Cost-Conscious

Can boards and managers be too cost-conscious? This inquiry came to mind when Habitat received an e-mail from board member Regina Warren, who was questioning a financial arrangement her building had with an attorney. Was it an expense the board needed to incur? Specifically, were the fees paid to tax certiorari lawyers who annually challenge a building’s tax assessment a necessary expense? And were they fair?

“Our [tax cert] lawyer charges 15 percent of the tax savings the reduced assessment provided,” she explained. “The only problem is that when the city increases a building’s assessment by a huge amount, it is limited by how much it can increase it per year – so the city phases in the increase over the years. However, when the lawyer gets the assessment increase reduced, the lawyers seem to charge the client for the five-year reduction at once. Then, the next year the city starts over and raises the assessment again. It seems this is a crazy process that enables the lawyers to reap the most benefit.

“For example, if a building’s assessment was raised $500,000, that’s about an extra $65,500 in taxes. However, the city only phases that $65,500 extra in over five years; that is about $13,000 per year. Now, if the lawyer gets the $500,000 taken away, the lawyer charges the total savings, which comes close to $10,000 (15 percent of the $65,500). The net benefit to the building is small. Then the next year the city raises it $500,000 again, and it all starts over. That’s what happens to us.”

Cert attorney Eric Weiss, a partner at Tuchman, Korngold, Weiss, Lippman & Gelles, has heard all that before. “New York City operates under a transitional tax system,” he noted. “All real property is reassessed annually. There are two assessed valuations. The actual assessed valuation made public on January 15 of each year is the assessor’s determination of the proper value. The transitional (taxable) assessed valuation is derived from the actual assessed valuation. Under this system, any increase in the actual assessment is phased in over a five-year period in equal annual installments. The phase-in each year is called the transitional or taxable assessed valuation.

“The benefit from a settlement usually consists of a cash refund as well as a future savings in taxes,” he added. “The refund portion may be much smaller than the future savings. The size of the refund depends upon the history of the assessments on the particular parcel. The refund arises from overpayment of the taxes for the first year of the track where the taxes were paid on the original transitional assessment. After the settlement, the remaining payments in the track are made on the reduced transitionals, giving rise to the savings.”

Weiss argued that the fee is fair in that the tax challenge saves money in the long run, and that the board members who complain tend to forget about how high their taxes would be without the successful challenge. It’s costly, he concluded, but boards should look at it in perspective and try not to pinch pennies unreasonably.

Still, Warren is correct to raise questions about costs, because board members who do not question the bills are doing their property a disservice. This is a point that came up when I talked to longtime management executive Ellen Kornfeld, vice president at The Lovett Group.

“You have to question every bill you receive,” she said. “Some managers and board members are lazy; they get the invoices from contractors and just sign off on them without checking. You have to make them fill out P.O.s [purchase orders], so it is clear what the service is, when it was done, and who okayed it. Small vendors may do it cheaply and do great repairs, but they don’t do great bookkeeping. You should check everything.”

She recalled one building where a representative of a fire-extinguisher company showed up, telling the board that the law required them to get new fire extinguishers at $32 each. The going price, however, was researched by Kornfeld. “It was $10 for each extinguisher,” she noted wryly. “I told the board, ‘If you don’t know the price of things, don’t sign off on bills.’ You have to be careful.”