Rainy Day Funding

How prepared is your building to take charge of its future? That's the question for any boards of directors getting ready to take the plunge into self-escrow. While most buildings have bank-controlled escrow accounts to handle their big-ticket budget items - like property taxes, insurance, and water bills - more and more are negotiating with their lenders to relinquish control of the escrow account and return the reins of financial management to the co-op itself.

Be warned, though. While giving a co-op control over its finances is a good idea, particularly if the building has emergency or expensive repair work to do, the property can quickly get into a bind if it decides to self-escrow. If it hasn't been following a strict schedule of setting aside funds in a money market account to pay fixed costs - insurance, property taxes, and water bills - the co-op may have to scramble to pass a maintenance increase or assessment to make up the difference if it experiences a sudden spike in taxes or insurance.

So with all the risks inherent in a building taking over the escrow account, why do it? One reason is the building owners often understand their financial portfolio better than their bankers. "Many times I find that when a bank escrows for property taxes, they don't always understand all the intricacies that can be involved," observes Cynthia Dubensky, comptroller at Mark Greenberg Real Estate, a management company. "A couple of years ago, when the co-op abatement program was approved, the credits were not posted to the tax bills until the second half of the tax year. The banks were escrowing based on the higher property taxes - even though ultimately the credits were issued later on. So the cash flow in the properties was affected by that fairly severely."

Convincing a bank to reanalyze an escrow account at any time other than August can be very difficult, she adds. If there are changes or amendments to the tax law, or if there is a successful certiorari challenge, and a board requests an analysis mid-cycle, "you usually get a variety of opposition, as well as them wanting to charge a fee." On the other hand, when a building self-escrows, "you have much more control. You have the ability to reanalyze every month, if the need arises."

More and more, say spokesmen for management companies, buildings are successfully handling their own money market accounts for such payments as property taxes and mortgage. At 645 West 239th Street in Riverdale, the 42-unit co-op has a separate account for its property taxes, and one for its water-and-sewer bills. The 15-year-old co-op has never had an escrow account, reports the board president, Jeff Botwinick. "The bank never required us to set up a separate escrow. And also, we felt we can keep control of our funds if we self-escrow."

That is also the case at another Riverdale co-op, the 620 Tenants Corporation, where the board members of the 72-unit building have been putting aside their property taxes in a money market account for the past decade, eschewing any bank control. While the interest on the account is low, less than one percent, "I feel we have better control when we do it this way," says Mark Niven, the treasurer. "We have a better idea how the money is handled, and it's immediately available if we need it."

When New York City's property taxes increased last January, Niven's board dipped into its reserve fund and levied a one-time assessment on shareholders to make up the difference. At the same time, the board instituted a four-percent maintenance increase to pay for the increased taxes in the future.

One of the benefits, however, to having property taxes in a bank-controlled escrow account is that when it comes time to pay taxes, and there is a big hike, the bank will pay and then go back to the co-op for additional funds.

"The general experience is that banks tend to escrow more than they need," observes Don Levy, director of management at Lawrence Properties. However, that can be a good thing if there is a sudden hike in taxes, such as the 18.5 percent increase in property taxes last year.

In the case of a self-escrowing property, if taxes spike, "you may be put into a position of having to do an emergency assessment for a lot of money without having time to plan for it, and putting a real financial burden on the shareholder," Levy says. "The benefit to having an institutional escrow account is that the escrow agent almost always has sufficient funds to meet a short-term bump up, and will go back to the cooperative to replenish the escrow account."

But even banks have acknowledged that the typical escrow account "cushion" was blown sky-high by the property tax hike last year. For the most part, banks have a "one- to one-and-a-half month's cushion" in an escrow account after they have paid a building's taxes, reports Ed Howe, regional vice president of the National Cooperative Bank. The cushion is the additional funding that is then added to each month for the rest of the tax year until the next payment. The 18.5 percent tax increase created a hole, however.

According to James Glatthaar, a partner with Bleakley, Platt & Schmidt, self-escrowing comes down to two issues: the building's overall financial health and the ability of the managing agent to oversee finances. "The best managing agents always set aside money to pay taxes, mortgage, and payroll. You never want to be in a position where you don't have enough money."