BUDGET SURPLUS

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Tell me what you are suggesting your clients do with surpluses – if they have any, of course.

To give a little history: Fannie Mae and Freddie Mac devised what they called "sales guidelines" that lenders are required to follow. And, under that, condominium budgets were required to allocate at least ten percent of the annual budget to a reserve contribution. Fannie and Freddie could deny mortgages for any association that did not have [10 percent allocated for the reserves] in their annual budget. 

How widespread is the problem?

I don't know if it's affecting New York in great numbers. It applies to condominiums, and will have the most impact on new construction. Still, at least one condominium handled by our firm had a problem selling units because [its] budget didn't "conform." Czarnowski & Beer is making recommendations and we're looking at budgets currently [to see] if there are surpluses. As we approach December 2010, we're asking that they earmark those surpluses and try to transfer those into a designated reserve fund, and of course we can give unit-owners as a step-up in basis as a result of that because essentially it's a capital assessment.

What do you mean a "step-up in basis"?

Well, if the unit-owners are assessed a capital assessment, a step-up in basis actually increases the cost basis in their units. So, let's say someone bought a condo for $500,000, and here they have a capital assessment of $1,000 per unit. Now they've got a tax basis of $501,000 in the unit. So, when they sell their unit, theoretically, they'll have [fewer] taxes due, assuming that the sale of the unit is subject to tax.

Do buildings have surpluses?

Yes. We're just reviewing our policy right now, recommending that any surpluses that anybody has, whether it's a condo or a co-op, towards the tail end of 2010, to really take a look at the budget, determine if in fact they have a genuine surplus. Obviously, with fuel costs down this year and utility costs down from '09 into '10, some of the budgets may have overshot those targets, so what we're finding is that there could be some legitimate surpluses that actually could be reallocated and then earmarked as a capital assessment. Then, the board could make a resolution that, say, the capital assessment is, or the budget surplus is X amount. They can actually resolve or make a resolution in the minutes that they want to reallocate or reclassify some of the December maintenance or common charges in the form of a special assessment.

At least one condominium handled

by our firm had a problem selling units

because its budget didn't 'conform.'

Is this strictly because of what Fannie Mae and Freddie Mac are doing?

No, not really. We're looking at it as prudent financial and fiscal responsibility. Because I think what's happening is now a lot of people are taking a look at the reserve funds and, you know, the AICPA [American Institute of Certified Public Accountants] wanted these common interest realty associations, co-ops, condos, to do a study of future major repairs and replacements. Nobody does that because of costs and other concerns. So, I think now people are just starting to wake up, in light of the current economy, [and] a lot of these co-ops in particular are just going to the banks to fund their improvements and what we're finding is some boards are making an intensive effort to try to see where they can save money and then reallocate the money towards capital accounts and not have to go to the banks to borrow.

So the money stays in-house, pretty much.

That's correct. Yeah, if they have the surpluses, and they have the ability to sweep the money into the reserve account, and then they legitimately spend the money on capital improvements, they have completed the loop and essentially they can get a step-up in basis. It's a win-win situation.

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