Many co-op and condo boards are loathe to raise maintenance fees, because once fees go up, they almost never come back down. At the same time, if a building needs to raise a significant amount of capital, the sticker shock of a one-time fee can be an impossible burden for middle-class households. So to avoid either option, some buildings are instead tacking on a quasi-permanent monthly assessment. Residents often accept the arrangement because it feels less permanent and maintenance fees appear lower to potential buyers. But critics cry foul, calling the practice dishonest and one that sends a false message about the true costs of running a building.
The truth, perhaps, lies somewhere between these extremes.
When Cash Runs Dry
Nearly 20 years ago, the Nagle acquired 15 apartments from a bankrupt sponsor. Over the years, these units became a cash cow for the 111-unit complex in Inwood. When a tenant moved out, the co-op sold a unit and used the proceeds to pay for various capital improvements. But now only four units remain, and the board has begun thinking about a future without this revenue stream.
“That has been a fantastic gift to the shareholders,” says board president Stephen Vernon. “Now, knowing that this great gift we had is ending, how do we fund capital projects?”
Three years ago, the board sought an answer. Its members sat down one December evening and discussed ways to raise revenue without burdening the middle-class shareholders. Boilers could break. Brick façades could need work. Roofs could need repairs. The shareholders had voted down a proposal for a flip tax. So the board decided to charge shareholders a monthly assessment. The first year, it cost 2.5 percent of the monthly maintenance. Each December, the board votes on whether to continue the arrangement. It has been raised incrementally each year. This year, it is at 7 percent and may eventually reach 10 percent of maintenance, which is $635 a share.
“What is the alternative?” says Vernon. “The alternative is to say, ‘Dear shareholder, please provide $2,000 in the next two months.’ It’s a little more steady, has less surprises. It’s something they can get used to.”
In fact, only a handful of residents complained about the assessment. The building received far more complaints when it raised maintenance this year – the first time it had done so in three years.
Look Who’s Doing It
Buildings charge these more or less permanent assessments for various reasons. Many condos, for example, began worrying about their capital improvement reserves after Fannie Mae and Freddie Mac tightened lending rules. The two mortgage giants no longer back loans for buyers purchasing apartments in condos that don’t have 10 percent of their reserves earmarked for capital improvements. To fill their coffers, many condos started long-term, monthly assessments.
Buildings have also turned to assessments to cover the rising cost of fuel and property taxes. But residents find that just as the cost of fuel never seems to go back down, neither do the so-called temporary fees.
Permanent assessments are so common that Jill Sloane, a real estate broker for Halstead Property who also owns several investment properties in the city, has seen it happen in three of the apartments she has owned. When she finally sold her Harlem condo, the fuel surcharge had been ongoing for three years. “I told the buyer not to count on this going away,” says Sloane.
Some buildings do have an endgame in mind. Several years ago, an Upper East Side condo needed to do a $500,000 exterior waterproofing project. But they didn’t have the money to do it. Rather than issue a one-time assessment for all the owners of the 48-unit, prewar building, the board took out a long-term loan, putting up the super’s apartment and common areas as collateral. A typical one-bedroom apartment pays about $77 for the assessment. Nearly 12 years later, residents are still paying the tab because the building refinanced the loan, allowing it to take on more debt for future projects.
“At the end of the day, every board works in a vacuum and they do what they think is best for their building,” says Steven Birbach, chairman of Carlton Management.
Here’s Where It Helps
There are upsides to the permanent assessment arrangement. For one thing, it spreads out fiscal pain over a long period of time. “A flat assessment is more palatable than getting whacked with large assessments periodically,” says Robert Mellina, a certified public accountant. “Most people don’t have the luxury of paying $10,000 at a moment’s notice.”
It also has potential tax benefits. If an assessment is earmarked for a specific capital improvement, it can reduce the capital gains tax when a resident sells his apartment because he can deduct the assessment from his profit margin. However, the benefit only applies if he’s made enough of a profit on the unit to get hit with the tax, which isn’t always the case.
Assessments also feel less permanent (even if they aren’t). Unlike maintenance fees, they sometimes, eventually, end. The aforementioned Upper East Side condo with the waterproofing project plans to end its assessment in another 10 years. And at the Nagle, the board votes on the assessment every year, so theoretically a new board could do away with it.
But perhaps the biggest upside to an assessment is the most controversial one: it makes maintenance appear lower. When buyers consider an apartment, one of the first numbers they look at is maintenance. Keeping that number low is key to attracting buyers. Many residents are willing to absorb a higher assessment if it means their maintenance bill won’t look any worse than it is.
“It’s more psychological. Maintenance feels more permanent,” says Justin Verret, a property manager at Blue Woods Management Group. “When buyers are doing their comparables, they tend not to care as much about an assessment because an assessment has an end of some sort.”
Critics of long-term assessments have harsh words for the arrangement, calling the policy dishonest and shady. They argue that if a building needs to indefinitely charge residents $50 or $100 more every month, it should simply raise the maintenance and be upfront about what it really costs to run a building. “It’s voodoo accounting,” says James Samson, a partner at Samson, Fink & Dubow. “I find it horrifying. Nobody is getting fooled.”
Residents might think that an assessment makes their maintenance fees look more attractive, but few buyers are taken in. After all, it doesn’t take long to figure out that the $50 fuel surcharge that has been on the books for five years isn’t going anywhere. In fact, some brokers see an ongoing assessment as a sign that a building is not financially sound.
“When you see an assessment, it is a little bit of a red flag,” says Sloane, of Halstead. “People feel there isn’t enough money in the reserve to do the work. But, really, the building could have totally fine financials.”
When a resident sells his unit, the assessment can come into play in another way. If it was intended to spread out the cost of a single project over a number of years, then the seller is expected to pay whatever remains at the closing. Rarely will a buyer expect to pay for work that was already done. Ongoing assessments, like the one at the Nagle, are simply passed onto the buyer.
Another drawback to the permanent assessment is that it leaves less wiggle room when you actually need an assessment. If a building already charges residents $100 a month for future capital improvements, but suddenly needs to raise $500,000 for a specific project, it might be hard-pressed to convince weary shareholders to pony up more money. By not leaving the assessment in its rightful place as a revenue generator of last resort, the board loses a valuable tool to raise revenue when it needs the money most.
“They’re taking away the ability to have those extra assessments,” says Jay Menachem, a certified public accountant. “Now they are going to feel every dollar of it.”