There is a reckoning happening in New York: What it costs to operate buildings.
Each of these costs factors into what homeowners pay each month. In cooperative buildings, this line item is called your maintenance fees. In condominiums, they are called common charges. In the latter, real estate taxes not included. So there is sometimes confusion about co-op charges; they look high, but they are all-inclusive.
These include:
- Real Estate Taxes
- Repairs such as gas lines, water lines, brick repointing
- Labor costs
- Insurance costs
You will hear that “80% of all building expenses are nondiscretionary.” What that means is that buildings have real trouble controlling these costs: The wages that unions negotiate, plus the prevailing wage in New York City that impacts non-union employees; the age of buildings and the eventual capital expenses that come around in 100-year-old buildings; the decisions made on a city level that turn into higher real estate taxes. Lest you think the pain is over, insurance rates are skyrocketing at the same time.
Adding to this perfect storm are borrowing costs for buildings. It’s not that higher mortgage rates are a surprise; it’s that most buildings have borrowed for capital expenses at rates under 4%, and at some point in the next few years they will have to refinance the debt. Soon, those costs will leap by 30-50%. This is the biggest liability, called an underlying mortgage, over which cooperative buildings can exert any control. Buyers will walk away from deals when they believe the financial disarray of the building in which they were interested have much, much higher monthly costs looming—too large for comfort.
And Yet
Despite the grim outlook here, there are more than enough people who want to live, anyway. So these problems are not necessarily a death knell, but merely obstacles to overcome. So my question is this: What can buildings do to mitigate these costs, control them, and make their apartments more sellable at the same time? I have a few suggestions to cooperative and condominium boards out there, ideas which are under their control. And I have a few ideas for New York City, too. Both area would help increase buyer enthusiasm, and ultimately increase sales volume.
Reconceive The “Flip Tax”
Coops levy a charge on every transaction. If a building isn’t seeing consistent sales volume in their building, it could very well be that this is too high. 2%-2.5% of the purchase price, payable by the buyer or seller, seems palatable, based on the deals we negotiate on a regular basis. Anything higher than this is unreasonable—and an issue. Lower the flip tax, and see transaction volume rise. It will add more to the building’s coffers, allowing them to pay down debt. Win-win!
Create Amortizing Loans for Coops
There needs to be better lending products for buildings’ borrowing needs. Just as this problem becomes more acute, local lenders such as Valley National Bank and others are having serious trouble with their own balance sheets.
So who will step up? Who will offer amortizing loans, rather than the interest-only garbage that keeps cooperatives awash in debt? I would think private lender funds will crop up to fill the gap. These buildings are among the most safe bets of which I could conceive. They are like the tenured professors of real estate. Think about it- groups of 50-100 owners, each of whom have at least 20-25% equity in their homes. They are never going to let their buildings get taken from them. Safe bets for lenders or all stripes to make.
Create Some Short-Term Pain, with Long-Term Gain
Yes, this will increase costs in the short-term, but with a rosier longer-term outlook. Buildings should strongly consider creating assessments to pay down their underlying debt. It is an unpopular move, but one which is under their control. Properly communicated, even the most unsophisticated, non-financially-minded person can see that a little fiscal diet today can mean a smaller waistline tomorrow. Prospective buyers can understand the logic, too.
Install Incentives for Preventative Maintenance
Insurance companies may be increasing their rates, to cover the endless mess of leaks and such. But what if they were doing the same thing they do for drivers? That is, give incentives for building owners to do preventative maintenance. Address the problem, not the symptoms. Everybody wins. There are massive capital projects that buildings will have to do, one way or another. Better to do it when the sun is shining. If insurance companies gave buildings credit for doing it, buildings would be in better health for the long-term and insurance companies would have fewer claims.
Diversify the Taxes That Pay For NYC
I know that New York City is like a small country. But real estate can’t be the only lever to generate money to cover its costs. If they are doing something like the congestion tax to decrease street traffic and pay for systems upgrades in the city, they can consider using some of that money for other things, too. Studies are showing that there could be a surplus in money raised, for instance.
How About You Reduce Real Estate Taxes?
It’s a shocker, but if the city reduced ongoing real estate taxes, you would see transactions going up- and the city would capture more transfer taxes.
Charge “Mortgage Tax” on Cooperative Loans
This is not a revolutionary idea. But the city could tie a reduction in real estate taxes to any number of taxes currently not levied on cooperative sales. They could tax loans against co-op apartments, for instance. Currently, only condo purchasers have to pay a mortgage recording tax. When 50% of all sales are in cooperative buildings, the city is leaving money on the table. I think many people would rather pay a tax going in, than taxes every month. That trade could be very interesting.
One More Thought- Create a Bigger Buyer Pool
This is only the start. There are other areas which could spark transactions, handled at the building level. They wouldn’t reduce the monthly costs, but they also don’t cost a building anything. I’m thinking of buildings changing their borrowing policies. Want to create a bigger pool? Allow for slightly more financing. Buildings can update their policies for their prospective buyers. Building that only allow 50% could allow 65% financing. Buildings that require 35% minimum downpayments could allow 25%. On down the line. Every slight adjustment allows more buyers access.
Nowhere in the country are there fewer loan defaults than in Manhattan. 1 in 50 loans are delinquent, according to the New York Fed. It’s only slightly worse across the US, but these are safe bets that should show solid returns.
I’d love to hear from you with other ideas! -Scott & The HRT