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March 6, 2008
Our Building Is Broke!
... not quite, but our 40-unit elevator prewar building is on tough times.
We have a substantial reserve fund, but that is about to be slaughtered by two unexpected and potentially large (100K each) expenses. There was no real way to foresee these charges, and I can't blame previous boards. So here we are.
What should we do now?
We have a small flip tax which generates very little revenue since nobody seems to move. We have precious little other revenue (bike storage, resident lockers, etc).
Any idea how people raise money? Should we use the reserve -- leaving us with 75kish, a small amount for a large building? Should we impose an assessment? (We have lots of older residents for whom a 5k charge could be too much). Should we raise maitanence fees -- we've done this so many times in recent years to keep up with heating, etc., and I think we're already slightly above market. The building runs at just a barely break-even point now. We can't refinance for several years. A bake sale? Just kidding - but would love creative ideas about raising capital.
The building itself is in great shape with no other projects in the near future (he said hopefully).
Comments
The very purpose of a "reserve fund" is to meet unexpectedly large expenses that can't be funded out of the annual budget. The fund doesn't exist just to sit there so you can be proud of it. If you want to keep an absurdly large reserve fund intact and assess residents for the big expense instead, then that is poor management.
Assuming you continue to operate at break even without raising maintenance (and that you do not want to raise maintenance further), then you could assess residents on a staged basis to replenish the depleted reserves, after using them to fund the unexpected large expenses. That way residents don't have to swallow the assessment all at once.
You may want to investigate opening a credit line for the building, if one is not in place already. That can serve as an on-demand reserve fund, although its availability depends on your current financial picture.
Posted by: Emigre at March 6, 2008 10:57 AM
Maintenance should be raised until it covers the ongoing operating costs of the building and some extra with which to build the reserve. If it's just breaking even it still has to go up. Spend the reserve on the necessary large capital improvements - that's what it is designed for. Increase the flip tax and other fees in order to generate additional reserve building sources. Cut some expenditures out of the budget if possible (cleaning staff, etc.). And, regardless of the age of residents, do a special assessment if necessary.
There's no magic - only math.
Posted by: guest at March 6, 2008 11:02 AM
What are the assessments running currently? And put them in the context of the amount of square footage. Maybe you think they are too high but maybe they are too low. Obviously assessments should have been higher to build a reserve over the years. That's what separates a good condo from a poor one. The only thing you can do now is a special capital charge. Usually these are done months in advance of the budgetted expenditure. They are usually spread out over 6-12 months. That's life in the big city!
Posted by: daveinbedstuy at March 6, 2008 11:02 AM
Our building was in a similar bind. We sold the storage lockers instead of renting them. I think they cost 2k each (we were renting them for $50/yr) and we raised about 65k. That covered half of our roof issues and we took the rest from the reserve fund.
Meanwhile, I don't agree that 275k is an absurdly large reserve fund (if my math is right) for a prewar elevator building. We've been told reserve fund should run around 5k per apartment in buildings your/our size.
Posted by: guest at March 6, 2008 11:05 AM
Agree with emigre. If you will still have 75k after two big unforeseen disasters, that's not bad. Use a mellower special assessment to bring the reserve back up over time. Start it now. To get back to $275k, you need about $5k from each unit. Over 3 years, that's about $140/mo. Also, could you lower the interest rate on your underlying mortgage enough to warrant a refi? You could take out a bit of cash that way and the accompanying increase in maintenance would be deductible.
Posted by: slopefarm at March 6, 2008 11:17 AM
Thanks for your thoughts! I really appreciate it.
To answer the specific questions:
Maint. runs about $1.20 psf. Okay for a prewar building with super, but not great. Any higher and people thinks it impacts resale, and I agree. Because we've built an established reserve fund (yes, 275), there wasn't much need to continue to raise money above and beyond running costs.
Our expenses have been cut to the minimum, I think.
Refinancing at this point would be cost-prohibitive. The underlying mortgage is on pretty good terms, we'd only do it to take out a slightly larger mortgage. But again, not an option right now.
Really appreciate the ideas.
Posted by: guest at March 6, 2008 11:28 AM
I once lived in a building with a large reserve fund and we were able to buy the building next door. It was poorly run and there was a lot of value there. Maybe that's the idea -- double-down.
Posted by: guest at March 6, 2008 11:35 AM
Agree with slopefarm. Another thing to do short-term if you need money is to assess the R/E tax abatements. Figure out what it is on a per share basis so it is a wash on the maintenance (this usually happens in April). You can do this every year and put it straight to the reserve fund. Keep maintenace for operating expenses only.
