Theresa Racht, Theresa Racht, Esq.
The coronavirus crisis has taxed every co-op and condo board in the city, but the full economic fallout is still a bit of a mystery. So far it seems many co-ops and condos are doing pretty well when it comes to collecting maintenance and common charges. But what do you advise boards in the event that shareholders and unit owners start falling behind?
Well, the first thing boards need to do is be sure they're attuned and getting monthly reports on who's paying and who isn't. You need to be on top of your arrears and not let them accumulate before taking action. So I'm telling boards to review their arrears policy. You should have a letter going out from management reminding people that as soon as they're 30 days past due, that they're past due. And boards should make sure they have a late-fee policy and are applying late fees.
Once it gets to three months, it needs to go into legal right away, whether you're a co-op or a condo. A lot of times the condos are slower to take action than a co-op, but they really can't afford to in this market. One of the reasons a co-op in particular should be aggressive is that if there is a loan, a lender with collateral of the shares, the lender will step up and make payments if the owner doesn't. And the sooner you get hold of the lender, the sooner you can get payments restarted, so that you're no longer sitting with a lack of income from a multiple number of units.
This sounds like a pretty aggressive strategy you're putting forward.
It's the strategy I’ve been telling my buildings to use for 30 years. Do not let arrears mount up, because it can take six months before you can get a bank to step up and start paying maintenance. In a condominium, you don't get to pressure the bank to make payments. You need to file a lien, and you may need to make a decision very quickly either to start foreclosing on that lien or to bring some kind of action to collect the money. So in condominiums it's a much longer process that could take two or three years in order for you to collect the money.
You need to get counsel lined up, and it should be someone who handles arrears regularly. Can I go file suit to get arrears? Sure, but I don't like to litigate. It's not what I do, so the fees are high. Counsel that does handle co-op and condo arrears on a regular basis are in court every day. They have somebody down there to file the papers and process them, which keeps costs down. And that’s important, even though the costs get passed on to the owners who are in arrears, because you have to pay the bills until you get reimbursed.
Do you think that the incidence of arrears in co-ops and condos is going to increase in the coming months and as the crisis goes on?
Absolutely. I truly believe it will be like six months before the real economic fallout from COVID-19 is realized by everyone across the board. There are several things in play. There are a lot of people who are still on furlough from their jobs and not laid off yet, but I see a whole wave of layoffs coming. We're already hearing it from big companies like Old Navy, Microsoft and Google; but what about all those smaller companies? The middle-range companies that benefited from the Paycheck Protection Program and stimulus loans had a moratorium on laying people off – now that that has ended, what’s going to happen? Where are the new jobs? People are going to have difficulty finding them. The other important thing to realize is that if you have a bunch of owners who are renting out apartments as an investment, they may lose their tenants and not be able to find new tenants. There's a lot of rental properties on the market right now and not a lot of people looking.
Let's shift gears now and talk about sublet policies. I just saw a story that the second-quarter real estate sales fell by half in the city from a year ago. A lot of people are leaving the city either temporarily or permanently, and maybe they can't or don't want to sell their apartments. Do you think it's time for co-op boards to revisit their sublet policies in light of what's happening?
I have co-op clients already doing that. I actually had a shareholder in one of the larger co-ops I represent already approach the board questioning what the sublet policy was and whether they were going to ease up on it. He had planned to put his apartment on the market, but was uncertain that he would be able to sell because of COVID-19. The board already has a policy that you have to have lived in the apartment two years out of every five before you can request, which is fairly standard. This gentleman had never sublet before, so the answer was easy for him.
We had a question raised today at a different co-op, which is going to be revisiting whether or not to liberalize their sublet policy at their next board meeting. And another building that doesn't allow subletting contacted me to discuss whether or not they should start allowing it. So yes, you do need to revisit your policy, and you may need to ease it up. If you're very restrictive, you may need to go from three years to two years out of every five, or something like that. I'm not sure I would advise giving up the requirement that you have to live in the apartment for a year or two before you can request to sublet, because the last thing most co-ops want is investor ownership. They want resident ownership.
Actually, reviewing your sublet policy is not new. We had to do this in the late '80s and early '90s, when there was the economic fallout with the tax code changes and sponsors needing to disclose their financial situations. There was a real chill on the re-saleability of co-ops, and a lot of people were stuck, and a lot of buildings had to ease up their sublet policies after that.
We’ve talked about arrears on the residential side. On the commercial side, a lot of businesses were shuttered, and that income, which is vital to many co-op and condo boards, vanished. Do you advise boards to renegotiate contracts with their commercial tenants?
Absolutely. I have a small building in Brooklyn that has a retail tenant on the first floor, and like many very small buildings with retail tenants, it's a very critical income stream to pay their operating costs. This particular building doesn't use it to offset operating. They’re operating comes out of maintenance charges, and they use the commercial income to build up their reserves to do work when they need it. So they have a little more leverage, a little more flexibility, in how they negotiate with the tenant. What you have to remember is that right now the tenants have the leverage, since there’s a moratorium on bringing any kind of commercial eviction action in the courts. You cannot even bring an action to collect arrears from your commercial tenants right now.
So you have to keep that very much in mind with your commercial tenants, and not just retail but doctor and therapist offices. A lot of people are shifting to working from home, particularly psychiatrists, psychologists and social workers, and they may not want to keep the office anymore. They may try to get out of their lease. You're going to have difficulty bringing any action and doing any collections. If you get the tenant out or let them out, who's your new tenant going to be? Who's going to rent this space now?
So you’re saying that it's in the interest of co-op and condo boards to hang on to a commercial tenant if they can.
Absolutely. Try to negotiate something – a reduction in rent, some kind of extended deferral, a renegotiation, whatever you can do. Another thing to think about is if you have restaurants, bars or any kind of a facility where groups of people meet, they’ve been allowed to reopen for inside dining, but there are restrictions. Maybe some of these restaurants are going to try to stay in business, but they're going to need to upgrade their ventilation system. What are the lease obligations with that? Is it a co-op or condo responsibility, or is it the tenant’s responsibility? That's going to vary from lease to lease. So that's an expense you may end up having, or you may want to share that expense with the tenant to keep the business going, because if you lose the tenant, who are you going to get into the space? These are all things that you need to weigh. You need to be flexible.
I guess the one thing that we can be sure of is that the economic fallout is going to intensify in the months to come.
Absolutely, and it's going to affect sales as well. Right now there seems to be some pent-up demand for apartments and people are buying, but that's going to slow down. There's going to be too much on the market, so prices are going to come down. This is also going to affect flip taxes that are collected by buildings. Winter is coming.