Unfixing "Fixed" Costs

Most co-op and condo boards are hamstrung by fixed costs, which can eat up nearly 90 percent of the operating budget. Jodi Leff, treasurer of a 165-unit Upper East Side co-op, was particularly dismayed by her building’s water and sewer bill, which was running about $100,000 a year.

The board started working with The FolSon Group, a financial consulting company that promised to substantially reduce the co-op’s water costs. “Although the cost of water and sewer is determined by the city, the amount of water that a building uses is not,” says Tina Larsson, CEO and founder of The FolSon Group. “If the end-user doesn’t directly pay for his or her use, there’s little incentive to reduce water usage.”

The FolSon Group found an ingenious way to reduce the co-op’s water consumption. The board instituted a new policy that requires an upgrade of plumbing fixtures before approval will be granted for any apartment sale or renovation. “Replacing old 5-9 gallons per flush (GPF) toilets with today’s standard 1.28 GPF toilet and replacing the shower heads and faucets throughout the building should result into a 20- to 40-percent reduction in water consumption,” says Larsson. “(Under the policy), the cost of the upgrades is paid for by the shareholders, not by the building. And it’s easily affordable, as a toilet can be purchased for as little as $75.”

“Since we initiated this program,“ Leff says, “we saw a 20 percent drop in our water costs within the first two and a half years.” In that time, 33 units were sold and 10 were renovated.

The FolSon Group worked on a contingency basis – charging nothing up front and nothing if they failed to find ways to save money. If savings were realized, the FolSon Group would keep half of them for two years. After that, the building pockets all savings.

Attorney Deborah Koplovitz, a shareholder in the firm Anderson Kill, says a co-op board needs to have its corporate documents reviewed by a lawyer before implementing any such policy. “Normally, the business judgment rule standard will prohibit a court from inquiring into the decisions of a co-op board which are made in good faith,” Koplovitz says. “The policy to require the installation of water-saving fixtures as a condition for a sale or a renovation will likely be upheld, provided that the proprietary lease permits conditional approvals of renovation requests. If not, the proprietary lease may need to be amended by the shareholders.”

According to Larsson, the policy doesn’t specify if the buyer or the seller must pay for the plumbing upgrades, or how quickly the work must be completed. In Leff’s building, most sellers change to efficient fixtures before the sale. Should the board approve a sale before the new fixtures are in place, the policy requires that money for the job be placed in an escrow account. The money is released when the work is done and management has inspected the apartment for compliance.

Though there was some initial resistance from some sellers, Leff says the policy hasn’t met with significant opposition. “Purchasers love the idea that the board cares about the environment and also about controlling costs on their behalves,” she says. “We’re amazed that such an easy change could result in such large savings. It helped us avoid raising maintenance.”

“In only five years,” Larsson adds, “most of the co-op will be upgraded, and the savings will be even more substantial.”

So much for “fixed” costs.

PROJECT PLAYER – Consultant: The FolSon Group.