Condo Dues Defaults Will Punish Unfairly and Scar the Innocents
Financially sound condominium owners will be among the next groups victimized by the credit crisis. While shaky owners default and buildings’ fees rise, that financial burden will fall squarely on the shoulders of better-positioned owners. The problems that led to this situation are sending disastrous ripples to areas that few had predicted. Laws that protect Co-op owners require any repossessing bank to pay maintenance. In a co-op, equity reverts to the building. A condo lacks this protection. With a condominium, the bank has or –in these times- lacks the equity.
Liens, Times and Years. Oh My!
A building can place liens, or threaten to, before the customary three months. Processing a lien can take many years. We got into this financial mess by assuming that existing circumstances will be similar to historical trends. It’s wake up time for the people with the ability to act.
Proactive measures for Condo boards. How early is too early?
Property managers can look for early signs of delinquency. Impose STIFF, eye-popping fines on late dues payers. The owners willing to accept eye-popping penalties are the ones with no choice. This serves as an early warning sign. Proactively filing liens on these condominium owners may get them to repay quickly. It could also be the call to face the music and downsize or seek financial help.
Another less discussed and highly likely scenario is that the courts will become backed up with foreclosure actions. The proactive boards that act swiftly in 2009 are the ones more likely to benefit.
Likely suspects
Owners who financed with no money down and or those who used the 421 tax abatement will face huge increased charges. If 40% of your building’s units have changed ownership in the past 3 years, your neighbors may have taken advantage of easy money and over leveraged themselves.
Blame the Victim?
Looking to victims for help will not provide the best solutions. Although rising delinquencies can lead to finger pointing in the micro-culture of a building (making for tense elevator rides, long board meetings and possibly officer turnover), the people most likely to solve the problem are not the ones who caused it. That unfortunate financial burden will rest with the remaining owners. The time for buildings to offer less and charge more is rapidly approaching.
A difficult pill to swallow
To help, buildings can repurpose assets for income generation – storage areas for commercial or medical rentals, rooftops for solar panels or cell towers. Lighting can be switched to high efficiency fluorescent, saving thousands of dollars per year. All systems- ex. furnace gas or oil- can be evaluated for efficiency. These are potential band-aids. In the meantime, many will be injured.
Boards can implement or increase flip charges (transfer fees), and sublet charges and while decreasing required sublet lengths of stay. They can actually welcome sublets in order to increase revenue and to help the struggling owner. Health club hours can be shortened, and other amenities trimmed. These measures have traditionally been associated with Co-ops. We expect to see more condo boards instituting co-ops style policies where possible.
There is no easy fix and the problem will get worse before it gets better. The best way out of this problem is to adopt proactive measures and remain ahead of the curve.
The board of managers…shall have a lien on each unit for the unpaid common charges thereof, with interest thereon, prior to all other liens except only
(i) liens for taxes on the unit in favor of any assessing unit, school district, special district, county or other taxing unit,
(ii) all sums unpaid on a first mortgage of record,
Modern Property Management- Managing to Metrics
Property Managers need to advocate and implement financial visibility and operating efficiency. Unlike management in many other fields, property managers have largely neglected management evolution for too long. Despite Ford developing the assembly line roughly 100 years ago, building superintendents still lack processes to replicate strong consistent results on a weekly basis. Although Automated Clearing House (ACH) has been around for years and years, most property management companies still rely on postal carriers to deliver rent/maintenance/common charges. These seem like the tips of the iceberg.
Techniques have been developed to increase efficiency and visibility in business and organizations. We aren’t suggesting superintendents become automatons or that everyone be required to link their bank accounts to their property management (though sometimes these would be improvements). Instead, we advocate increased visibility and efficiency.
Wherever possible, staff responsibilities and routines should be spelled out. This is down to the details of how staircases are cleaned top to bottom, at what times, and how long it should take. Managers should inspect the results each week and keep recorded, trackable results. This performance tracking is great for employee review and customer satisfaction.
