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5 ways to tell if the NYC apartment you want to buy is about to get hit with an assessment

By Sophie Rogers  | December 20, 2017 - 10:00AM
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When you finally find an apartment that fits your needs–and maybe even some of your wants–there’s still more to think about than just your monthly carrying costs. Beyond the mortgage, maintenance, and utilities, there is also the possibility that you could get hit with an assessment at any given moment. That could mean an extra fee in the four-, five-, or even six-figure range for building expenses that are too big to be covered by the monthly maintenance or other charges.

Generally, these fees support projects deemed by the board to be either desirable or necessary to improve the building. These projects can take the form of an elevator replacement, a new roof deck or boiler, façade repairs, etc. Different buildings finance these projects and general upkeep with varying strategies and levels of responsibility. Here’s what to consider when closing your deal.

1. Hire a real estate attorney who’s been around the block a few (hundred) times

The key to deciphering the veiled terms and rampant legalese in a building’s financial reports is to hire the right attorney for the job, says real estate broker Brian Lewis of Compass.

“Make sure your real estate attorney is known for their work with the type of property your interested in,” he says. “They should not be cutting their teeth on your case.”

Ultimately, your attorney should be your strongest advocate and know her way around your type of property, be it condo, co-op, brownstone, etc., blindfolded and backwards. Your attorney will be your window into the world of your future home, the executor of all the necessary due diligence, and your main point of contact with the building manager and board.

2. Know what’s on the docket for the next 12-24 months

A major part of your attorney’s job is to send in an extensive questionnaire to the building’s management and to read the board minutes.

According to real estate attorney Bruce Cohen of Cohen and Frankel, your attorney’s eye should be trained on three major things: any projects announced or expected, the condition of the major building systems, like plumbing and electricity, and how any such projects and repairs or upgrades are expected to be financed.

The questionnaire should ask about future projects or current infrastructural issues the building is seeking to fix in the next year or so.

In smaller buildings, things like boiler and elevator replacement can spur significant assessments (think $10,000-$20,000 an apartment in a 30-unit building). Larger buildings can spread those costs out less painfully, but are not immune from potentially big-ticket jobs like Local Law 11-mandated façade repairs, which can run into the seven figures.

Do the board minutes show residents are clamoring for a roof deck? If it keeps coming up in the board minutes, there’s a good possibility you’ll be helping front the cost of a roof deck within a couple years of moving in.

One caveat about board minutes: Cohen warns they may be whitewashed so as not to scare off potential buyers.

3. Scour the building’s financial statements for clues

Part of the due diligence to be performed by your attorney is interpreting the building’s financial statement.

This is not a DIY project, warns Deanna Kory, a real estate agent at Corcoran. For one thing, what may appear as big losses on paper may not actually represent any irresponsible or negative financing.

Real estate attorney (and Brick sponsor) Steve Wagner of Wagner Berkow, LLP pays particular attention to the reserve funds and cash flow statements.

The reserve funds can indicate how well the building can withstand moderate expenses without assessments. But Wagner points out that condo boards in particular prefer not to have large reserves.

“Their feeling is that if they need money, they will ask their unit owners to pony up, rather than sit on the money for a long time,” he says.

So if you’re looking in a condo, be prepared for more reliance on assessments to cover moderately sized projects. A look at the cash flow can give you an idea of not only how much money they’ve spent in the last year, but also of the way the owners have invested in the building. In this way, the cash flow can be an indication of how well maintained the building is.

“You have to invest in a business in order to keep it running,” Wagner explains. “Through depreciation, you’re going to liquidate the business. In order to keep it running, you need to make investments. In a co-op or condo, that means keeping things new.”

Assessments for capital improvement help you keep both your quality of life and property values high. If you don’t see adequate spending on these kinds of projects, like Local Law 11 work for instance, or a heavy reliance on temporary fixes rather than larger, more infrequent projects, those can be signs of improper upkeep, which may result in larger assessments in the future.

Your attorney will be the one who can tell you that the $75,000 the prewar building with gargoyles and fine stone masonry spent on the facade should look a lot more like half a million, and maybe that building isn’t as scrupulous as you may have thought.

4. Remember that history tends to repeat itself

A resounding insight from all of the experts we spoke to is that the past informs the future.

Make sure you and your attorney look carefully at the projects undertaken by the building in the last several years. How often have they occurred? What kinds of projects do they tend to be?

Steve Wagner recommends paying close attention to the state of the building’s infrastructure to get a sense of this beyond what the broker can (or what the sellers may be willing to) tell you. One thing he looks at is the brick on the building.

“Different color brick suggests a lot of repairs," Wagner says. "There have been buildings that for years have been doing the minimum to get by and not quality work.”

You have to compare your observations to the cash flow. Maybe this is just what the brick looks like, but maybe the building has been reluctant to finance a single cohesive project. Reliance on temporary fixes or on less-than-optimal materials can lead to frighteningly large assessments in the near future.

Buildings with many projects frequently paid for by assessments in the past, Deanna Kory says, will probably continue to act similarly in the future, and you should probably prepare yourself for a relatively assessment-heavy culture if you buy in one. Looking at whether a building has leaned towards increasing maintenance, drawing on lines of credit, or levying assessments in order to budget its projects will give you a good sense of what they might do in the future.

5. Determine the building’s financial philosophy

Make sure to take a good look at how the building finances everything from large-scale changes and improvements to routine infrastructural maintenance. Do they raise the maintenance accordingly? Or do they rely on regular assessments to cover the costs?

There are two reasons why a building would rely on assessments, real estate attorney Toby Cohen of the firm Holm & O'Hara explains.

“Low maintenance is a selling point, so some boards, in an effort to keep the maintenance in the building low, will vote in an ongoing assessment with no end date, which they use to supplement the below-market maintenance for operating costs,” he says. A buyer encouraged by low maintenance fees may feel rather misled when barraged with high assessments.

However, there could be a silver lining to an assessment-heavy strategy. Every dollar you spend in assessments for capital improvements, the IRS considers part of the payment on your home, Cohen points out. So unlike maintenance fees, assessments can result in significant tax write-offs for owners who go to sell, or at least, under the current tax law…

Because this financing strategy varies so extremely from the more well-known raising-maintenance strategy, you’ll want to rigorously decipher your building’s financial philosophy with your attorney from the financial statements, questionnaire, and board minutes. You would also be wise to speak to your accountant, to figure out which philosophy could work best for you.

 

 

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