Co-Op Maintenance Fees Are Rising

The average co-op maintenance fee in New York City climbed 19% from 2009 to 2010 to $1.76 per square foot per month, according to Miller Samuel, a Manhattan-based appraisal company that tracks maintenance costs.

The main driver behind the fee increases has been a jump in property taxes brought on by rising state and local debt. Property tax revenue from New York City co-ops increased 9.68% to $12.8 million in 2009, the most recent data available, according to the NYC Department of Finance.

Co-op boards looking to offset rising property taxes have few options but to raise maintenance fees, which shareholders (the people who purchase each unit) pay on a monthly basis separate from their mortgage.

“In conjunction with rising costs, a co-op board has little choice but to pass those costs through to the shareholders either in the form of increased maintenance fees or with temporary or permanent assessments,” says Brian Tormey, a co-op board treasurer at The Mildred in Park Slope, Brooklyn, and executive vice president at TitleVest, a title insurance provider for co-ops, condos and commercial properties. Maintenance fee increases are typically implemented to avoid a deficit, but boards have other options like instituting a separate fee or assessment on an annual or biannual basis, he says.

Management companies say their proposals serve the best interests of the co-op.

“We look at all income sources and we see fees the board charges,” says Robert Grant, director of Midboro Management, which manages 85 residential communities in New York City, most of which are co-ops. “If they are below market [rate], we will tell the board it’s time to raise these fees and that way they can raise their income.”

Property taxes are playing a big role in increasing maintenance fees, Grant says. One of the properties Midboro manages, which has 353 co-op units, has seen its property tax bill rise from $1.3 million in 2010 to $1.5 million in 2011.

Grant’s management company offers boards alternatives to higher maintenance fees to offset other costs, like instituting a fuel surcharge as a separate fee that would temporarily cover the costs of rising fuel prices before they drop again, he says.

Co-op boards usually consist of around seven to 10 shareholders of the building. Individuals who purchase a unit don’t own the fee title – instead they’re given shares based on the size of their apartment, as well as other factors like the floor that it’s located on. In addition to paying their own mortgage, shareholders pay monthly maintenance fees to the co-op that cover the building’s expenses, which include debt service for the underlying mortgage, property taxes, maintenance, personnel and other items. Co-op boards work with their building’s management company, which prepares its budgets and informs the board whether they’re facing a deficit and their options for avoiding financial setbacks. The decision to raise maintenance fees ultimately rests with the co-op boards.

Co-ops are most common in New York where they make up 75% of all housing stock, excluding rentals, says Jonathan Miller, president of Miller Samuel. Currently, they also account for roughly half of sales, he says. Boston and Washington, D.C., also support large co-op populations.

Several other factors besides property taxes have been lifting maintenance fees.

Heating and water costs are also on the rise. Natural gas is expected to rise to $11.31 per thousand cubic feet during the fourth quarter and to $11.66 during the first quarter of 2011, according to the Energy Information Administration’s projections for the Mid-Atlantic region of the country. That’s up from $10.22 and $10.75, respectively. Natural gas is used in 53% of property units in New York City according to the Census Bureau. Separately, the EIA projects the cost of heating oil rise to $3.04 per gallon for the fourth quarter and $3.13 for the first quarter of 2011, up from $2.73 and $2.92, respectively. Heating oil is used in about 33% of homes in New York.

Water costs are up slightly. Most buildings have water meters, and charges are based on how many hundred cubic feet of water are used. Shareholders are typically charged not by their individual usage but as part of their common charges that fall under maintenance fees. For New York City’s fiscal year 2010, which ended on June 30, the cost was $6.76 per hundred cubic feet of water used, according to the New York City Department of Environmental Protection. For current fiscal year 2011, the price rose to $7.64.

Then there are the costs tied to the buildings’ staff. Most full-time workers, including doormen and elevator operators, are union members and their contract is usually renegotiated every two to three years, says Sherry Matays, senior vice president who specializes in selling co-ops at The Corcoran Group, a New York real estate firm. In April, the owners of more than 3,200 buildings agreed to a new four-year contract that includes a pay raise of nearly 10% for around 30,000 union members, including doormen, janitors and superintendents. “The basic trend is that fees [pertaining to staff] continue to grow, and therefore in order to keep up with that, the maintenance has to go up,” Matays says.

Rising insurance costs could also play a role, although the cost increases vary by building and location. Premiums are based on the costs to cover labor and construction materials to fix buildings and whether risks have increased for incidents like fires, which tend to be a problem in urban areas, and crime, says a spokeswoman at the Insurance Information Institute. Insurance costs also increase if a building has liability protection for its common areas, like coverage if someone falls in its hallways, she says.

Another expense that can increase a co-op's monthly cost is the building’s upkeep, including major repairs to the boiler room, plumbing and electrical systems and the roof. The buildings most susceptible to fee spikes tied to upkeep are older properties – those built before 1980 – with infrastructure problems that require structural repairs that are unavoidable or can’t be postponed, says Steven Goldman, partner Kurzman Eisenberg Corbin & Lever, who specializes in co-ops and condominiums. They could see fees spike by more than 7% this year, he says.

Goldman predicts maintenance fees will continue to rise because real estate taxes and water rates should continue to climb as the state and city deal with growing debt and budget gaps.

Here’s what co-op boards and shareholders can do to lessen the blow.

What co-op boards can do

Most of the decisions that can keep maintenance fees down are up to a co-op’s board – not its individual shareholders. These strategies can include postponing or canceling discretionary projects, like installing a gym, children’s playroom or a roof deck, says Matays.

Buildings with upcoming projects can also request several estimates from companies, she says. They should try to “negotiate a little harder to get some of these things done but at a slightly reduced cost.”

Co-op buildings can also refinance their underlying mortgages. Right now, refinancing is likely to lower the interest rate on the mortgage and could reduce the building’s outstanding mortgage debt, says Grant, who is currently proposing refinancing to some co-op boards as a way to keep costs down.

A board can also implement a flip tax that would kick in when a shareholder sells his unit. The terms vary by co-op board, but the tax usually calls for seller to pay the board a percentage of his profits from the sale or a percentage of the sales price, ranging from 0.5% to 3.0%, Matays says. In some cases, the flip taxes can be imposed on the buyers.

“Over the last few years it’s become an increasingly popular way for a building to add to its reserves by not imposing a tax on the current residents of the building and instead increasing its coffers at that point of sale,” she says.

In this market, fee decreases are possible but rare, Grant says. Recently, the board of one of the properties that Grant’s company manages lowered maintenance fees for its shareholders for 2009 and 2010 when the retail space on its ground floor freed up and a new company signed a long-term lease at a much higher price.

How shareholders can prepare themselves

Co-op shareholders have few options in coping with rising maintenance fees.

Most co-op boards expect that shareholders will be equipped to deal with fee increases because they conduct a thorough review of applicants’ finances – including their income and savings – before allowing them to buy into the building, Matays says.

As a rule of thumb, new co-op shareholders should have at least two years worth of housing expenses in cash reserves, Matays says.

Those likely to have the biggest problem meeting fee increases are those who’ve been in co-ops for 20 years or more – original occupants or purchasers who bought into the co-op during its conversion, Goldman says. Many of them are now retirees with fixed incomes.

Boards will try to take a shareholder’s financial hardship into account, but their greater obligation is to the corporation, so those who can’t meet fees could have few options in the end but to sell, Goldman says.