The cash conversion cycle is another passion of ours. If, rather than traditional postal delivery (assume a minimum of two days), managers use ACH, it not only improves the cash conversion cycle, it also increases automation, making payments easier to track. Increased automation is good.
When you consider what’s important in selecting your vendors (property managers, mechanics, lawyers, dry cleaners, whatever), look for visibility and efficiency. Together these produce reliability- a characteristic we’re all looking for in our partners.
According to Inc., Cash conversion cycles for small businesses are predicated on four central factors: 1) the number of days it takes customers to pay what they owe; 2) the number of days it takes the business to make its product (or complete its service); 3) the number of days the product (or service) sits in inventory before it is sold; 4) the length of time that the small business has to pay its vendors. Inc. provided the following formulas to determine these factors:
Once a small business owner has these figures in hand, he/she can figure out the company’s cash conversion cycle by adding the receivable days to the production and inventory days, then subtracting the payables days. “That will tell you the number of days your cash is tied up and is the first step in calculating how much money you’ll want in your revolving line of credit,” Inc. concludes.
Strategic Advice- Do I Need More Than a Sober Super?
People ask us how property managers differ. One important difference is a focus on strategic advice vs. a focus on operations. Better property managers treat buildings as businesses- increasing shareholder value and improving cash flow. Others view their responsibilities as making sure supers are sober and avoiding violations for a building.
In 2007, we focused our efforts on increasing our clients’ property value. This year, and probably through 2009, preserving value is and will be on the tops of everyone’s list. Our clients’ focus has shifted to reflect the change from seller’s to buyer’s market. It’s no coincidence that the buildings which invested or upgraded in recent times of surplus are best positioned to see their value preserved.
Currently, when owners consider investment and return on investment, they are far more concerned with the initial investment than the return now relative to last year. Where last year building boards and owners focused on what will benefit their properties the most, they are now concerned with what will cost the least. Although clients are still looking for the largest value impact for their dollars spent, they are more conscious than ever about how many dollars they are spending.
Some projects which may have been intended to increase value or functionality last year are still being implemented but on a smaller scale or with an eye towards reduced expenses.
Two examples that I plan to discuss more fully in later posts are rooftops and Children Areas (play centers, Kid corners, children areas, RecRooms, etc.)
Rooftops
Board members and owners used to ask whether we could help them utilize their rooftops. We still get some requests for this but far more frequently clients ask us about incorporating solar technology into their roofs or building coverings. We are also asked how best to utilize undeveloped FAR.
Children Areas
One low cost way to utilize a low traffic common area is a Children’s Area (Kids’ room, Play Center, Kid corners, children areas, RecRooms, etc.). These rooms transform underutilized or unutilized areas into cheerful showplaces for young children and perspective buyers. This transformation can be accomplished in areas formerly used for a variety of purposes though personal storage, equipment storage, and workshops are likely candidates. The important factors for many owners though are the low required investment (mostly paint and time) and the perceived quality of life improvement associated with the new area. Although newspapers and websites do not yet include Children Areas in their lists of amenities, in the future they may. These areas can make the difference for buyers with children.
Having reliable and impactful solutions to these questions is what sets property managers apart. Furnishing strategic plans and providing these answers are the abilities that can make property managers trusted partners.
Water: The Waste You Don’t Know About
Property owners are asking where they can save more money. We have helped them to reduce violation occurrence, to deal with problem tenants, to cure and prevent arrears, but how often does anyone think of their water? If there’s no visible leak, then it’s not broken, right? Wrong.
In NYC, the Water Board, a division of the Department of Environmental Protection (DEP) is in charge of water. It has a monopoly and in recent years has been hiking up fares in the tradition of Standard Oil. Unlike other utilities (gas, electricity, etc.) where New York State (NYS) has unbundled services so residents can choose their providers, water doesn’t offer that opportunity. That means residents are price takers. In recent years, residents have been taking quite a beating.
