TIPS ON BUYING A NYC APARTMENT

There are usually two reasons for an ongoing assessment. The first is to raise funds for capital projects or capital reserves. It is not unusual for a building to face more than one capital project in short order, or year after year after year. For instance, funds may be raised or otherwise available for a needed roof replacement but then the board learns that the heating plant will not make it through another winter, and, hey, the elevator controller is problematic, and replacement parts are no longer available.

Then, too, there are those buildings whose construction always means that each Local Law 11 cycle triggers yet another massive project. So the board must either borrow the money or assess over a protracted period of time to cover scheduled, anticipated, and unexpected capital projects. These assessments should be tracked by unit-owners/shareholders as they add to the cost basis of their individual apartments.

Then there are the boards that believe that their common charges/maintenance payments are higher than any similar building in the neighborhood and that this devalues the marketability of their apartments. To keep common charges/maintenance payments in check, some boards will keep running assessments on the books to subsidize operating costs rather than raise common charges/maintenance payments. The accountants call this "smoke and mirrors" and it is a ploy that is clearly evident to anyone reviewing a building's annual financial statements. This type of assessment does not add to the residents' cost basis.

Lori Buchbinder is a principal at Buchbinder & Warren.

We put in an offer for a condo apartment, and were told we had to go for an interview. I thought that was just for co-ops. What's up?

Although condominiums have fewer tools than do cooperatives in controlling their residents, they do have "the right of first refusal" when it comes to the sale of any unit in the building. This right is very rarely exercised, primarily because most condos lack the funds to buy at today's market rates, but if the board has serious concerns about a potential buyer, it has the right to buy the unit under the same terms to keep that buyer out.

A condo board is well within its rights to request an interview with any potential buyer to meet him or her, to see if he or she fits in well with the community, and to assess whether there are any glaring financial or personality issues.

As a potential buyer, it behooves you to meet your new board to give you the same peace of mind that they are seeking: that you feel comfortable spending a good part of your time in their midst over the coming years.

Because condos have less leverage over defaulting owners than do co-ops, they have good reason to be vigilant about screening incoming owners to be sure they can afford to live there, and that they intend to follow the bylaws, rules, and regulations of the condo. Once you are living in the building, you may decide to join the board yourself and help keep it running smoothly. Standing in a board's shoes, you are likely to agree that interviewing potential new buyers is a wise idea.

Harris Bornstein is CFO at Douglas Elliman  Property Management.

I'm buying a sixth-floor apartment. There is no doorman, and I was told by the board that I have to go down to the lobby every time someone I don't recognize buzzes. Why?

The buyer may find that, while extreme, the extra security is warranted. Ultimately, a buyer should be comfortable with a property's level of security before purchasing. As with the purchase of any new home, research is fundamental. The buyer should visit the current managing agent, read the minutes, and review the house rules with a broker and ask questions. An interview with the board of directors is a great opportunity to find out the reasoning behind house rules that may seem extreme or out of the ordinary. By asking why these rules are in place, the buyer will be more informed; for example, "Was there an incident that caused this to be put into place?"

When a buyer who is aware of the house rules purchases an apartment, he or she agrees to obey them, and the co-op board must enforce them. The board implements these regulations because they are governed as a corporation and are subject to its own bylaws. House rules can be amended by a majority vote of the board. Added security measures are common in properties with older residents.

Jackeline Monzon is a partner at Crystal Real Estate Management.

We're in the middle of the purchase process and just learned about an upcoming assessment. We're concerned that the board doesn't know what it's doing.

In co-op and condo circles, "assessment" has long been considered a dirty word. But, in reality, it is the cleanest way to fund a project. For the most part, an assessment has a clear start and end date. The funds are meant for a specific project and based on a specific budget. As a shareholder or unit-owner, you know what you are paying for and how long you have to pay for it. There is comfort in knowing and being able to plan for a finite end date to both the project and the cost.

The alternative methods of raising the funds are through common charge contributions or borrowing. While I'm a big proponent of building a reserve fund through common charge contributions, I feel this is a long-term solution in capital planning. The danger in longer-term solutions is that the people making the decision – the board members – aren't always there for the duration. Boards change and, when that happens, so do strategies and agendas. With any long-term planning, you have to hope that board members and their successors have the same fiduciary discipline and similar financial goals.

Assessments are clear in what they are meant to address, leaving little room for misunderstanding and misinterpretation.

A.J. Rexhepi is director of operations & development at Century Management.

A new shareholder should be concerned about an open lawsuit because the outcome may pose a financial burden on the building. Not all lawsuits are covered by insurance policies and, therefore, the cost of litigation and a possible negative outcome could wipe out reserves or require a special assessment. As a new shareholder, you are now faced with funding these costs in addition to your regular monthly maintenance and mortgage payment. I suggest a shareholder get a legal opinion from his or her attorney as to the likelihood of a negative outcome, or get an opinion from the attorney representing the building.

