NYC Affordability

Two ways to pay for the same budget

A co-op’s costs rise most years. Property taxes, payroll, insurance, and fuel all go up, and every so often a roof, boiler, or façade needs replacing. The money comes from shareholders either way. The board picks how to bill it:

• Maintenance increase. The board raises the monthly maintenance charge, split by shares. It’s permanent until the board lowers it, which boards rarely do. Hauseit puts the typical NYC co-op increase at about 3% to 5% a year, driven mostly by rising real estate taxes.
• Special assessment. The board levies a separate special assessment, also usually split by shares, billed as a lump sum or in monthly installments, and it ends when the target amount is raised.

Some boards raise maintenance steadily to build reserves. Others are, in Hauseit’s words, culturally opposed to permanent increases and cover shortfalls with assessments instead. Some do both: small yearly increases for operations, plus an assessment when a large project comes due.

Why a board keeps maintenance flat

• Price. Buyers and brokers compare monthly charges across buildings, and maintenance is in every co-op buyer’s debt-to-income math. A low, steady maintenance history makes apartments easier to sell.
• It ends. An assessment has an end date. A maintenance increase tends to stay.
• Possible tax treatment. An assessment raised for a capital improvement can add to a shareholder’s cost basis, lowering taxable gain at sale. A maintenance increase can’t, even when it pays for the same project. (More below; the details matter.)
• It matches a one-time cost. A new boiler or façade repair is a one-time expense, and an assessment ties the charge to it. Reserves, a building loan, or an assessment are the usual ways to pay for one; an increase sized for a single project would keep collecting after the project is paid for.

When flat maintenance is a warning

The trouble starts when an assessment pays for ordinary operating costs, not a project. If taxes and payroll rise every year and maintenance doesn’t, the building runs a deficit that grows every year. An assessment can close this year’s gap, but next year’s will be bigger. The assessments aren’t really one-time; they come back every year, larger each time, until the board eventually raises maintenance.

Signs to look for in the financial statements and board minutes:

• Assessments most years, especially ones labeled as operating, budget, or deficit assessments, not tied to a named project.
• Operating expenses rising faster than maintenance income on the income statement, year after year.
• Thin reserves relative to the building’s age and upcoming work. Brick Underground notes that when reserves can’t cover a sudden large expense, the cost goes straight to shareholders.
• Big required projects ahead, such as façade work under the city’s inspection program, Local Law 97 emissions upgrades, or an aging roof or elevator, with no plan for paying for them.

Writing in CooperatorNews, accountant Stephen Beer says he worries more about assessments no one can see coming than ones that can be counted, and that buyers want to see planned, adequate reserve contributions. A board that assesses for a defined project and can tell you the remaining balance is very different from one that assesses for whatever the budget is short this year.

The tax difference, and its limits

IRS Publication 523 lets you add the cost of improvements to your home’s basis, and its adjusted-basis worksheet includes condominium association assessments “that aren’t merely for repairs or maintenance.” For co-ops, the question is the same: did your money pay for a capital improvement?

• An assessment for a new roof, boiler, or elevator is the strongest case for adding it to basis. Ask the managing agent whether the board designated the assessment for capital work and how it was billed, and keep that letter with your closing papers.
• An assessment to cover an operating deficit pays for the same things maintenance does: taxes, payroll, insurance, fuel. It’s not an improvement, so don’t assume it adds to your basis.
• Neither is deductible every year the way part of maintenance can be. The deductible share of maintenance comes from the building’s real estate taxes and mortgage interest (see co-op maintenance explained). An assessment that pays for a project isn’t that, unless the building uses it to pay those costs.

Basis only matters if your gain at sale exceeds the home-sale exclusion ($250,000, or $500,000 for most married couples filing jointly, per Pub. 523), so for many owners the benefit is small or zero. This is general information, not tax advice; check your own situation with a tax professional.

How boards and lenders count an assessment

Fannie Mae’s definition of monthly housing expense lists “special assessments” right alongside co-op fees, so a lender can count an active installment in your DTI the same way it counts maintenance. Co-op boards generally look at your total monthly obligations to the building, too.

Assessments also come up when the lender reviews the building itself. Fannie Mae’s project eligibility rules have lenders check each current or planned special assessment’s purpose, approval date, original and remaining amounts, and expected payoff date. If an assessment is for a critical repair that hasn’t been fixed yet, the project is ineligible. A large assessment for structural work can make financing harder in the building, not just for you.

Insurance generally won’t help. Loss-assessment coverage on an apartment policy pays only when the assessment stems from a covered event like a fire. Brick Underground quotes a broker saying assessments for maintenance or upgrades aren’t covered.

Buying into a building that assesses

When you compare buildings, compare their real monthly cost: maintenance plus any active assessment installment, plus the building’s recent pattern. A building with $1,200 maintenance and an assessment every year may cost more than one at $1,350 that never assesses.

Before you sign:

• Ask for five years of assessment history and any assessments under discussion. Habitat quotes a broker advising buyers to find out about planned assessments and their scope, cost, and timeline.
• Read the board minutes and two or three years of audited financials. Your attorney does this as part of due diligence; ask specifically whether maintenance income is keeping up with expenses.
• Settle who pays an existing assessment in the contract of sale. It’s negotiable, and an assessment announced after you sign typically falls to you for installments due on or after closing.
• Budget for one. If a building’s history says assessments are how it pays for things, keep cash on hand beyond the board’s reserve requirement.

Condos face the same choice with common charges. Condo boards levy assessments too, and the same questions apply.

Worked example

All figures are hypothetical. Two co-ops each charge $1,200 a month for a similar apartment today, and both face the same cost growth: about 4% a year.

Building A raises maintenance 4% a year. In year 10 the apartment pays about $1,708 a month. Over the ten years, it pays about $172,888 in maintenance.

Building B keeps maintenance at $1,200 and assesses to cover the gap. It collects $144,000 in maintenance over ten years, so its assessments have to make up about $28,888, or roughly $241 a month on average. The gap isn’t even: about $48 a month in year 2, growing to about $508 a month by year 10.

The total cost is the same. What differs is what a buyer sees in year 10: Building B lists maintenance at $1,200, but it really costs about $1,708 a month to run, and $508 of that comes in as assessments. A buyer who budgets from the listed maintenance underestimates the real cost by about 30%.

To stress-test a purchase, add the expected monthly assessment to the maintenance figure on the Co-op Calculator and see what it does to your maximum price. The co-op maintenance guide shows how much purchasing power each extra $100 a month costs.