THE ART OF THE ASSESSMENT: RAISING FUNDS WITHOUT RAISING TEMPERS

Assessments are not a new idea to raise money, but figuring out how to implement them and how they should be structured can be challenging. Some residents can afford a one-time hit, while others will find that an unexpected assessment can cripple them financially. The goal for any board when imposing assessments should be to create one that is fair, transparent, and manageable for residents while meeting the building's financial needs.

First Steps

The first step in thinking about creating an assessment is to check your governing documents. "There are very few restrictions in a co-op," says Michael Wolfe, president of Wolfe Realty Services, but condos usually have restrictions on how much they can assess.   "They may have to get a percentage of ownership to even approve the assessment," he said. "There are condos where anything more than $50,000 requires approval of the unit owners."

"Each board should know the financial wherewithal of their residents," says Michael A. Esposito, a CPA and shareholder with WilkinGuttenplan. "In one building, the residents may be able to pay a huge assessment in one lump sum, but in other buildings, there might be a mix of residents – some very wealthy, some middle-income or middle-upper class, and even some fixed-income owners. This becomes a challenge. Each building needs to modify the assessment based on their residents."

Esposito explains that most of the time a co-op assesses the residents based on a per-share basis, while a condo assesses based on the common area percentage. "For example, if you and I were condo owners and my common area percentage was 40% and yours was 60%, you would pay 60% of the assessment," he says.

Too many assessments aren't beneficial for the building either. "One thing that's always a turn-off to a prospective buyer is frequent assessments over a short period of time," said Wolfe. "It usually gives rise to bad luck, bad conditions, bad planning, things like that. At the end of the day, as these pre-war buildings age, they aren't perfect and things will need to be fixed."

Planning an Assessment

Avi Zanjirian, a partner at the accounting firm Czarnowski & Beer, says that there are two paths to consider when thinking about an assessment, "Are you dealing with an emergency or is it something you can plan?"

For example, your building facade passed inspection on Local 11, but the building is going to need significant work by the next cycle to the tune of $1 million. "Know how much money is in the reserve account and figure out if you need to borrow," he says. "To hit everybody with an assessment for a million dollars to be collected in six months can wipe people out. Instead, plan to collect to get to a million in five years by assessing monthly. When you have time to figure things out, barring any emergencies, you'll be able to plot that out in a methodical way."

"Some buildings have an ongoing assessment of $100,000 every year to keep the reserve fund going," says Zanjirian. "They may stop it at some point; they may not. They might increase it. $100,000 a year on a bigger building might not be enough money to cover a big $2 million facade project."

Having a capital budget in place for big-ticket items like a new roof or a furnace overhaul is crucial. "It doesn't have to be a full-scale budget with an engineer and a full reserve study for 30 years, but maybe a five-year plan where you talk to management, the board, resident manager or super, and then the companies that maintain your boiler or elevator," says Esposito. "Update that every year so you're not scrambling around for money or surprising your shareholders. Then they are well aware of the work that needs to be done.

Types of Assessments

Straight Assessment The simplest of structures, Wolfe says, "It is what it is. "We divide the assessment based on the amount of shares you have," he says. "The residents pay it off every year."

"Assessments are used to pay for emergency repairs," says Zanjirian. "For example, one building built a reserve but it was a perfect storm and everything broke. They took care of the emergency with the reserve fund but didn't have enough money to improve the facade or upgrade the boiler. So they had to assess their residents for $250,000."

Line of Credit Most co-ops have a line of credit they can also draw on to fund the work. "The assessment could then be used to pay off the line of credit, including interest, over a period of time," says Esposito. "A condo can also get a loan, usually a construction loan, where there will be a draw period for a year or two. At the end of the draw period, whatever they've drawn turns into a term loan for five, 10, or 15 years depending on the documents. An assessment is then implemented against the unit owners to pay down that debt."

Underlying Mortgage "It's inevitable that there's going to be some additional financing required," said Wolfe. "A board has an option of taking a much larger mortgage. For example, one building takes out a $5 million mortgage. Their existing mortgage was $2 million. They put $3 million in the reserve fund and that's it. Another building takes a $7 million mortgage and pays off the old $2 million and now has $5 million in reserve, but they're paying debt service."

Carrying debt is a balancing act. "If I had a large mortgage with a low interest rate and I'm concerned with what's going to happen when I refinance, I would create a recurring assessment to reduce the amount of debt I have on a building in the event that interest rates don't go down. If interest rates don't go down, then I have a bucket of cash to still reduce the debt or take a line of credit or do something else with it."