Buildings face lawsuits all the time for trips and falls, interior damages, etc., but they are often covered by the building's insurance. Lawsuits for claims of discrimination, sexual harassment, human rights violations, mold, asbestos, or fraud are usually not covered under these policies. That's when the effect could be significant.

Pamela DeLorme is president of Delkap Management.

Falling behind on collecting arrears is a big problem with smaller buildings, especially co-ops. Larger buildings have many shareholders and they can survive if a few people don't pay. I see this in the large new condominiums in which the foreign investors often don't pay their common charges.  

In smaller buildings, there are only a few owners. If one or two of them do not pay, the other owners have to pay double. In essence, the owners who pay are punished for the malfeasance of those who don't; they have to pay their own common charges and put in money through assessments or increased monthly charges to make up the budget shortfall.

These buildings have mortgages to pay. If they don't have sufficient funds to cover their mortgages, they could default and the lender could foreclose. We saw this in the early 1990s when the bigger buildings got into trouble because sponsors with unsold apartments and rent-stabilized or rent-controlled apartments could not afford to make the monthly maintenance payments. In sum, boards are advised to aggressively pursue arrears. Although the legal costs may be significant, you have to get owners to pay. Banks will not lend to buildings or unit-purchasers if there are significant arrears in maintenance or common charge payments.

Martin S. Kera is president of Bren Management

I want to put in a dishwasher, but the broker said I would have to ask the board. The apartment I want to buy already has a washer/dryer, so why would this be a problem?

Your board has probably consulted with its engineer or architect or other professional involved with the building's systems. Many properties, especially the beautiful older ones, do not have sufficient infrastructure for all the equipment we like to use now.

In your case, the building's drain system may have limited capacity. The board may have restricted the quantity and type of equipment it will allow to accommodate the current drain capacity; it may have chosen to cap certain equipment to what was present as of a particular date; or it may have limited the number or type of equipment based on some other guidelines. The board may also be concerned about additional costs for water/sewer charges that the additional dishwasher would incur.

I encourage you to discuss any concerns with your property manager. Also, arrange an appointment to read your building's minutes. Both resources will provide meaningful guidance to you. Your offering plan may also provide a report of your building's plumbing capacities and an explanation of the equipment originally provided to each apartment.

Finally, you should confirm that the washer/dryer currently installed received the board's approval, especially if they were not part of the original installation by the sponsor. If your seller, or any former owner of the apartment, installed the washer/dryer without approval from the board, you may need to remove it (using a licensed and insured plumber and electrician).

Divya Rashad is executive vice president and managing director of The Andrews Organization.

Not always. The importance of having a reserve fund has been coming up with greater frequency in the last few years. This past spring, we began managing a building and it was immediately apparent that the property was a wreck. In the field, our property managers were met with severe problems such as deteriorating elevators that were damaged from years of neglect, cracked sidewalks in need of repair, a leaky roof, asbestos situations in the boiler room and garage, and a temperamental boiler. And, of course, let's not forget about all the local law work that had not been done!

If Murphy's Law was to apply to any building, this was it! The challenge continued away from the building. Over time, we found ourselves receiving legal notices from irate vendors demanding payments. The largest ones came from oil companies because of the high heating costs of recent winters. We had numerous meetings with the board to come to grips with the enormous financial challenge. A more financially sound building would have turned to its reserves to address these issues. But this was not an option here. This building did not have any reserves.

A special meeting had been called to give all shareholders an opportunity to speak. The truth was painfully clear. There was no money for a rainy day. Ultimately, the board decided to impose a special assessment. Because of the magnitude of the financial challenge, the assessment will be a part of their lives for the next four years.

Anastasios Magoulas is CEO of All Area Realty Services.

Most well-run co-ops and condos have a reserve fund, which you can think of as a building savings account. As an owner/shareholder, you want peace of mind that, should an unexpected capital project arise or large-scale repair be needed, the building has the funds to cover the expense. Imagine a rather large and unexpected leak in the roof causes damage to many of the building's common areas. If a building does not have a reserve fund, the owners/shareholders are responsible for coming up with the immediate funds needed to pay for that unexpected roof repair. The reserve fund makes it easier for the building's management team to expedite needed repairs.

It should be a red flag to you if a building you are looking to buy into does not have a reserve fund. When reviewing a building's financials for a prospective owner/shareholder, auditors and attorneys like to see a reserve fund that contains enough money to cover an unexpected expense or repair that could arise. They want to assure their client that the building has money to fall back on without the need to assess the building's owners/shareholders. You want to buy into a financially healthy building, one with three to six months' worth of common charges or maintenance charges in its reserve account. It is also recommended that a building set additional funds aside to finance anticipated future major repairs and replacement projects.

The reserve is a positive building asset, one that is shared by all unit-owners/shareholders on the balance sheet. A reserve fund demonstrates board discipline and healthy financial solvency.

Michael Berenson is president of Akam Associates