Your Dream Come True Could Turn Into a Nightmare

Be suspicious. Be very suspicious. If you hear someone claiming that he or she can reduce your maintenance or common charges, that should be a warning sign.

Or if you hear a board member insisting that he or she should be re-elected because the board has been able to run the building for years without raising maintenance or common charges, that should be a very big warning sign. A catastrophe may be in the offing.

First, a reality. Because of their limited useful life, most of a building’s components must be regularly maintained, repaired, and replaced. The pyramids may have been standing for 3,000 years, but your building cannot stand for long without some deterioration. That’s why there are regular Local Law 11 inspections. Here’s another reality. The board has control over a very small portion of the budget (usually less than seven percent). And certain numbers generally go up every year: real estate taxes, water and sewer charges, insurance premiums, maintenance and repairs, and payroll and related expenses. So how can a board cover these costs without raising maintenance or common charges?

It can’t. Still, I have seen dissident groups take control of boards after claiming that money was being wasted, then declining to raise maintenance or common charges for several years or, worse still, reducing those items and then subsidizing operations by taking funds from the reserves. There are also boards that refinance the underlying mortgage – increasing the indebtedness – and then use the proceeds to pay for operations. Of course, that cannot continue indefinitely; at some point, a large capital project will be required – Local Law 11 work, a new city mandate, or replacing a worn-out elevator or roof – and if the reserves are gone, the residents will have to be assessed for the indebtedness or else their maintenance/common charges will skyrocket. Imagine what that does to the value of apartments.

If operating expenses increase by 4 percent per year and the board subsidizes those expenses from the reserve funds for five years, then in the sixth year, when the reserve fund has been depleted, the maintenance or common charges have to be increased by roughly 22 percent. A maintenance or common charge of $2,500 in 2012 would jump to $3,041 in 2017. And that assumes a relatively low yearly increase in expenses; if the increase is 8 percent annually, the aggregate increase of the maintenance or common charges of $2,500 would increase to $3,673, or a 47 percent increase. And, since there are no reserves, if a typical Local Law 11 job of $1 million were needed, the money would have to come from a hefty assessment. Many of the shareholders or unit-owners, especially those on fixed incomes, could not pay and would have to sell their apartments at a depreciated price because the building’s financial statement would be so bad.

Seems rather bleak, doesn’t it? It could be worse. What if one or more members of the board wanted to sell their apartments and felt that low maintenance or common charges would increasethe price they could receive in a sale? If they sell after the second or third year of zero maintenance or common charge increases, when things seem so positive, the buyers might think they had bought into a bonanza.

Unfortunately, when the values of the buyers’ apartments tumble, they might decide to sue, arguing that they were misled or defrauded. It is not likely that they would be successful, but the lawsuit would further depress the value of the apartments. Some residents might want to sell to get away from this headache. The negative publicity could then cause the value of the other apartments to collapse. The worse the lawsuit, the bigger the collapse.

Am I exaggerating? Not really. I have seen it happen. I have seen a board president convince the board to spend the entire reserve fund to purchase a first-floor apartment and then build a very expensive gym. Afterwards, the president – who got the benefit of the apartment appreciation (paid for by every other owner) – sold his apartment and moved. I have seen dissidents take control of the board and spend the reserve fund to subsidize the operation because they were either cheap or wanted to be treated like heroes. All these things happen in buildings full of people who think they can get something for nothing, or who are too busy to pay attention to the details.

The most important lesson is that every cooperative and condominium should be run like a successful business. And any business that begins to cut corners will lose customers and won’t be around for long. This is all the more important for cooperatives and condominiums because it is, for many people, the largest investment they have. And it is their home. As we enter December, the 2017 budgets are being finished. A zero-increase budget may be a dream come true in 2017 – but it could turn into a nightmare in 2019. So do your homework, ask questions, and remember: if something seems too good to be true, it probably is.