New York's Cooperative and Condominium Community

Habitat Magazine Business of Management 2021

HABITAT

BALANCING BUDGETS WITH AGING COMMUNITIES

Balancing Budgets with Aging Communities

Neil Davidowitz, President, Orsid New York

 

People who bought their apartments at insider prices in the ‘80s are now living in homes worth millions, but many are now living on retirement incomes, which can be problematic for co-op boards. At buildings with commercial units that have lost income because of the pandemic, dealing with long-term owners is even more challenging. Just how bad is it? 

The situation actually preceded the pandemic. Buildings were having issues with general maintenance increases and capital assessments and how to deal with an aging population who did not have the income stream to meet these rising costs. That situation was exacerbated by the retail market falling as a result of the pandemic. We have quite a few buildings that relied on a significant portion of their operating income stream from their retail stores, which was sometimes as much as 30 or 40%. Those numbers decreased dramatically, creating significant operating deficits that continue through 2021.

 

What about buildings that have a split population of longtime residents who aren’t wealthy and newer owners who paid multimillion prices for their units? Boards need money from everybody, so what do they do?

First and foremost, the building has a fiduciary obligation to create a balanced operating budget. For the most part, the buildings that experienced a significant decrease in commercial rents implemented operating assessments to cover the shortfall. There was some discourse on utilizing existing reserve funds to do that. But in my opinion, and I think accountants and financial people would agree, that would be a huge mistake. Those reserve funds are intended for future capital needs. And using them for operating expenses may actually be problematic relative to a building’s underlying mortgage documents, since you need to have a balanced budget.

 

But if a building implemented a 30% assessment and maintenance is $1,000 or $2,000 a month, that’s a significant jump. 

It is a huge jump. And in many buildings that imposed assessments in April, it wasn’t a one- or two-month assessment, but one that continues today and has had a detrimental impact on those shareholders on fixed incomes. From talking to boards, it’s clear they realized that it’s created significant pressure points, with people having to go into their IRAs or liquidate certain investments to meet this obligation.

 

As a board member and a neighbor, you obviously feel compassion. But your hands are sort of tied in terms of what you can do, aren’t they?

Your hands are tied in the sense that your obligation is to maintain the financial stability of the co-op corporation. Nothing is more paramount than that. You can extend certain shareholder payments. You can provide short-term loans utilizing building reserve funds to people who may need some time. So there are things you can do outside the box to assist them, but the fiduciary obligation still has to be met. Remember, this is a population that wants to age in place. They want to remain in the homes where they’ve been living for many, many years. But even in the worst-case scenario, this is not a situation where people are put on the street. They have significant equity in their units, and they can always downsize and relocate. But the goal is for people to remain in their home, and I think boards are trying to do their best to accommodate those needs.

 

Do you think the city has any obligation to these shareholders? After all, they did make an investment in the city when they bought their units.

With all due respect, I think that’s a bit of a stretch. There are significant populations that are really in trouble and may need assistance from the city, but it’s hard for me to think of a cogent argument that long-term shareholders would rise to that same level. By the same token, the city should acknowledge that this retail market has plummeted, and they should take this into consideration as they assess buildings with retail tenants. The assessed valuation of these buildings should decrease proportionally to the decrease of the value of the stores.

 

But even if the city decreases the valuation, that doesn’t mean the taxes will go down, right?

That is correct. That’s the famous New York City issue. We’re the only jurisdiction I’m aware of in the country that reassesses real estate every single year. You can have a modified or reduced assessed valuation, but then you could have a tax rate increase, which means the real estate taxes would remain constant or go up. I’m hoping that doesn’t happen and that there will be tax relief for these buildings.

 

What’s the takeaway here?

The takeaway is that management and boards need to be cognizant of dual populations in their buildings. As we assess or increase maintenance, and as we adjust for these changing times, we need to be aware of the needs of long-term residents and think about what can be done outside the box to assist them. Can we communicate with their family members? Can we talk about possible reverse mortgages? Not an easy thing in New York now, but I’ve seen family, personal, private and reverse mortgages. The goal is to allow these people to age in place.

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