A Conversation About the “Self-Escrow” Strategy
I would really appreciate feedback on this financial planning in an 111-unit co-op in upper Manhattan (which was submitted by Steve-Inwood to Board Talk in December 2011):
We save up over 12 months and pay off the real estate taxes all at one time in July. So in August, we start savings up for the following July’s annual real estate taxes. We got our bank to drop the escrow requirement for the mortgage and they allow us to do this internally. There are three benefits: 1) the co-op receives interest each month as we save up; 2) we get the discount on the second, third, and fourth quarters of early paid tax (the first quarter is considered paid “on-time” and not eligible for the discount); 3) we have created a working capital reserve in case of emergency.
There is an additional benefit. This assists in creating a board culture of saving up ahead of time for expenses and projects. For example, we are completing a $500,000 roof replacement project without assessment or loan as we already had funds on hand.
Finally, we also “self-escrow” the annual insurance charges. This allows us to pay off the annual worker’s compensation and building insurance policies fully when due to avoid paying the insurance premium finance fees. We used to self-escrow for the annual water/sewer bill (frontage) but since we switched to quarterly billing (meter), we save up for the quarterly bill.
1) How is the money saved? It has to come from somewhere. 2) If they are doing it without assessments, where does the money come from? 3) How high is maintenance and is it increased to build these funds?
The money comes from the budget. It is the same total amount of money, regardless of whether you pay the bill broken down to several payments during the year or whether you pay it all at once. The difference is that if you pay it by July – and all at once – you save thousands of dollars.
This can work in a “rich” building where a substantial reserve fund exists or can be created if everyone deposits money into it. Our taxes are around $275,000 after School Tax Relief (STAR) and co-op credits this year, with a budget of about $850,000 and $200,000 in reserves. Just try collecting an extra $250 per month per unit in a squeezed middle-class neighborhood to save $2,750. And with banks paying maybe one-quarter of one percent interest, you’re not getting much there.
thecoopblog.com This is a great tip that many boards are unaware of. I believe we will push for this next year.
Hi Larry, I was reading the posts and I came across some of my own writing – what a hoot!
My co-op is not rich by any means. We are located near Dyckman Street in upper Manhattan in zip code 10040. Our maintenance fees are approximately $1.10 per square foot. With that, we are also paying off our mortgage in 10 years.
Most co-ops pay their property taxes each quarter (some through the mortgage escrow fund). What is needed to set this up is having the funds for the other three quarters worth of tax amounts. We initially had some good financial news, so in the first year, we paid all of the taxes off in July and gained the discount only. Then in August, the co-op decided to set aside approximately one-twelfth of the next year’s payment and so on, earning interest along the way and also earning the discount when paid in year two. This one-time change (really an investment in our co-op) has paid up four years now. And those monthly savings are available as working capital in case of extreme need. This is our way of making sure that the annual expenses are kept as low as possible.
Well, that worked so well that we started the insurance and water/sewer self-escrows.
But the culture of the board is what really changed. Initially, there was the realization that we could change and save up ahead of time. Then, more action: we are now in year two of a semi-permanent assessment equaling 5 percent of the maintenance to save up for future needs. It was 2.5 percent in year one. I envision this will increase to 7.5 percent of maintenance next year, and finally to 10 percent for year four and onward. Let’s face it: there is always a need for capital funds. This type of semi-permanent assessment sets the expectation with the shareholders that things will eventually break and this is the board’s estimate of an owner’s long-term financial commitment above and beyond maintenance changes. Finally, in 2023, when the mortgage is paid off, we can drop maintenance charges even more. So, please don’t tell yourselves that we are “rich” or “special.” We just decided to do it and you can too.
Want to participate in the conversation? http://www.habitatmag.com/Board-Talk