Sinking Fund A sinking fund is a strategic way to save money by setting aside a little bit of money each month. "Not every job is going to be funded by what's in the reserve fund," says Wolfe. "Boards have options, which would be to have a sinking fund aspect of their operating budget that places money into reserve for future capital improvements or emergency repairs. They realize it will probably never fund them in their entirety, but it could reduce the frequency and amount of assessments."

Payment Plans Many residents may not be able to pay the assessment in one lump sum and you can offer a payment plan. How they are structured depends on the work that needs to be done. "If they are planning for a repair or improvement to be done in a few years, they can collect the money over time," says Esposito. "If the work is about to begin in the near future, they may need to implement, say, a three-year assessment. They can offer discounts – for example 5%, to the residents who pay in full within the first month or by the inception of the assessment. The discount gives some a financial incentive to pay in full."

If you are offering a payment plan, consider adding a finance charge of a few percentage points. It will be up to your management company or building treasurer in self-managed buildings to keep track of this. You’ll also need to be clear on what happens if an apartment is sold during the payment period and who will be responsible for any remainder that hasn’t been collected.

Jessica Wright, a former New York City property manager and current owner of Buy My Home Chattanooga, led multiple assessments for the buildings she managed. One project was a $2.1 million facade renovation for a 100-unit upper west side co-op. "We engaged an engineer to record leaks, cracks, and safety hazards without sugarcoating it," said Wright. "Tenants were shown the raw data: 15 flats had water damage, and 60% of the bricks were affected. Trust was established via transparency."

The expenses were divided into stages. Emergency repairs were made within the first year and cosmetic improvements in year two. "We held "Fix It Fridays," quick town halls with coffee and blueprints, to promote the evaluation," she explains. "To generate buy-in, owners voted on design decisions, such as brick color." While residents weren’t ecstatic over the situation, at least they were informed. And one offered a comment that probably many thought:  "At least my grandkids won't sue me over falling masonry."

Communication Strategies

Asking anyone for money of any amount is often difficult and selling an assessment to residents is no exception. It's not always easy to convince the residents to pay large sums of money for repairs and upgrades. 

"If it's stopping leaks or it's an amenity that people use, I think it's an easier sell," said Wolfe. "If we're caulking windows but they don't have a leak in their apartment, it's a bit harder. When it's done in concert with something that shows value to them, it's easier."

Esposito says that the toughest sell is building up a reserve fund. "If I was going to sell in two years, the owners would think, 'Why would I want to put money in a reserve fund?" he says. "They aren't going to derive a benefit when the work eventually gets done, because they will be out of the building."

The other tough sell is the type of work being done. "It's the difference between necessary work – like needing a boiler or roof or needing work under Local 11, as opposed to doing a lobby, hallway, or a new gym."

Getting buy-in is a strategy that can help, and the first step to accomplishing this is to survey residents and ask for feedback. Conducting a survey can help you sell the assessment to the residents. "Where you get the biggest pushback is in, for example, a pre-war building where the hallways look okay, but they are a little dated, and now there's a monster assessment because we're putting in special lighting,” says Wolfe. “ We would change the ceilings, floors, and wallpaper, and a lot of residents would applaud. But there will be a group that says they don't look so bad. You send out a survey and if 65% of the building votes in favor of proceeding, it's a safer way to go."

When it comes to presenting assessments, Wright says to present them as rewards rather than punishments. "The estimated savings for a recent energy renovation were $200 per unit per year," she explains. "When we linked upgrades to resale value, I observed that skeptics turned into supporters. Unexpected benefits, such as free storage while the building was underway, also helped." Bottom line, she says: "Provide schedules, contingency contractors, and worst-case situations out of advance," she says. "Tenants value directness."

What Not to Do

The last thing the residents want is a letter demanding money. "Sending out a letter that says here are your monthly charges or here are your options, is a bad way to go when you know your assessment is going to be received poorly," says Wolfe. "So getting in front of it, with the board, the property manager, and sharing information with the residents or the people that you represent is super important."

How the residents handle that assessment will depend on the culture of that building. "Some buildings only assess to keep maintenance and common charges lower," says Wolfe. "If you moved in yesterday and a month from now there's an assessment, it can be painful. However, if you lived in the building for 20 years you are used to it. People are certainly not happy with assessments, but they are happy that their buildings are being maintained."