Co-Op and Condo Boards Use Assessments to Fund Capital Improvements

It’s something that boards, shareholders and unit-owners all dread: assessments. While careful budgeting can help minimize the need for them, the city’s ever-increasing requirements often cost huge sums and send many boards back to the assessment table. Whether it’s a relatively small add-on to monthly fees, or large amounts needed in short order, assessment planning is key.

Here’s a four-part primer on what you need to know.

Assessment Rights

Whenever boards ask for more funding, there is a risk that shareholders or unit-owners will disagree with a project’s necessity and attempt to block the project or assessment. Generally, however, a co-op’s bylaws or a condo’s declaration empowers boards to impose an assessment for a particular purpose, which can be done with a board resolution. As long as an assessment is reasonable, boards are protected by the business judgment rule in the event that a shareholder or unit-owner takes them to court. 

While assessments are a handy financial tool, they tend to be more frequent in condominiums because of loan restrictions. “There are typically limits on the amount condo boards can borrow without majority or supermajority unit-owner consent,” explains Dennis DePaola, the chief legal officer at the management firm Orsid New York. “That gives them one less arrow in their quiver to fund capital needs without an assessment.”

Assessment Duration

The life cycle of an assessment begins with a board creating a budget for a capital improvement, and then a timeline for financing and project completion. If a project is expected to take a year, the assessment may be in place over that same time period. 

Determining the total amount of the assessment depends on the cost of the project and whether it can be partially funded by your reserves or a loan. The amount is then divided among shareholders or unit-owners based on the number of shares for each apartment or its percentage of common interest. For example, if a 125-unit co-op that has a total of 50,000 shares imposes a $1 million assessment, the amount assessed to each share would be $20 ($1 million divided by 50,000). A person who owns 1,000 shares would be assessed $20,000, determined by multiplying 1,000 by $20. If the assessment were for two years, the shareholder would owe about $833 per month ($20,000 divided by 24).

Assessments are typically paid in equal installments during the period of the loan. As for how long the assessment will last, it depends in part on how soon the money is needed and the financial strength of the building’s population. “We’re seeing a lot of boards extend the length of their assessments from one or two years to three or even five years,” DePaola says. “By spreading it out, the monthly amount is much lower, enabling people who would otherwise not be able to make the payments.” 

But even when assessments are a heavy burden on residents, boards sometimes have to make the tough call. That was the case at Blossom Gardens, a 186-unit co-op at 134-30 Franklin Ave. in Flushing, Queens, that was hit with a punishing insurance premium increase after a four-alarm fire that damaged 20 apartments. “The insurance covered our $3.4 million claim, but the premium went up from $130,000 to $750,000, so the board imposed a one-year $800,000 assessment to cover that,” says Vik Shingwani, a property manager at First Management Corp. who oversees the building. “This is obviously not a wealthy building, and the board knew it would be hard on shareholders. In fact, a few people have had to sell their apartments. It’s heartbreaking.”

Butterfield House, a high-end 103-unit co-op at 37 W. 12th St. in Greenwich Village, didn’t have the problem of cash-strapped shareholders, but it still decided to spread its $1.3 million assessment over three years after it was hit with high costs for upgrading its AC system by making a partial switch to electrification to comply with LL97. “We originally thought the project would be $1 million, but it went up because we don’t have the electrical capacity, and increasing it is approximately 50% of the total cost,” says Matthew Liss, the board president. 

While the current equipment still has several years of useful life, the board thought it prudent to tackle the upgrade now and avoid higher costs later — and reap the benefits of energy efficiency sooner. “We have been diligently putting aside money and could pay for everything with our reserves, but we don’t want to deplete them in case of emergency,” Liss says. “And this isn’t the environment to refinance, because of interest rates. So we’re using a combination of a longer assessment and the 2% transfer fees we collect from apartment sales.”

To Discount or Not

As for payment structure, boards can choose to offer a discount to people who pay their entire assessment upfront in a lump sum or in larger periodic installments, which can be an effective strategy if money is needed immediately and there are people with deep pockets. A 66-unit co-op in the West Village that needs to raise more than $7 million in cash for urgent facade repairs is taking that approach. The building, which recently started a 12-month $8 million assessment — an average of about $100,000 per apartment — is offering a 6% discount to shareholders who pay their entire sum upfront. “We’ve already spent $800,000 out of our reserves and can’t afford any more,” a board member explains. “We have people with combined apartments who can pay upfront, and we’re going to need that cash earlier rather than later.”

A co-op at 227 E. 57th St. in Manhattan’s Midtown East neighborhood decided not to offer a discount because it wasn’t facing a money crunch for its latest capital project. After a LL152 gas inspection at the 21-story, 110-unit building revealed leaks in the main gas branch line and three risers, the board imposed a two-year $800,000 assessment to cover the repairs. “We didn’t have to put $800,000 upfront because we were able to work with our vendor and pay for portions of the job as each stage was completed,” says Alex Moir, the board president. “We did discuss a discount for upfront payments, but nobody could agree on what was a fair discount amount. It was just easier to have everyone pay the same way.”  

Complications

Indeed, offering discounts for early payments can lead to complications, especially when capital projects are being financed with both a loan and an assessment. While loans can bring down costs for shareholders and unit-owners, the loan interest is factored into the assessment, and calculating the reduced interest for those who pay ahead of schedule can get tricky. “If someone pays half of a $20,000 one-year assessment early and the remaining $10,000 in monthly installments, the board would have to deduct the loan percentage for first half $10,000 but include it for the second half,” says Mohammed Salyani, a principal at the accounting firm WilkinGuttenplan. “You have to do the math and keep track of who’s doing what. That can be an accounting nightmare.”

Apartment sales can pose another challenge for boards. The assessment language should be clear about whether the seller’s balance on the assessment is due immediately upon sale or if there’s an option for an agreement between seller and purchaser in which the purchaser assumes the balance and pays it in monthly installments going forward. “If it’s the former, the full remaining assessment amount would be collected upon the transfer of the stock or unit,” DiPaolo explains. “If the latter, it should be referenced in the minutes that the assessment is payable by the purchaser and in the transfer documents between the purchaser and seller.”

Even with safeguards in place, boards can get caught short when a shareholder or unit-owner dies and the estate stops paying the monthly assessments, which are still collectible, just like maintenance or common charges. One 37-unit prewar co-op on the Upper West Side ran into that problem in 2022 after a shareholder died while the building was in the middle of a three-year assessment. “We had put a $1.5 million assessment in place for 36 months to pay for facade repairs and replacing our freight elevator, but haven’t received maintenance or assessment payments from the estate for two years,” the board president explains. “We’re now missing $100,000, which is a huge chunk of money.” The apartment, which has been vacant, is finally being prepared to go on the market. “Fortunately, there’s no mortgage, so under our proprietary lease, we have a de facto lien on all unpaid charges,” the board president adds. “So we are first in line when the sale closes. We will recoup everything.”