FIGHTING UNJUSTIFIABLE TAX ESCROWS

Once a year, usually in August or September, banks analyze their property-tax escrow accounts. If a bank thinks a property needs more money in escrow to cover rising property taxes, it sends a bill. At condominium buildings and subdivisions of single-family homes, individual homeowners pay to fill escrow accounts. At co-op buildings, the escrow bill goes to the co-op board.

CPA Meyer M. Lieber advises that you check the bank's statement for the escrow account and compare it against the city's tax bill. There should be no more money in escrow than the bank will need to pay its property taxes for the quarter. City property taxes are due in January, April, July, and October. (Note: If your escrow includes both property taxes and charges for water and sewer, then the amount in escrow should also include one quarter to one half of the annual water and sewer bill.)

Banks are entitled to hold some extra money in escrow to cover projected property tax increases — an extra 10 percent over the estimated annual property tax is often allowed in the bank's mortgage documents.

However, management company Metropolitan Pacific Properties found its banks were piling up far more in their escrow accounts.

Legally Stealing Co-ops' Money

One 600-unit complex with about $1 million in annual property tax obligations had more than $300,000 in escrow — even immediately after the property tax for the year had been paid! The bank had use of this money almost for free, paying the co-op a nominal interest rate that floated around one percent.

"How can they have that much in the escrow after the disbursement?" marvels Steve Osman, Metropolitan Pacific's CEO. "The escrow never seemed to be zero."

Metropolitan Pacific, which had an accountant examine its escrow accounts to determine how much extra money the banks had taken, is now demanding that the lending institutions return the cash. You can have your management company analyze and do the same.

The property-tax rebate programs available to individuals have been a particular sore spot between banks and co-ops. That's partly because a variety of these programs supply those rebates through reductions in the individual's property-tax bill. However, the bank and the property's co-op board stand between the shareholder and a rebate check. The money rarely travels smoothly.

Exploding STAR

Individual shareholders apply to local government officials for property-tax rebates under such programs as STAR. However, once local officials approve the rebate, the city does not write a check to the resident. Instead the city adjusts the property tax bill for the whole property. Theoretically, the board would get the rebate money for residents from its bank in the form of a reduction of the property-tax escrow account. But the bank almost always refuses, saying the escrow account needs more money to cover the property tax, not less.

"With these property-tax increases and the more aggressive cushioning from the banks, the co-ops don't get any money back for the rebates," says Harry Otterman, treasurer for Norcor Management, which manages 25 cooperatives in Brooklyn and Queens and has also sponsored co-op conversions.

Banks usually insist on keeping their cushion of escrow dollars as flush as they can, in case property taxes rise. As a result, many co-ops get no money from the banks to pay shareholders their rebates (which, in most cases, gets charged back by boards in a special assessment equal to the rebate amount, in order to raise money for the building's reserve fund).

Many co-op boards never realize the time management companies spend analyzing and sometimes arguing with banks over escrow accounts. "We don't let it get to the board until we have a resolution," says Cynthia Dubenski, chief financial officer for Mark Greenberg Real Estate.

However, as banks demand more cash for escrow, co-ops should ensure their management companies are ready to fight if necessary. Be certain your company conducts an accurate estimate of your building's property taxes early in the year and contests inaccurate assessments with the city, says Dubenski. If the escrow balance is too high, have your management company negotiate with the bank to bring it down.

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