Unlike other cities and towns across the land, New York’s borough of Manhattan consists of almost all multi-tenant buildings. They’re either rental apartments or owner-occupied (mostly) co-ops. While hurricanes and wildfires aren’t issues, a great many buildings are pre-war, necessitating major updating, and thus hefty assessments.
Co-ops differ significantly from condos. Condos are like houses, with occupants owning them outright. With co-ops, occupants simply own a piece or percentage of the building, not the individual units.
Also, buyer hopefuls must be approved by the co-op board, much like a private country club. Other than discrimination, there are virtually no laws, and boards have significant power to approve or reject potential purchasers, with broad discretion in their decision-making. This power is generally governed by the building’s bylaws and proprietary lease, and the Business Corporation Law (BCL) in New York. While they can’t be arbitrary or illegal, they can reject a purchase for virtually any reason, or no reason at all.
At the two Coldwell Banker Warburg offices in New York City, agents provided various thoughts on the state of the co-op business at present, financial and otherwise. Much of the information provided could be applicable to co-ops in other municipalities.
“In Manhattan, co-ops are very accustomed to assessments,” says Susan Katz. “Owners expect that operating costs will be paid out of the (monthly) maintenance (charge) and capital improvements will be paid from assessments. Most co-ops want to have a tight budget so as not to overcharge on maintenance. We have a lot of old buildings with boilers, roofs and elevators needing updating. The city enforces much of this, and buildings can’t get away with the kind of ‘deferred maintenance’ that occurs elsewhere in the country. There are exceptions, but in general, people in co-ops expect that there will be periodic assessments.”
Katz experienced firsthand what many co-op and/or condo owners face with their homes and HOAs.
“Three years ago, I bought a condo in a 68-unit waterfront property with a pool in Bridgeport, Connecticut,” she says. “I knew there had been a lot of deferred maintenance over the years, and I was given an engineer’s report for a $3.5 million capital expenditure project. I was assured that there was a new board committed to maintaining and upgrading the property, and they had already done good work increasing the reserve fund.
“In the last two years, two board presidents have been ousted, and there has been a real backlash to borrowing the money needed to fix the serious problems with the buildings. We need new roofs, extensive masonry repair, paving, entrance gates, columns holding up the largest building with a garage underneath—and more.
“I’m now on the board, and there is a process in place to bring the community along and involve them in the decision-making. I’m hopeful, but not confident. Many of the older residents are on fixed incomes and cannot afford a large assessment of their unit. Some of the newer owners may not have realized what was coming, and they are suspicious. We also have a lot of long-time investors who may or may not be paying attention. The board needs a 60% yes vote to pass the cap-ex project.
“I spend a lot of time at board meetings explaining the difference between operating expenses and capital expenditures,” she concludes. “Buyers are having trouble getting mortgages due to deferred maintenance, and the ability to insure the complex is at risk. We are not talking about the level of expense they have in Florida; these are smaller complexes in Connecticut, and they are not high rises, but many of the issues are the same.”
Getting back to Manhattan property issues, Veronique Perrin notes that some clients don’t realize what could be in store with the purchase of a co-op.
“I am always amazed by how many potential buyers were not aware of assessments,” she says. “In one deal, we only found out when my buyer’s attorney did the due diligence, and it came up in the board meeting minutes. That killed the deal, because that assessment tipped the scale for the debt-to-income ratio. My buyers did not have the extra cash to pay it in full at once.
“The topic always comes up at yearly shareholder meetings, but quite often the units are just pied-a-terres, so the owners are not actively involved or invested in the daily life of the building, and don’t attend. If you don’t attend, you do not know what’s going on. Meanwhile, a huge one-time assessment—or even a monthly one—will definitely affect any sale.”
Building renovations using assessment funds can have other negative impacts past the financials.
“The whole thing means a huge inconvenience, with scaffolding all around,” says Perrin. “It could also end up blocking your view or take away access to outdoor space for what could be years. If buildings don’t comply, there are substantial fines to pay. So buyers and shareholders need to know what the plan is, and know what that will mean for them as a shareholder.”
Sarkie Ampim explains that new construction buildings sometimes offer perks for those buying into them, but cautions clients that it’s a meandering process.
“I will often discuss the importance of understanding offering plans with new developments because of tax abatements and common charges that could increase once incentives expire,” he says. “It’s important for buyers to understand what they’re really signing up for long-term.
For co-ops, I make sure to explain the financial requirements, board approval process and different taxes, if necessary, to set the right expectations. A lot of buyers are from outside the city and aren’t used to the level of vetting that takes place to own a co-op here.”
Tate Kelly says one new law can not only affect the building’s financials, but can potentially be an inconvenience and eyesore on the building if they have to do significant work to the facade, as there will be scaffolding in place on the sidewalk and surrounding the building.
“Another law that I am beginning to discuss more with my clients is one which was established to put a cap on carbon emissions intensity for every building in New York City, with the aim of getting buildings to reduce their carbon emissions or face fines,” he says. “To do this, co-op owners will have to address the building’s energy efficiency, which can be quite costly.”
Parisa Afkhami adds that owners are having to understand the timing of potential assessments as much as buyers.
“These assessments have become burdensome on owners, particularly those on limited or no incomes, and have become an impetus to sell, sometimes at a loss,” she says. “Especially Local Law 11 (in which a licensed engineer or registered architect oversees the inspection of the facade of every building greater than six stories in the five boroughs). I always check when this was completed, and when it will be next.”
Of the facade repairs, Jarrod Duncan says that while the cost of this to the current and potential new owners is the primary concern, “I have also had issues for some buyers when it comes to financing in certain buildings as well,” he says. “Banks have an ongoing list of buildings in the city that they have deemed unfit to finance due to the facade conditions. This is very important as it can limit the pool of buyers.”
