New Condo in Brooklyn Faces Financial Crisis After Developer Departs

For prospective buyers, it seemed too good to be true: a new, 60-unit condo in downtown Brooklyn — located right by the Brooklyn Bridge — that had irresistibly low common charges and solid reserves. Unfortunately, when the novice board took control and hired its own management company, they found out that looks can be deceiving.

In A Hole

When the developer turned control over to the board and Anes Radonic, a managing partner at Venture NY Property Management, was brought in to start overseeing the property, he discovered that the condo’s finances were anything but rosy. “During the three month transition, our team did an analysis, auditing all of the financial documents, service contracts and so forth,” he says. The building’s budget was a disaster. “Looking at their income-to-expense ratio, we found that the condo was bringing in about $200,000, but their expenses were twice that.”

How had the condo managed to stay afloat? “It had been able to sustain itself because the developer had left them a cash cushion and they had been operating from that surplus fund,” Radoncic explains. That, in turn, allowed the condo to maintain common charges at such a low rate and attract new buyers before the developer stepped away. It’s not an uncommon scenario, he adds. “That’s because first-time condo owners are typically not experienced in reading an offering plan or financial statement, especially one that comes from a developer, which can be skewed in some way, shape or form to  sell the units.”

Hitting Rock Bottom

By the time Radoncic began managing the building, the reserve cushion was almost completely drawn down, with only two months of operating funds left. He dreaded breaking the news to the board. “When you’re coming in as new management, you never want your first foray with the client to be, ‘Hey, we need a 30% common charge increase,” he says. “They’re going to look at you as the bad guy, even though you’re not.”

An Accurate Forecast

Radoncic was tasked with breaking down the condo’s budget and explaining it, line by line, to the board. “We assessed all of the actual expenses and then projected what they would be not only for the next year, but several years down the road, essentially mapping out a five-year budget plan,” he says. “There’s the mortgage, taxes and insurance, where the increases have been absolutely staggering in the last few years.”

To come up with a realistic forecast, it was essential to tweak the numbers. “When it comes to budgets, you always want to lightly pad every line item,” he says. If a building’s insurance is $30,000 a year, he advises putting it down as say, $31,000. And that doesn’t take into account things like unexpected repairs and capital projects, which can make or break a budget. “You have be mentally prepared for that,” Radoncic advises. “That’s why you always want to allocate 10% of your income to the reserves so you can build them naturally without having to assess.”

A Hard Choice

In the worst-case scenario, that isn’t always possible. The Brooklyn condo was in such dire straits that it had three options: a massive increase in the common charges, an assessment or a loan. The board decided to impose an 80% common charge hike as well as a $50,000 assessment that was spread over 12 months. Not surprisingly, unit-owners were up in arms. “They calmed down once we explained the big picture,” Radoncic recalls.“I told them, ‘Look, I’m pretty sure 99% of the reason you bought into the condo is because it’s a new building with great amenities and had such attractive monthly charges,” he says. “But the reality was that they were paying about 100% to 200% less than comparable buildings in the neighborhood. That’s a real red flag.”

People have since calmed down, as has the condo’s finances. “It’s been a few years, and now we’re doing annual common charge increases of about 3% to 4%,” says Radoncic, who has become a veteran dealing with boards in similar situations. “About 10% to 20% of the new clients we bring on have either a developer-related issue or have been mismanaged by their previous company. But there’s no wiggle room when it comes to having a working budget. Boards need to have realistic expectations — and take their medicine.”