Mid-Year Budget Check

Read this article in the digital edition.

We may still be on the cusp of summer, but a smart co-op or condo board member is considering the cold chill of January – or at least thinking about January 1, 2013, when next year’s budget will be a reality. Every building’s budget is different, but there are a few common areas that all co-ops and condos should consider. Here they are:

Fuel

One of the biggest issues that some buildings will have to face in the near future is the end of No. 6 oil, which will be banned from the city’s oil burners by July 2015. The city Department of Environmental Protection will stop issuing triennial certificates of operation for No. 6 oil burners this summer, and will stop those certificates for No. 4 oil in 2020. If you’re burning No. 6 or No. 4 oil, you should be making plans to switch over to a dual-fuel system as soon as possible. Con Edison offers incentive programs to make the switch, but Joseph McGowan, manager of gas customer solutions, says the next deadlines for applying will not be until spring 2013.

For more information on the conversion process, check out “The Big Switch,” in the Habitat Archive at http://bit.ly/gasconversions.

Con Edison has a new website devoted to helping buildings convert at coned.com/gasconversions, which features a calculator where you input your oil type and some specific information about your building and oil usage to see what savings you can realize by switching to gas, McGowan says.

If you’re already paying for gas, it’s probably safe to say that you won’t have to worry about a big price hike. “We’ve just seen that they are at pretty record lows and they are expected to stay at those levels or even go lower,” says McGowan.

Chris Fazio, operations manager of Approved Oil Compay, says that his company is very busy with conversion work. “In 2011, we did the most we’ve ever done in the history of the company,” he says, adding that he estimates that prices for No. 4 and No. 6 oil will go up by about 10 percent in 2013. No. 2 oil, he predicts, will go up by about 7 percent.

“Given the situation we’re currently in with the Middle East and Iran, plus we are also having some refinery issues in the Northeast – I’d imagine you can anticipate higher prices going into the next heating season.”

Joseph Colonel, senior vice president of sales for Castle Oil, says he would not even want to hazard a guess on how much oil prices will rise. But he does say that several environmental efforts will probably push prices higher. One is a state law – due to take effect in July – that mandates a lower sulfur content. The other is a law that requires that two percent of heating oil be biofuels. “I think that those factors will drive oil prices a little higher,” he notes.

Insurance

Another expense to consider is your building’s insurance. Michael Spain, president of the Spain Agency, predicts increases from 8 to 15 percent. “If a building has had a lot of claims in the last few years, it can be higher,” he says. “If the building has had zero claims, it’s going to be on the low side, but even with zero claims you’re going to see some increase.”

Spain recalls the case of one building where the premium went from $155,000 last year to $185,000 this year – a 19 percent hike. “That will certainly get their attention,” he observes. But, by looking at the history of the building’s payments, he can see that it got a great deal in the years from 2007 to 2011. “We think that if boards look at their historical costs, it may be more palatable,” he says. “It may be that it’s going up now, but there were years where you saved some money.”

Spain also advises that boards should be familiar with their claim history. “If you find out your rates are going up 20 percent, well, that may be because you have five major claims pending,” he says.

Barbara Strauss, executive vice president of York International, says her clients saw increases as low as 3 percent and as high as 20 percent for 2012. She notes that one way to consider how much your rates may increase is to also think about what type of risk you have. If you have a large building, you have more chances for claims. If you have a lot of amenities – swimming pools, decks, etc. – that could lead to an increase in claims.

Buildings that are close to possible terrorist targets can see increases in premiums because of the increase in risk. “It’s very hard to give a projection for 2013,” she says, but a 15 percent bump is not out of the realm of possibility. “All managing agents should consider thinking about that.”

Edward J. Mackoul, president of Mackoul & Associates, predicts price bumps ranging from five to nine percent. Smaller buildings often get lower rates, he says, because more insurance companies can handle their claims and more competition means lower rates.

“If you’ve got an eight-unit building that needs $2 million in insurance, that’s different from a four hundred-unit building that needs $60 million. There are not as many companies large enough to handle the possible claims,” he says. “Some companies shy away from larger buildings because they fear they are not as profitable. A burst pipe on the 10th floor leads to 10 units being damaged.”

