It is like that moment in The Perfect Storm when a 100-foot-tall wave towers over the heroes’ tiny boat – cooperative apartments buildings are about to get clobbered. This time, the bad news comes from banks: the amount of money they now require co-op properties keep in property tax escrow accounts is almost certain to increase by well over 10 percent this fall. Experts are already protesting. “What a rip!” exclaims Char Cesarano, an accountant with Cesarano & Khan CPAs.
Just like the perfect storm in the movie, the likely escrow increase is the result of several events colliding. It’s bad enough that property tax rates have swollen nearly 10 percent in the last year, including a retroactive increase. It’s also bad that the city’s assessed value of many properties continues to rise, pushing tax bills up despite the real estate crash. However, many property managers also believe that banks are demanding even more money than they need to pay these property tax bills — making a difficult situation even tougher for co-ops with little money to spare. Many co-ops have been forced to extract money from their residents through special assessments.
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, they send a bill. At condominium buildings and subdivisions of single-family homes, individual homeowners pay to fill escrow accounts. At cooperative apartment buildings, the escrow bill goes to the co-op board.
Here’s a quick way to assess whether your bank is demanding too much money in escrow for the mortgage on your cooperative apartment building, according to accountant Meyer M. Lieber.
Check the bank’s statement for the escrow account and compare it against the city’s tax bill, he says. There should not be 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. Of course, 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 also 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. 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 the 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?” says Steve Osman, chief executive officer for Metropolitan Pacific. “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.
Property tax rebate programs have been a particular sore spot between banks and co-ops. That’s partly because a variety of property tax rebate programs available to individuals supply those rebates through reductions in the individual’s property tax bill. However, the bank and the property’s co-op board stand in between the shareholder and a rebate check. The money rarely travels smoothly.
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. The resident then goes to the property’s co-op board to ask for the rebate. Theoretically, the board would get the rebate money from its bank in the form of a reduction to 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 cooperative apartment properties in Brooklyn and Queens and has also sponsored co-op conversions.
Banks usually insist on keeping their cushion of escrow dollars as plush as they can, in case property taxes rise. As a result, many co-op properties get no money from the banks to pay shareholders their property tax rebates. Co-ops often raise money by charging all shareholders a special assessment. The assessment’s debit often appears on the same maintenance statement as credit for the rebate to an individual homeowner – effectively swallowing the rebate whole.
To be fair, unexpected property tax hikes have also squeezed the banks. Since banks last analyzed their escrow accounts in 2008, the city has raised property taxes twice, including a retroactive December tax hike passed by City Hall in an attempt to close giant holes in the municipal budget.
In July 2008, the rate was 11.928 percent. That December, in the depths of the financial crisis, City Hall increased the tax rate again to 12.596 percent, but the tax hike was retroactive. It covered the whole fiscal year from its beginning on July 1. That means that for the next two quarters, the effective property tax rate was 13.053 percent. The rates swelled again this July as the city turned the effective rate for the first half of the year into the new official rate of 13.053 percent.
Because December’s tax hike came after most banks had analyzed their escrow accounts, there was not necessarily money in escrow to cover the higher taxes, forcing some banks to pay out of their balances.
Banks will get some of their own back this August and September, when they attempt to adjust escrow accounts to reflect December’s tax hike, this July’s tax hike, plus whatever tax increase the banks project for the future.
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 make sure their management companies are alert and ready to fight if necessary. Be certain your management 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, make sure the management company negotiates with the bank to bring it down.
Finally, if there is a legitimate shortfall in the escrow account, make sure your management company argues hard for a reasonable amount of time to pay it. In the end, says Dubenski, “most banks will take the shortage over 12 months.”