Condo Boards Are Being Shortchanged by Commercial Unit Owners

Commercial units in condos often account for a significant source of income for the corporation. Typically, the amount a commercial unit pays is based on its percentage ownership in the building, but it turns out that boards are often getting shortchanged. Greg Poverelli, the senior property manager at Harlem Property Management, explains how that happens — and what condos can do to prevent it. For condos that have commercial units, rent can be a significant source of revenue for the building’s operating budget. 

An unfair bargain. Every condominium has an offering plan, which is a sales disclosure document that the sponsor uses to give pertinent, necessary information to interested parties when it is first selling units in the association. And within that offering plan are a declaration and bylaws. The plan is filed with the state; the declaration, which is filed within the county, is noted on purchase deeds and is the governing document that managing agents and boards should use to run the condo. However, “you sometimes find discrepancies between what was in the offering plan and what was actually in the declaration,” Poverelli says. “The declaration might have a Schedule A specifying that commercial units pay rent based on their percentage ownership. But the offering plan has a Schedule B that gives them a reduced cost based on provisions that might not be in the declaration.”

For example, commercial unit-owners might have language within the offering plan that says they need to pay toward repairs, maintenance items and utilities for only their units and not residential ones. “Perhaps they’re not responsible for the full cost of the building staff payroll, security expenses or elevator repairs,” Poverelli says. “The logic is that the commercial units do not interact with all of the residential common elements.”

The cut-rate deal is no coincidence, since sponsors or developers often end up owning the commercial units for an extended period of time. “That’s why the offering plan is beneficial to them,” he says. 

The letter of the law. But when it comes down to what’s binding and what’s legal, the declaration is what should be followed. And if there is no mention of such reduced operational expenses for commercial units in the actual declaration, they should be charged by their common interest in the association. For example, if the condo’s budget is $500,000 per year and a commercial unit has a 20% interest in the association, it should be paying 20% of the total common charges, or $100,000, not a reduced amount.

To avoid getting shortchanged, condo boards should always make sure they have the declaration that’s on ACRIS, the Automated City Register Information System, which provides online access to property records in New York City. “Whenever we’re onboarding new clients, one of the first things we check is that commercial units are being billed properly,” Poverelli says. “And managing agents need to confirm that the declaration and bylaws, not the offering plan, are being followed to govern the building.” Condominiums are legally allowed to have different expenses borne by each residential and commercial unit, he adds, but that must be cited in the declaration. And when it isn’t, condos need to correct the problem.

That can be done by amending the declaration, usually by a supermajority vote of unit-owners at a meeting called for that purpose, which can be difficult. Getting a quorum and the votes required can be time-consuming and challenging, and at some condos there are provisions that the sponsor needs to agree with the change. But it’s well worth the effort. “We’re sometimes talking about significant money here,” Poverelli says. “At the end of the day, it’s incumbent upon boards to run their buildings properly and fairly. There’s a reason the city has these documents as public records — and boards need to use them.”