Mackoul and Spain both say that the insurance industry works cyclically in pricing, hitting peaks and valleys. In recent years, insurance companies lowered rates significantly in order to lure new customers. But once those customers sign on and eventually start making claims, insurers have to raise rates to boost their profit margin. That cyclical nature, combined with last year’s economic upheaval and rough weather, led to a perfect arena for hiked rates. “Everyone took a bath in 2011,” Mackoul says.

Taxes

Co-ops and condos fall into the Class 2 designation, as far as the tax code, and that meant a 13.353 percent tax rate for the first half of fiscal year 2011-2012 and a 13.513 percent for the second half.

What makes your taxes go up appreciably, of course, is not a boost in the tax rate, but rather your building’s assessment. Eric Weiss, a tax certiorari attorney and a partner at Tuchman, Korngold, Weiss, Lippman & Gelles, says it is almost impossible to predict how much your building’s assessment will rise.

“I always tell my clients that I’m going to make a guess and 99 percent of the time I’m going to be wrong,” he says. “But I can make an educated guess. Some buildings don’t go up at all, and some go up 20 or 30 percent. Some [assessments] will come down.”

New York City operates under a transitional tax system, he notes. All real property is reassessed annually. There are two assessed valuations. The actual assessed valuation made public on January 15 of each year is the assessor’s determination of the proper value. The transitional (taxable) assessed valuation is derived from the actual assessed valuation. Under this system, any increase in the actual assessment is phased in over a five-year period in equal annual installments. The phase-in each year is called the “transitional” or “taxable assessed” valuation.

It is important to understand the following principles:

1) Taxes are always paid on the lower of the actual or the transitional assessment.

2) Any increase of the actual assessment starts a five-year track that becomes locked in place unless later reduced by legal action. Thus, if an assessment of $100,000 for 1995/96 is increased to $200,000 for 1996/97, the increase of$100,000 starts a five-year track of increases of $20,000 a year in the taxable assessment.

3) Even though a five-year track is running, the tax department is not barred from increasing the actual assessment in a subsequent year, starting a new five-year track that is added to the original track. There are usually several tracks running at all times.

4) Any reduction in the actual assessment, by legal action, will adjust that year’s five-year track downward, thereby creating a tax benefit in each year of the five-year track. This benefit is locked in place even if the assessor increases the actual assessment in a subsequent year.

5) The benefit from a tax commission settlement usually consists of a cash refund as well as a future savings in taxes. The refunded portion may be much smaller than the future savings. The size of the refund depends upon the history of the assessments on the particular parcel. The refund arises from overpayment of the taxes for the first year of the track where the taxes were paid on the original transitional assessment. After the settlement, the remaining payments in the track are made on the reduced transitionals, giving rise to the savings.

Payroll and Other General Expenses

For the most part, payroll expenses are a set commodity that most boards can predict. Minimum wage rates for full-time, 40-hour-per-week staff in Class A buildings, which includes most condo and co-op buildings, went up in April to $22.94 for handymen/women and $20.77 for other employees, according to Maia Davis, spokeswoman for the union, SEIU 32BJ. It will stay at that rate for a year. In April 2013 it goes up to $23.57 for handypersons and $21.34 for other workers.

One wild card in the general expenses column is the 17.5 percent tax abatement granted to most condo and co-op owners as part of the New York City Co-op and Condo Property Tax Abatement If the abatement is eliminated, that could leave buildings with less income.

Water

Water rates are one thing that buildings can count on. In May, the New York City Water Board set the rates for fiscal year 2012-2013, pegging water rates to rise 7 percent. One change is that the city is ending the so-called flat-rate frontage program, which set a water rate based on the number of units in the building. Those properties instead will go to what the city is calling the MCP, or Multi-family Conservation Program, which will charge $894.15 per dwelling unit per year.

Most condos and co-ops are on metered rates – not the flat-rate frontage – says Alan Rothschild, a water consultant and owner of the Vantage Group. But if your building is one of the few on that program, you will see more of an increase. Rothschild estimates that the buildings on frontage pay about $800 to $825 per unit, per year. The boost from that amount to $894.15 can be almost 12 percent. The increase in metered rates is less than what Rothschild was expecting. He notes that the last five years of increases ranged from 9.4 percent to 14.5 percent.