The Drips That Could Add Up to a Perfect Storm

Lisa Prevost in Board Operations on March 12, 2018

New York City

Big Squeeze
March 12, 2018

Co-op and condo boards are facing a steady drip of pressures that have the feel of Chinese water torture. Drip. The new federal tax law promises to skewer taxpayers in high-cost states, including New York and New Jersey. Their pain will very likely spread to the housing markets, hitting co-op and condo owners literally where they live.

Drip. Boards already feeling squeezed by rising property taxes and new regulations now face the added prospect of declining property values and a sharp slowdown in unit sales

Drip. If sales decline, boards and their property managers will lose vital transactional revenues, such as flip taxes or fees for buyer applications. 

Drip. The renegotiation of 32BJ building-employee contracts, now under way, will probably result in higher salaries and benefits for unionized workers – and higher costs for boards. 

Drip. Operating costs and interest rates keep creeping upward. 

“There’s a combination of things happening that don’t look good,” says accountant Carl Cesarano, a principal at Cesarano & Khan. And those things – the relentless drips wearing down many co-ops and condos – could wind up engulfing shareholders and unit-owners. “It could be a perfect storm,” Cesarano says. 

It’s too early to predict just how dire a scenario lies ahead, or whether the city’s real-estate market will rebound from a noticeable slowdown at the end of last year. Buyer apprehension about the final form of the tax bill had a significant cooling effect on the Manhattan market during the last quarter of 2017, according to a recent report from Douglas Elliman Real Estate. Sales of co-ops slid 11 percent while condo sales were down 14 percent compared to the same period a year ago. Overall, the report said, Manhattan sales were at the lowest fourth-quarter level in six years, since the nadir of the last recession. (See the report at http://bit.ly/DE-Q4). 

Attorney Elissa Brinn, a senior counsel with Hodgson Russ, says the spring buying season will provide more clues about where we’re headed now that the tax bill is law. In the meantime, she says, boards may want to add a “layer of conservatism” to their budgeting process. “As in, ‘Is it really necessary for us to redo the hallways right now?’” 

The most troublesome aspect of the new tax law is the $10,000 cap on annual deductions for state and local taxes, including income and property taxes. For New York-area homeowners who itemize their deductions, that’s a very big hit, given the region’s high tax rates. And it could depress home sales and values. 

Moody’s Analytics has predicted that the tax changes could so reduce the incentive to buy that prices in expensive markets like New York will decline by about 10 percent initially. Cesarano, the accountant, agrees that the changes can’t help but depress the market, at least in the short term. And that could cut into co-ops’ and condos’ transactional revenue, such as flip taxes or fees for buyer applications. “Buildings that rely on high turnover and use flip taxes to fund their reserves could very well be hurt by this,” Cesarano says. 

Boards may find that they will have to make up for a revenue shortfall, perhaps by raising maintenance or changing their fee structure

Drip, drip, drip.

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