Co-op Budget Shortfalls Will Lead to a Day of Reckoning

Habitat spoke recently with Leslie Winkler, president of Halstead Management.

The original co-op conversions created a whole new class of real-estate investor.  Now, 40 years later, they’re on fixed incomes, and the cost of maintaining their co-ops has gone way up. Does that create a challenge for boards? 

Yes. There's the day-to-day expenses of the staff running your building, plus normal repair and maintenance. Then you add in the extraordinary expenses which come up every 20 or 30 years. Some of these owners who bought in the ’80s and ’90s are going into their second cycle of expensive capital improvements, which the converting sponsor may have paid for the first time around. And it’s quite a shock.

Is that why some boards opt to side with their community and not take the plunge?

Some are trying to appeal to their entire constituency. When the demographics of their building include a variety of people with different incomes, boards are often more concerned about those shareholders or unit-owners who do not have the wealth to be able to fund major projects. 

Won’t ignoring the building’s needs have huge consequences?

Some boards only increase common charges to fund a pay-as-you-go approach, with respect to the needs of the building. In the short run, you may be able to do this because you can take money from reserve to fund those projects, or hope that your expenses for the year are not as great as you had anticipated. But in the long term you can't keep doing that because if you run shortfalls year after year, there will be a day of reckoning. Capital-improvement projects, such as elevator modernization, hallway renovations, and air-conditioning repairs, are expensive. And they’re only going to become more so.

Does that make funding a challenge? 

You can only refinance your mortgage X number of times, and at some point you become so debt-heavy that it becomes an added burden. Real-estate taxes for New York City are not going down anytime soon. In fact, exponentially, they're probably going up a lot more now than they had. And there are fixed costs in terms of running a building that eat up 90 percent of your budget, which you have no control over. So the prudent board should try to convince residents that having shortfalls year after year is not in anyone’s best interest.

It’s just like owning your own home. 

Yes, because that's basically what you bought. With a co-op or condominium, you're in a community, but you still have to maintain the structure while also paying for your building’s amenities and special features as well as mechanical equipment and the entire envelope of the building. I'm not sure that conversion owners, coming from rental buildings with landlords, understood that going in.  

So what’s your advice for boards?

They have to convince their community that putting your head in the sand and kicking the can down the road will not work in the long run, and that their assets will be better protected, and the value of their apartment will be enhanced, by doing the proper maintenance and capital improvements today. That said, of course, you have to fund buildings honestly and be prudent in your expenses.