at the 85-unit Wychwood in Great Neck.

Not so, says Siim Hanja, a broker at Brown Harris Stevens. “You’re talking price points,” he says. “I have a listing that has a $10,028 maintenance figure. That by itself should be enough to chase people away, but I’m having regular appointments because the rest of the package is attractive. If, on the other hand, you’re talking about buildings that are predominantly studios and one-bedrooms and it’s an older community where there’s a lot of fixed income, then I’d listen to those people [about keeping maintenance down]. But in hot spots like Chelsea, the Village, and Tribeca, it doesn’t matter. These are the desirable neighborhoods, and the monthly figures matter less.”

Still, not raising maintenance when needed and/or covering it with assessments or other gimmicks is the height of irresponsibility. “It’s bordering on fraudulent,” says Hanja. Adds Goodman: “Sooner or later, it hits the fan, and then you have an increase of 25 percent. You can’t get away from it. These are the facts of life.”

Experts add that before boards raise maintenance, they should look at possible spending cuts, especially if there are residents on fixed incomes who will be hard hit by increases. For example, when The Beechhaven, a 120-unit Queens co-op, decides to raise the maintenance, “people know we have explored all avenues,” says Jeannette Reed, the vice president. “It means we have no other choice. We have a mixture of people who are on fixed income, a lot of seniors, working people, and a few who are out of work. Our goal as a board is to be as fiscally responsible as we can be.”

Prudent Increases

Many argue that the best way to deal with maintenance is to treat it like death and taxes: another constant in the world. What that means is having a regular small increase every year – like a cost-of-living adjustment – rather than one big one every five or six years. The residents will then expect it and can plan for it. And the board looks (and is being) fiscally prudent.

“When we have a surplus, we don’t the following year use the surplus to reduce maintenance,” reports David Goldstick, shareholder at a 57-unit Manhattan co-op who signed on as treasurer in 2005 because the co-op had a 14 percent increase, the first rise in maintenance in many years. The co-op’s current approach is to raise it three percent every year. Any excess money goes into the reserves.

Reynold Weidenaar, the treasurer at 20 Jane Street, a 20-unit Manhattan co-op, recalls a similar problem at his building. “There was a lot of pressure against raising maintenance. People would appeal to everyone’s sympathy. They would talk about personal financial hardships. As a result, we had a period of 17 years from 1991 to 2008 when maintenance was raised only 16 percent while the consumer price index went up 58 percent for that same period of time. We were in very difficult times. Finally, we got a new board with a new philosophy to raise maintenance. So now the maintenance covers the operating costs.”

In the end, such common sense is not so common. Yet, as Fred Rudd notes, raising maintenance should not raise Cain. It should be recognized as the prudent thing to do. “It’s a fact of life,” concludes the management executive. “Everything goes up every year. Everything. And that should include your maintenance.”