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LEGAL/FINANCIAL

HOW LEGAL/FINANCIAL PROBLEMS ARE SOLVED BY NYC CO-OPS AND CONDOS

A Savvy Super Can Add to “Useful Life” of Equipment

Michael Wolfe in Legal/Financial on October 3, 2017

New York City

Budget Building II
Oct. 3, 2017

Yesterday I discussed the nuts and bolts of putting together an operating budget – and arriving at a bottom line that will tell you whether or not you need to raise monthly maintenance or common charges. Today I’ll discuss the other key elements of the budgeting process: the capital budget, the reserve fund, and the city’s tax assessment.

A capital budget consists of money allotted for local laws, elevator upgrade regulations, and any “wish list items” that the board may want to undertake, such as upgrading the lobby, gym, or pool. Typically, a capital budget covers anywhere from 5 to 10 years. Forecasting any longer than that becomes an uneducated guesstimate. 

There are two ways to create a capital budget. You can make your best estimate, listing your major components, their useful life, and the costs associated with them. Some boards hire an engineering firm to look at every component of a building and come up with a long-term plan. There is a danger in having a capital budget prepared by an engineering firm, however, because it produces a document based on the so-called “useful life” of the equipment. What happens if you’ve got a great super who has been maintaining your equipment and keeping it operating longer than expected? You have to look at all the factors that affect your equipment, such as the care by the super.

Accountants typically state that a co-op or condo should have three months of operating income as the reserve fund. But every building is different, and funding the reserves can be done in a number of different ways. Boards can refinance an underlying mortgage; charge transfer taxes and alteration fees; sell hallway, roof, or other common-area space; or sell air rights. Many buildings are trying to change their governing documents to permit a transfer tax. The average is two percent, and it’s a great source of revenue. Having a large reserve fund doesn’t eliminate assessments, but it can certainly decrease their size and frequency.

When preparing the budget, we also have to consider the co-op tax abatement. Almost all cooperatives recoup that abatement for use by the building in the form of a matching assessment on their shareholders. The problem is that if the abatement is not renewed, the co-op would have to make up the difference, and, in most cases, it would require a substantial increase in maintenance. However, the general feeling is that the abatement will continue. 

The key to maintaining a balanced budget is to monitor your monthly income and expenses. We look at the budget every month, searching for any major variances between projected and actual costs. We feel that a board should increase maintenance to balance its budget. Boards that do not increase maintenance or common charges, or do not levy assessments, are hiding behind a smokescreen that a sophisticated buyer will see through. 

Remember: banks want to see a balanced budget. They want to see that a cooperative or condominium is on solid footing. They certainly don’t want to risk their loan to a building that may be in financial distress. 

Michael Wolfe is president of Midboro Management.

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