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How Can Boards Protect Themselves When a Resident Dies Leaving No Heirs?

New York City

Jan. 20, 2015

Namely, get a savvy accountant. That professional can come to your rescue in a number of ways. One is to make a special disclosure. What that means, says Stephen Beer, managing partner of the accounting firm of Czarnowski and Beer, is that the board must submit an "advisory note" explaining the reason for the high rate of arrears.

The problem with this is that "the banks may not pay attention to your note," Beer observes. A more sophisticated technique is simply to write off the deceased residents' debts. Why do that? It's a question of math. Doing so takes the arrears off the list of units that are behind in paying their charges, improving the ratio of paid to unpaid units. (Beer observes that he does not know of any accountants who would employ the second technique unless a client requested it. But, he says, many banks will fail to notice the shift.)

The maneuver implies that these debts are not expected to be repaid, even though they almost certainly will be if the units are in a standard co-op building. That's because a co-op has the first lien (i.e., is first in line) to collect when the estate is settled. If and when the apartment is sold, one of the conditions of sale is that the arrears be paid.

Condos are a different story, though: the bank has first lien on the units here. Consequently, after the bank has recouped outstanding bills, the building may come away with nothing.

Small Size, Big Problem

Beer reports that probate can be a particular problem for Mitchell-Lama cooperatives. Beer says those subsidized co-ops may get into a bigger financial hole than that caused simply by arrears. "Often these apartments need a lot of repair work before they can be sold," Beer explains. "You have costs getting the unit ready for the next person. The apartment may have $20,000 in equity, and you have to spend $30,000 to make the apartment [presentable] because it hasn't been taken care of for so many years. That's a potential loss." Moreover, no lender is going to be standing ready to clear the arrears off the books to keep the late owner’s mortgage on the unit from going into default.

The size of the building is likely to be relevant to its capacity to cope with delinquencies as well. Jay Silverberg, general manager for the 2,702-unit Lindsay Park Housing Corp., a Mitchell-Lama co-op in Brooklyn, says that the most serious problems his complex has faced have only arisen when a unit-owner died without a will or a close relative.

"Arrears can quickly exceed the equity in a Mitchell-Lama unit," he acknowledges. "But even if the unit-owner dies without a will, the building will typically get the unit back fairly quickly if there's a close relation who can step forward. If you have neither, then the matter has to be resolved by a public administrator, which can take time." He adds, however, that "we've only had a few such cases in the 20 years I've been here."

Richard Montanye, managing partner of the accounting firm of Marin and Montanye, which has an extensive Mitchell-Lama client list, points out another pitfall: write-offs related to arrears in Mitchell-Lama buildings must be approved by a New York City or New York State official. "And you can’t really transfer the unit until the estate is settled," he says. At the same time, Montanye emphasizes that in his experience it is "unusual" for such problems to deter financing.

But just as death is inevitable, the complications arising from it may be equally unavoidable. Thus, it may be good for co-op and condo boards to bear in mind the Scout Motto: be prepared. (And don't talk to any dead people.)


Adapted from "The Dead Don't Pay" by Jonathan Leaf (Habitat, January 2015)

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