Andrew Stern in Board Operations on November 13, 2017
This article appears in the special November issue of Habitat, "Governing Documents Through a Legal Lens."
Maintenance is usually the main revenue stream, and it’s absolutely essential to the operation of a co-op. In New York, maintenance is primarily governed by one of two statutes – either the Business Corporation Law, or the Not-For-Profit Corporation Law. Maintenance charges can be based on the number of shares or the number of rooms a unit has; or it can be divided equally among shareholders, regardless of the size of the unit or the number of shares associated with it. The central requirement is consistency. The formula for determining maintenance can differ dramatically, depending on what your governing documents say. But it must be applied consistently to all shareholders.
Maintenance is usually set on a per-share basis. That means the co-op should be taking its total budget, figuring out how much revenue it needs to generate from maintenance and assessments, and then dividing that by the total number of shares. For each account, you multiply that base number by the number of shares to get the amount to charge each shareholder every month or every year. Boards can spot-check their numbers against any given account. Shareholders can use annual financial statements to check their account, as can incoming purchasers once they know what the given maintenance is at the time of contract. They can also check the governing documents to see the number of shares assessed for each account to ensure compliance.
In affordable, government-regulated Mitchell-Lama co-ops, the maintenance is determined essentially on a per-room basis, factoring in apartment floor, number of bedrooms, and other things that can increase or decrease the value of an apartment in the same line. Increases in maintenance are handled through an administrative process that involves approval from the supervising governmental agencies.
At least one court found that among a single class of shares, as long as the standard was applied equally, a co-op could charge different amounts of maintenance based on whether a unit had been improved or not. That decision was governed by the Not-For-Profit Corporation Law.
Shareholders and board members should understand the formula that their governing documents require them to use. They want to be certain that whatever is being done not only complies with the governing documents but also with applicable laws. The maintenance paragraph is easy to find. It’s usually one of the first three paragraphs in the proprietary lease, or it’s in the very beginning of the operations section of the bylaws. If you do not comply with your governing documents and with regulations, you risk collection problems and will have trouble enforcing your rights.
Mistakes in setting maintenance can be embarrassing and costly to correct. You’re better off practicing preventive medicine and checking your numbers as part of your overall budgetary process. It’s a zero-sum game, so if somebody is being undercharged, somebody else is being overcharged. You want to make sure that you’re getting it right from the start.
Andrew Stern is a partner in the law firm of Tane Waterman & Wurtzel.
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