Posted by: guest at March 6, 2008 12:19 PM
Are there any sponsor units still held by the building? If so, sell them.
Posted by: guest at March 6, 2008 12:46 PM
All really good ideas above. I would only add that the maintenance should be a bit higher than operating expenses - that way, (1) it not only covers operating expenses, but puts away a bit into the reserve to cover some of the capital improvements/unexpected stuff, and (2) you never get in the position of having it BELOW operating costs (which could happen when operating costs rise sharply) - instead, you always have maintenance covering regular operating expenses. This second part is important if you decide to borrow money.
If you don't want to assess a lot due to the shareholders not being able to handle it, you can up your reserve, once you spend down for your repairs, by taking out a line of credit, or even a second mortgage, to spread out the pain of paying for it over time. I'd look into comparing the terms of those types of loans. Talk to banks.
You can also look into financing a specific project with a loan, and then having the shareholders pay for it over time. You can do that through assessments (the history of which potential buyers also look at, they don't just look at what the maintenance is), or you can do it by raising the maintenance to cover the loan payment. Me, I'd prefer to have it as a regular payment in my maintenance than assessments, both for my own finances, and for how it looks to potential buyers if I were to sell - but I know others can be of different minds about that.
Since no one is selling, I woudn't worry too much about raising the maintenance to cover operating expenses. Anyone buying in (or their attorney) will want to see at a minimum that the maintenance at least covers operating expenses. While potential buyers may think they want the lowest possibile maintenance, their attorney will set them straight if the building hasn't raised maintenance to at least meet operating expenses. Maintenance should be based on operating expenses, not market maintenance. If you are higher than market, look to reduce costs. But don't stop cleaning the building - just maybe find a way to get it done cheaper.
On assessing the real estate rebates: good idea, but know that you should assess only the coop abatment portion of it, as that is the part that is based on the number of shares owned, which is how coops are supposed to pay for themselves, pro rata per share, and NOT the STAR portion, as that is on a per unit basis, and, if you have elderly people, is partly based on their individual status. Still, the coop abatement is larger part, and will get you some funds.
Posted by: guest at March 6, 2008 3:38 PM
Assess over 12 months. Give people at least 3 months' notice to let them get ready for it. Also, this will give people who can't afford it the ability to move, which generates some flip tax.
Don't feel guilty about it, if they were living in a house that needed a new roof, they'd still have to pay for the roof or move.
Posted by: denton at March 6, 2008 3:51 PM
our maintenance always covers more than operating expenses for a while and then it doesn't. it gets raised every year or two. with a reserve fund of 275k, I wouldn't raise it too much. Use the reserve.
Posted by: guest at March 6, 2008 4:34 PM
You really aren't in that bad shape. Many buildings have that extra expense show up and don't have the funds in reserve to pay for it. So they have to scramble to assess.
You have the funds to pay for what you need, and will have a chunk left over. As slopefarm says, raising the maintenance to bring your reserve back up over a few years is not that much per month. And hopefully, you won't have another large expense show up before that happens.
It really is a positive position you are in. Though I would look to refi or borrow more if there is ANY chance you could have another large expense before you've topped up your reserve again in a few years.
Posted by: guest at March 6, 2008 5:03 PM
1.20/psf in Brooklyn? Yikes. That already sounds high to me.
Posted by: guest at March 6, 2008 5:57 PM
Check out National Cooperative Bank and investigate a loan/credit line.
www.ncb.coop
(yes, that really is a domain)
"NCB, the leading provider of financing to New York housing cooperatives...."
Posted by: guest at March 6, 2008 6:02 PM
What about sublet fees? Do you charge them and are people actually paying them? If your building is large it may be that there are owners subletting apts and you don't even know it. Check everyone and make them pay up.
Posted by: guest at March 6, 2008 8:37 PM
Thanks for all the advice. We actually do a lot of these ideas already (capture the tax rebates, sublet fees, etc). a member of our board thinks we should be "doubling-down" and investing the money in MORE real estate -- as someone here suggested. (too scary, I think).
I suppose we're back to doing a half and half thing: taking half from reserve and raising the rest from an assesment giving people the choice to pay upfront or in monthly installments. This way, there is still some reserve and people who think they may be selling in next 2-3 can pay now and not have that on their maintenance (or not). We are actually trying to make it easier for people to sell -- since that damn flip tax would raise some cash if anyone ever sold.
Thanks again. Again other thoughts appreciated
Posted by: guest at March 7, 2008 10:57 AM
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