The important element for managing water charges is to make sure they are correct. The DEP makes mistakes and leaves errors on their books for decades. Also, when the DEP is correct, they still rarely do much to collect on overdue bills. Even if the DEP is correct, there is still a chance you’re paying too much. This, like so many other property management issues, all boils down two areas: personal attention and modern management techniques.
Lines need to be checked regularly. A faucet that leaks one drip per second wastes almost 20 gallons of water a month. That comes back to bite owners after just a short while. Imagine that the leaking water is hot. Now you’ve got water and the cost of heating it too.
Bills need to be monitored. The New York City Department of Environmental Protection routinely over bills you for your water and sewer usage. One reason is that the process of monitoring and billing is subject to human and technological errors. Other reasons for overbilling are:
- Estimated Bills – By definition, estimates are not accurate. Estimated bills occur when the DEP estimates water consumption based on past actual reads. Auditors can correct inaccurate estimates.
- Broken Meters – A faulty meter can generate inaccurate readings, resulting in abnormally high water bills. Auditors can verify readings and check the accuracy of meters.
- Frontage Billing – You may be billed for lines or fixtures you do not own. Auditors can obtain refunds for errors in frontage billing.
- Overlapping Billing – Dates on your billing cycle may overlap so that you are paying double for some water use. Auditors can catch and correct this.
If there’s even a question about accuracy, companies like AWS can give their expert advice on the best ways to investigate and cure the problem.
Even with the recent price hikes (7% CAGR over the past 10 years); NYC’s water induced hardships are still not nearly as bad as some other cities. In September 2008, the annual survey conducted by the NUS Consulting Group found that the average price of water in the United States soared by 7.3 percent for the period ending July 1, 2008. The survey, which includes 51 water systems located throughout the country, revealed the highest price paid was in Boston, MA at $5.76 per one thousand gallons (“KGal”).
“With so much attention being paid to oil and gasoline markets, Americans may neglect to notice the increases in their water charges,” remarked Richard Soultanian, co-president of NUS Consulting Group. “While U.S. prices are considered modest by international comparison, this most precious commodity is truly our sleeping giant in terms of cost impacting each and every consumer.”
They hope to install a $200 million automated meter-reading (AMR) system, but that will not be in place until 2010. AMR is more accurate than manual meter reading. An added bonus to AMR is that it is less expensive than manual meter reading.
There may not be much we can do to fight City Hall but we can certainly do our best to keep them honest and make sure we are the masters of our own destiny by monitoring water in the properties we manage.
Boosting Your Reserve Fund- Naturally
At this time of year, our clients’ minds invariably turn to high energy costs. With ‘heating season’ upon us (October 1-May 1) and both heating oil and natural gas’s recent summer peaks fresh in our minds, owners of commercial buildings, and condo/co-op board members are looking to make sure that their budget is big enough to keep their property or home warm. If they seize the opportunity this year, they could find that budgets are big enough to heat their places and protect them from a rainy day.
Natural gas seems to be an area attracting a lot of attention within the scope of energy costs. As I write this, natural gas prices, despite doubling during the summer, are currently lower than they were a year ago (see chart below).
That puts Natural Gas prices at levels lower than most of 2007, 2006 or even 2005.
This helps us at OGI Management answer a question than many clients frequently ask: “How do we increase our reserve fund?”
If boards or owners have increased their budgets for the 2008-2009 heating season based on prices from earlier in the year, this is a good time for us to lock in today’s price. The difference between today’s price and the price they had budgeted for can be used to build up reserves. We can help property owners with the best programs for cost savings and flexibility.
*Perhaps you’re not aware that New Yorkers can choose which company to buy natural gas from? We sort through the providers to find the best deals.
**Many gas providers offer the opportunity to buy at today’s rate for the entire season, year or multiple years. This is called locking in a rate. Clients can alternatively choose to “float” and pay the utility’s going rate, which eventually moves up or down with the market. That said, long-term (or mid-term) price movements can be hard to predict but are expected to rise over time.