Flush With Cash? Reverse Assessments May Be for You
Your co-op might be making too much money. Yet sometimes it really can happen: you refinance the underlying mortgage, you refurbish and sell an apartment picked up in foreclosure – and then you have issues with your nonprofit status – and also shareholders wondering why their monthly maintenance is so high if you're rolling in dough.
What can you do? Lower the maintenance? Maybe. But if you're Michael Barbara, the 21-year board president of Yonkers' 528-unit Bryn Mawr Ridge Coopersative, you implement a concept that appears to have had no name until he gave it one: a reverse assessment.
"In the last seven years,” explains Barbara, “we were able to freeze the maintenance since we didn't need cash for any project. And we started to generate a profit over last couple of years. So we're taking in too much cash. I thought, 'Why are we holding so much money? It's not fair to the shareholders.'"
The board considered lowering maintenance but that can be problematic, says David Amster, president of the co-op's management company, Prime Locations. "If you give someone a reduction of, say, seven percent,” he says, "and then two years later you see your fuel costs are going up so you increase the maintenance five percent, people go, 'Oh my god! They raised our maintenance!' It's still two percent lower than it was before, but it's a psychological thing."
"I started thinking about how co-ops use assessments to raise money," recalls Barbara, "and I figured why not do it the opposite way – a reverse assessment? I didn't want to just put the word 'credit' on the monthly maintenance bill," since it was vague and could be confused with other credits the co-op might give for various reasons. "I wanted something unique that will stand out. And no one was using that terminology."
How does a reverse assessment work? "Normally if you're in a co-op and they're going to do a project, the board assesses [everyone] an extra charge [to pay for it]," says Amster. "Here, it's a credit. For example, let’s say the maintenance fee is $500. You line-item a reverse assessment of minus $50 [on the monthly maintenance invoice], so the shareholder only pays $450."
So now, "when brokers call and ask, 'What's your maintenance?,' I can say here's what it is and it's been steady for seven years," says Barbara, who will be funneling a monthly 7.5 percent reverse assessment to shareholders starting in January. "Worst-case scenario, you're adjusting the assessment and not playing with the maintenance all the time."
CPA Michael Esposito, a partner at the accounting firm Kleiman & Weinshank, finds no specific danger in this approach, but says, "It's just semantics. From a practical business standpoint I understand why they're doing it: Why reduce maintenance and a year from now your expenses go up and you raise it, when they can say instead we're just taking away the credit? At the end of the day, it's just a maintenance abatement." Which means, he says, that, "In effect, they may be overcharging on maintenance because they may be generating a surplus."
Whatever the nomenclature, reverse assessments will remain in this co-op's near future. "We just locked in a fuel rate out to 2018 that's 30 percent less than we'd been paying," Barbara says. "We'll probably generate another $150,000 [in operating capital] on top of what we're already taking in. So it looks like next year's reverse assessment will be over 10 percent." How do his shareholders feel about that? "It went over very well in our newsletter!"