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The Price is Right

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Like many buildings, our Harlem co-op is always looking for ways to raise money. At the same time, we are challenged by the need to be sensitive to the diversity of incomes in our building.

We found a way to balance both concerns.

I am the board president of Madison Park Apartment Corporation, an income-restricted building in Harlem. We offered affordable housing benefits to those who bought in when construction was completed in 2002. Our residents represent a wide range of incomes, with newer purchasers generally earning more.

At one meeting this fiscal year, the board agreed to raise the monthly rental charge of the 25-square-foot storage lockers from $25 a month to $32. Some board members argued that since storage locker renters had to pay a price increase, users of other services in the building needed to share the burden. In an attempt to reach consensus, we quickly agreed to raise monthly rental charges on other amenities including the tenants’ lounge and bike room.

I had written a detailed rationale for setting a price for the storage lockers, including a market comparison of our units to a commercial storage facility and to units in a neighboring building that shared our restricted-income status. My proposed price was below both price points, in an attempt to be sensitive to the diversity of incomes in our building. But when we quickly agreed on pricing increases on other amenities, we did not have comparative analyses to fall back on.

This lack of consistency in decision-making concerned me, and I also felt that the rationale of “we are burdening some shareholders with an increase, so why don’t we make sure others feel the pain?” was not particularly robust. Board dynamics can be tricky, and in retrospect I felt that we as a board had overemphasized the importance of achieving consensus. I therefore developed the following guidelines on amenity pricing, agreed to by the board and communicated to shareholders:

Every pricing decision will require a proposal that must include anticipated revenue. No amenity’s pricing will be raised without understanding net profit anticipated. This will also provide a benchmark for comparison, to see if the increase paid off at the end of the year.

The rationale for any pricing decision will be based on two factors: value of the amenity and amount needed to pay for its associated costs to the apartment corporation. For example, the waiting list is strong evidence that storage lockers are a worthy amenity. Clearly, we also need to gain compensation for ongoing costs. Our building’s gym committee did a thorough job researching options for overhauling that space, and determined the amount for monthly leasing of equipment. The committee subsequently recommended pricing that would allow the building to pay monthly leasing costs as well as make a profit. The board agreed.

The proposed pricing of any amenity will be determined in part by cost comparisons. If shareholders can obtain the amenity elsewhere for less, or observe that the pricing in our building is higher than in neighboring co-ops, they will probably consider the amenity overpriced.

 

Drawbacks will be clarified in any pricing proposal and potential solutions will be identified. Drawbacks include:

Negative impact on building value. People may see the building as less attractive because of certain charges; prospective purchasers may be put off by excessive fees.

Difficulties with implementation. You need to determine how much staff time, effort, and money are required to enforce collection of a proposed surcharge and whether it would be worth it.

Perceptions of unfairness. Certain shareholder groups may feel singled out by price increases; this is very subjective and boards should tread carefully. One solution that the board can consider is grandfathering in new charges – levying certain surcharges only on new buyers. For example, our building is pet-friendly, and shareholders bought into the building with no expectation of having to pay pet fees. If at some point we did decide to charge for pets, one possibility would be to charge only new buyers.

Risk of legal challenges to the policy. The apartment corporation has to pay to defend itself against charges of discrimination. A review by apartment corporation legal counsel will assess the risk. In our case, some board members had wanted to impose fees on shareholders who had roommates, but our legal counsel advised against it.

Additional suggestions for boards:

At the beginning of each budget cycle, check all amenities. One of the difficulties we had in implementing the $32-per-month storage locker fee was that the fee had been underpriced for years at $17. We had raised the monthly charge to $25 and then several months later to $32, and we heard complaints from some shareholders about the “double increase.” Hindsight is 20/20; we realized that these complaints could have been avoided if we and prior boards had implemented gradual pricing increases over time.

Close the loop on price increases during the budget cycle by analyzing whether the increases netted anticipated profit. If expectations fall short, you may need to go back to your old pricing.

Communicate your rationale for each pricing determination to shareholders. Explain why the price was set and the anticipated revenue.

Balance quality of life with amenity pricing. Recently, our board imposed stricter conditions on party room renters, including fees for additional security for large parties. While we think this will lower shareholder exasperation by reining in loud, out-of-control parties, we are also aware that we may lose revenue because of the higher price point. However, if the choice is between the contribution of $3,000 of revenue to a $1 million budget and peace and quiet, I recommend that peace and quiet should rule.

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