Carol J. Ott in Legal/Financial on January 12, 2023
Keeping the reserve fund healthy is a perennial challenge for most co-op and condo boards. Many rely on a flip tax, also known as a transfer fee, which funnels a percentage of each apartment sale into the reserve fund. It works splendidly when the real estate market is active and apartment prices are high. But with co-op and condo sales slowing to a crawl and with New York City’s real-estate market poised for a “year of disappointment,” according to the appraiser Jonathan Miller, relying on a flip tax suddenly looks like a shaky proposition.
A 132-unit co-op on the Upper West Side has developed a mechanism for replenishing its reserve fund that is not dependent on the vagaries of the city’s notoriously cyclical real-estate market. It’s called a “capital contribution.”
Nathaniel Polish, the president of the co-op board, recalls that when he got on the board there were three assessments going on at the same time for various projects, and it wasn’t even clear if maintenance was covering the co-op’s operating expenses. At the time, the co-op’s property manager, A.J. Rexhepi, a managing partner at Century Management, told him that a building of this size could expect to pay about a million dollars every 10 years on various capital projects.
“After hearing this, I thought, ‘Why don’t we just build in $100,000 a year to put in the reserve fund or pay down debt?’” Polish says. “That way we wouldn't have to assess every time there was a capital need.” And, for good measure, there would be no need to sell a super-majority of shareholders on the wisdom of instituting a flip tax, as required by the proprietary lease.
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Beginning about 10 years ago, the board implemented a yearly capital contribution, which at the time was $100,000 more than annual operating expenses. The co-op has an underlying mortgage and a credit line, and it uses the credit line to pay for projects. The capital contribution is then used to pay down the credit line. Today, the capital contribution is $300,000 a year, and having it means that unpredictable assessments are a thing of the past.
“When we first implemented it,” Polish recalls, “the board wondered whether we would be kicked out. I didn’t really care that much. I think in any political situation, if you're too attached to power, you make bad decisions. It just felt like this was the right thing to do. And we did it.”
And it worked. Polish and his fellow board members did not get ousted over the capital contribution, as they’d feared when they implemented it 10 years ago. Today it’s a valued part of the co-op’s operations, which include a balanced budget, a healthy reserve, and enough funds to give timely attention to needed repairs.
Whether funded by a transfer fee, capital contribution or some other method, having an adequate reserve fund is a necessity, not an option. “It should be a staple in every building’s budget,” Rexhepi says. How it gets funded, he adds, is a matter of a board’s politics, timing and, ultimately, marketing. But it must get funded.
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