Reverse It!

It sounds like a problem any co-op or condo board would love to have: your corporation is making too much money. Yet a surplus of cash carries its own issues. When you’re suddenly flush after refinancing the underlying mortgage, say, or refurbishing and selling an apartment that the corporation picked up in foreclosure, then you may find yourself facing concerns over taxes, over your nonprofit status, or over shareholders and unit-owners wondering why their monthly maintenance/common charges are so high if you’re rolling in dough.

One co-op solved its embarrassment-of-riches problem by implementing a concept that appears to have had no name until the board president gave it one: a reverse assessment. “I started thinking about how co-ops use assessments to raise money,” says Michael Barbara, the 21-year veteran board president of Yonkers’ 528-unit Bryn Mawr Ridge Cooperative, “and I figured why not do it the opposite way – a reverse assessment? I didn’t want to just put the word ‘credit’ on the monthly maintenance bill,” since it was vague and could be confused with other credits the co-op might give. “I wanted something unique that would stand out.” (He was informed by his board’s management and attorney that no one was using that phrase.)

How Does It Work?

How does a reverse assessment work? “Normally if you’re in a co-op and they’re going to do a project, the board assesses for an extra charge,” says David Amster, president of the Bryn Mawr’s management firm, Prime Locations. “Here, it’s a credit. For example, let’s say the maintenance fee is $500. You line-item a reverse assessment of minus $50 [on the monthly maintenance invoice], so the shareholder only pays $450.”

So now, when “brokers call and ask, ‘What’s your maintenance?’ I can say here’s what it is and it’s been steady for seven years,” says Barbara, who is funneling to shareholders a monthly 7.5 percent reverse assessment starting in January 2016. “Worst-case scenario, you’re adjusting the reverse assessment and not playing with the maintenance all the time.”

But is it for you? Here are four steps to help you decide if you should do institute a reverse assessment policy and how to implement it.

First Step: Find a Way to Get More Money

First, look at how budget surpluses happen, what they mean, and how to handle them.

CPA Carl Cesarano, a principal at Cesarano & Khan, recalls a co-op that lowered its monthly maintenance “because it refinanced from a much higher-rate mortgage to a lower rate. There was a big difference in [the size of] its mortgage payments, and so they no longer needed [the previous level of maintenance income] to cover the operating expenses.”

CPA Michael Esposito, a partner at the accounting firm Kleiman & Weinshank, says that surpluses can happen because of the natural uncertainties inherent in the budgeting process. Most of your income comes from the monthly maintenance or common charges. Typically, to get the right figure, you make a list of your building’s expenses and a list of ancillary income from laundry rooms, garages, and other amenities. “The difference between those figures should be the amount of maintenance or common charges,” he explains. “If I have $10,000 in expenses and get $2,000 from laundry,” he says, giving hypothetical figures, “then I need $8,000 to cover my shortfall.”

If you rack up fewer expenses or more income, you have a profit. And that usually goes in the reserve fund. “When you budget at the beginning of the year, normally it’s a breakeven budget with something to be applied to reserve,” says Jay Menachem, a CPA in private practice. “This is so shareholders [and unit-owners] don’t bear a disproportionate burden of the future repairs that are needed. It’s your home – it’s not a money-making scenario.”

Second Step: Decide if You Have Too Much Cash

There are potential risks to having too much cash, especially if yours is a limited-equity co-op, such as Penn South in Manhattan and Highland Green on Long Island. Because of their nonprofit status, they’re eligible for private-lender mortgages that are federally insured by the U.S. Department of Housing and Urban Development. Consistently showing an annual profit could affect that. (Nonprofit condominiums, such as the 600 First Avenue Condominium Association in Raritan, N.J., are rare, but showing consistent annual profits can affect the status of those few that are.)

In addition, says Esposito, “If you’re charging more than what your building needs on an annual basis, that could affect its marketability.” Menachem agrees. “High maintenance or high common charges make the units less marketable and have a lower value for resale,” he says.

You can also undertake a study of future capital projects, preparing a multi-year repair and maintenance budget. That can tell you how much money you need every year.

Third Step: How to Deal With Too Much Cash

So what can you do if your corporation has too much cash? At Bryn Mawr Ridge in 2014, the co-op refinanced the underlying mortgage from an almost 7 percent note on $10.5 million to 3.75 percent on $9.5 million. “Our debt ratio went down significantly,” says Barbara. Additionally, favorable results in a tax dispute decreased the co-op’s property tax by 30 percent. To top it off, he says: “We have a huge reserve right now.”

“The last seven years, we were able to freeze the maintenance since we didn’t need cash for any project,” Barbara says. “And we started to generate a profit over the last couple of years, so we’re taking in too much cash. I thought, ‘Why are we holding so much money? It’s not fair to the shareholders.’ I do not want to lower the maintenance per se, so we’re doing a reverse assessment.”

The board had considered lowering maintenance in response, but that could backfire, says Amster. “If you give someone a reduction of, say, seven percent,” he says, “and then two years later you see your fuel costs going up and you increase the maintenance by five percent, people go, ‘Ohmigosh! They raised our maintenance!’ It’s still two percent lower than it was before, but it’s a psychological thing.”

Fourth Step: Consider the Risks

CPA Esposito finds no specific danger in reverse assessments, but says: “It’s just semantics. From a practical business standpoint I understand why they’re doing it. Why reduce maintenance and a year from now your expenses go up and you raise it, when they can say instead we’re just taking away the credit? At the end of the day, it’s just a maintenance abatement.” Which means, he says, that, “in effect, they may be overcharging on maintenance because they may be generating a surplus.”

One possible risk for co-ops – though not for condos – may come from the federal tax code, specifically Title 26, Subtitle A, Chapter 1, Subchapter B, Part VII, Section 216. This provision says shareholders of a cooperative housing corporation cannot “receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corporation.” Reverse assessments such as those at Bryn Mawr Ridge do come out of earnings and profits, so that tax-code section doesn’t appear to apply. Yet a reverse assessment is such a new concept – untested in any court – that boards should ask their tax attorney about the best way to set one up. “It’s all stuff that has to be looked at,” Cesarano says, adding that, practically speaking, “Would the IRS send a task force out there?”

Maybe so, maybe not. In any case, reverse assessments will remain in this co-op’s near future. “We just locked in a fuel rate out to 2018 that’s 30 percent less than we’d been paying,” Barbara says. “We’ll probably generate another $150,000 [in operating capital] on top of what we’re already taking in. So it looks like next year’s reverse assessment will be over 16 percent.” How do his shareholders feel about that? “It went over very well in our newsletter!”