Stewart Wurtzel, Tane Waterman & Wurtzel
Coping with the pandemic this year has been challenging for everyone. But next year is just around the corner and boards need to prepare. The question is: Where to start? What are the main areas that boards should be thinking about and planning for?
Well, a lot of it's going to be budgetary. The budgets are going to be so up in the air, especially if you have a building with commercial rent, in terms of being able to collect it. Businesses are suffering. Every business of course is suffering differently, but restaurants are having tremendous problems, and we don't know how it's going to be through the winter.
Many buildings prepare their budgets in October. So they've prepared a budget in October 2020 for what's going to happen in 2021. Would you recommend going back and amending those budgets?
I think the budget has to be looked at regularly, more so than ever. Are you meeting your revenue production? Are you getting your maintenance or common charges? Are you getting your commercial rent? You need to really stay on top of it because problems can mushroom very quickly. For the most part, residential collections have been pretty good up to this point in time – a lot better than many of us pundits have predicted. But I don't know that we are completely out of the woods. In fact, I would pretty comfortably say that we're not, even on the residential side. Because depending what happens with people’s businesses, it's going to filter down to their living and to their ability to pay maintenance. So boards have to be extra vigilant looking on the income side by reaching out to their shareholders or unit-owners as soon as they see any type of problem so they can try to nip things in the bud.
And how can boards do that exactly?
Nipping things in the bud may be working out agreements. "When are you going to be able to pay? How much are you going to be able to pay?" If there are arrears, "Let's focus on staying current and come up with some type of plan for payment of the arrears." I'm not generally in favor of a waiver of any rent, especially in the commercial situation at this point in time, because a lot can happen. We don't know what government programs, if any, may be adopted and how that could help out. We don't know what the economy is going to do. So I'm not seeing a real advantage to waiving rent, but certainly deferring it. It could always be waived down the road as need be. But if you waive it now and things turn around, it's gone, you don't have it. Then your tenant has the advantage. Still, that's not to say that you're taking a hard line on this.
And of course you’ve also got to pay attention to the money that’s going out.
You need to take a very hard look on the expenditure side of things. What are you spending money on in 2021, and is it the best year to do it? Is it an expense that you can defer until later on? Obviously mandatory repairs and maintenance are important things, but is it the right time to lay money out for an upgrade?
I would think in terms of energy requirements and in reducing your energy footprint, I'm not sure next year is the right time to do it. But if you have an investment that will reduce your expenses, it seems to me that might be worth considering.
Yeah. It's going to depend in large part upon what the upfront cost is. How much can you afford now? How long is it going to take to recoup? If you're looking at something that's going to be a 10 or 15 year horizon to recoup the expense, there’s no firm answer that 2021 is the year to do it or not. But every building is going to be different, and you need to take a look at what you can afford.
As a litigation lawyer, do you anticipate more litigation next year? Or are people going to be respectful and understanding? What do you see in your crystal ball?
I think you're going to see more litigation. I think that there are going to be a lot of instances where tenants aren't going to really negotiate hard and firm unless there is some type of threat of litigation. The co-ops and condominiums may still also have the attitude, "We want 100%, and we want it now." That may not be a realistic expectation. That may all have to come out when you finally get before a judge. The problem we foresee with litigation is one, you keep getting extensions on moratoriums. You get state, federal and city moratoriums, and you just don't know how long it's going to be before you could get into court.
The longer there are these moratoriums, the bigger the number of both cases and the size of the arrears that will have to be dealt with. The courts are going to have such volume and such backlog. It's not going to be the old days in housing court, where there are 75 attorneys and clients jam-packed into a room, trying to work things out. We're not sure at this time exactly how this is going to be operating. Whether it be on the commercial part or if you're in the residential part, courts are going to have to be looking for situations for people to make agreements. They're just not going to be able to handle trials with the type of volume and issues that are involved. And now, of course, with the recent legislation, there's no eviction for COVID-19 arrears.
So in summing up, I would think it would be prudent, particularly if you have commercial tenants, that you have some kind of informational meeting with your residents to say, "This is what we're facing, and this is what we might have to do."
Absolutely. I think communication is going to be one of the most important things for trying to keep people as calm and understanding as possible. Especially if you have a building that's lost 25% of its revenue, whether it be commercial, residential or a combination of things. But bills have to be paid and employees have to be paid, and there may have to be some type of assessments. I think you're going to see buildings going towards the reserve for things that they might have otherwise assessed for. Maybe they're going to want to pull from the reserve for those types of repairs, then replenish the reserve in 2022 or 2023, to make it a little bit easier in the short run. But if you are going to be sending out an assessment notice now, in these times when people are struggling to pay maintenance, you can be pretty sure that unless there's a really good explanation given to the shareholders, they're not going to be happy.