Page 9 - New York Cooperator July 2020

COOPERATOR.COM THE COOPERATOR — JULY 2020 9 Cesarano & Khan, PC Certified Public Accountants PROVIDING PROFESSIONAL SERVICES TO THE COOPERATIVE AND CONDOMINIUM COMMUNITY Reporting on Financial Statements • Tax Services Budgeting & Consulting • Election Tabulation Services For additional information, contact Carl M. Cesarano, CPA 199 JERICHO TURNPIKE, SUITE 400 • FLORAL PARK, NY 11001 (516) 437-8200 and 718-478-7400 • info@ck-cpas.com cesarano &khan1_8 use this_:cesarano &khan 4 7/22/15 4:59 PM Page 1 exurban areas like the Hamptons on Long to approve the application, they should not Island, the Hudson Valley, the Berkshires in go forward with the interview. That is gen- Massachusetts, and New Jersey’s shore and erally accepted advice by legal and manage- horse-farm country. There has also been an ment consultants.” exodus of young families to both nearby sub- urbs and distant destinations, where manag- ing children is easier. Overall, though, Miller says he sees the the market. I don’t think people are going to market recovering easily. He indicates that dump apartments way below market. I don’t market factors affecting the value and pric- ing of apartment homes had begun to settle to get out of Manhattan that badly. People into some sort of natural equilibrium before will wait for the market to settle down. And the COVID-19 crisis. He expects that trend then, if they want to get out of New York for to continue once the real estate transaction other reasons than COVID-19, they’ll sell process can resume. On a Micro Scale So what does this uncertainty mean for ment for any old price? No. It’s a waiting co-op and condo owners and, by exten- sion, for how boards make their decisions in regards to sales of units? Condominium market-attuned pros is that boards of both boards have little grounds upon which to re- ject a prospective purchaser, other than the proceed with rational, business-judgement- purchaser’s inability to meet financial obli- gations. In co-ops, though, boards have the ing to rumors or unsubstantiated hunches. power to reject a sale for any reason, or for That’s not only the best way to survive and no reason at all. According to Miller, “The heavy layer even in calmer times. of uncertainty all of us are grappling with makes boards more conservative in their de- cisions. It is the same outcome seen in the lending community as they continue to mit- igate risk through more conservative LTVs \\\\\\\[loans-to-value\\\\\\\], higher credit scores, and enjoying the spread by not letting rates drift much lower.” The question is whether a board can choose to reject a sale on the grounds of wanting to maintain a particular price level within the building. According to Phil Simp- son, an attorney with Robinson Brog, a law firm based in Manhattan, “Co-op boards do just that. Their reason or justification—nev- er put into writing, of course—is to protect overall value in the building. Remember, they do not have to give reasons for their de- cision to reject a purchase; they just cannot violate the anti-discrimination laws of New York City and New York State. People may find it hard to sell, even if their expectations of a sale price have adjusted to the market, because boards may not approve sales be- cause of that price \\\\\\\[being too low\\\\\\\].” An Experienced Manager’s View Daniel Wollman, CEO of New York- based management company Gumley Haft, says, “In 30 years of managing co-ops and condos, I have seen no more than a couple of rejections on the basis of price. It’s not com- mon. Purchase price is certainly something a board would look at, because their job as a fiduciary is to help build value—but each building has its own financial criteria. Co-op boards look at an application, analyze it, ap- ply their building’s criteria, and then deter- mine whether they need more information, whether they want to interview the applicant, or if they will reject the proposed purchaser. If for any reason a board believes that they want to reject the proposed purchaser, they would typically decline to interview them. We tell our boards that if they are not prone Wollman goes on to say that “\\\\\\\[t\\\\\\\]he mar- ket is going to reset. Buyers and sellers are going to reset their expectations along with see that happening. I don’t think people want their apartment. Do I see people running away from New York and selling their apart- game, and the market will rise again in time.” In the meantime, the consensus among condominium and co-op properties should driven decision making, rather than react- thrive past the current crisis, but good advice n A J Sidransky is a staff writer/reporter for The Cooperator, and a published novelist. home for residents. Many aspects of a budget are essential- ly fixed. Items like water and sewer costs, utility delivery, insurance premiums, payroll (especially where determined by collective bargaining agreements), and taxes not only are non-negotiable, they also tend to make up a large proportion of an association’s or corporation’s oper- ating expenses. For other recurring costs that are dis- cretionary or can be reduced with some effort, boards must balance maintaining or enhancing the services their com- munities expect with the costs of those services. Boards—usually with support from their managing agents and financial advisors—have to use their best judge- ment about what their communities will require for a given year and the costs an- ticipated for those goods and services. “Building a budget is really a bit of an art and science,” says Jim Stoller, presi- dent and CEO of The Building Group (TBG) in Chicago. “As I tell clients, a budget is not something that is cast in stone; it’s a good faith estimate of income and expenses. The world changes, and one has to adapt to the environment that we live in. But we can make educated as- sumptions based on facts and building conditions, reserve studies, and cost es- calations. So it’s a balancing act between what residents want, what they need, and what they can afford.” Even in affluent associations where keeping carrying charges as low as pos- sible may not be a main consideration, boards still have to plan and prioritize based on expected cost increases like util- ities and payroll, along with infrastruc- ture and systems maintenance. And in the current environment, those priorities can be a bit mercurial. “What the current conditions have done to budgets—that’s a big issue,” says Stoller. “We’ve had some buildings where some residents want to have a maintenance person standing by the front door polishing the door every time someone goes in and out, and there are other people who just say they don’t want to spend the money.” Accounting for Crisis The best of budgets will include some form of savings—a reserve account sepa- rate from day-to-day operations—and a plan to replenish those funds, should they be used to cover unplanned, emer- gency expenses. Most accountants ex- perienced with multifamily community budgets recommend maintaining a re- serve account with approximately three to six months worth of operating funds. That means that if a corporation’s or as- sociation’s yearly budget is $12 million, it should keep $3 million to $6 million in a reserve account at all times. That way, when emergencies happen—as they often do—there are funds available to pay for them without having to incur or increase debt obligations. Whether co-op and condo boards with healthy reserves end up dipping into them to handle COVID-related pay- ables remains to be seen. At this point, says Paul Santoriello, president of Taylor Management in New Jersey, things are still too fluid to make any solid budget predictions or revisions. “In three months at least,” he says, “boards might be at a point where they can see where their ar- rears are, and what adjustments need to be made for projections going forward.” He is emphatic that they should not promise—or even consider—reducing or eliminating fees for amenities that have been forced to close, as this would wreak havoc on operational income levels that are already uncertain. What is certain is that the additional costs of more clean- ing supplies, protective gear, equipment like foggers and sanitizing stations, ther- mometers, and other new necessities will need to be accounted for. On the other hand, there might also be some cost reductions; Stoller notes that capital projects and construction not critical to building function have been put on hold in the buildings he manages, and it is as yet unclear when or in what capacity those projects will resume. If it’s reasonable to assume those projects won’t be occurring in the coming fiscal year, the projected costs associated with them could potentially be eliminated BUDGETING... continued from page 1 continued on page 10