To meet the high cost of maintaining condo properties, boards often have to make the hard choice between borrowing money or imposing assessments on unit-owners. Either way, there are decisions of fairness to consider and important operational details to work out. In this episode, Mohammed Salyani, a principal at the accounting firm WilkinGuttenplan, explains the ramifications of various options. Mohammed Salyani is interviewed by Carol Ott for Habitat Magazine.
Thanks for listening. Subscribe to this podcast for more stories on how New York co-ops and condos have solved a myriad of problems. Brought to you by Habitat Magazine, the "bible" that hundreds of board directors turn to every day!
To meet the high cost of maintaining condo properties, boards often have to make the hard choice between borrowing money or imposing assessments on unit-owners. Either way, there are decisions of fairness to consider and important operational details to work out. In this episode, Mohammed Salyani, a principal at the accounting firm WilkinGuttenplan, explains the ramifications of various options. Mohammed Salyani is interviewed by Carol Ott for Habitat Magazine.
Thanks for listening. Subscribe to this podcast for more stories on how New York co-ops and condos have solved a myriad of problems. Brought to you by Habitat Magazine, the "bible" that hundreds of board directors turn to every day!
[00:00:39] Carol Ott: Welcome to Problem Solved, a conversation about problems that have been solved in New York's co-op and condo buildings. I'm Carol Ott, publisher and editor in chief of Habitat Magazine. My guest today is Mohammed Salyani, a CPA and partner in the accounting firm WilkinGuttenplan. At some time or other, every building needs facade work and it's expensive work.
But if you are a condominium, there are many challenges you'll face getting the money. And the first is whether your governing documents even allow you to borrow funds. Mohammed is here to explain the particular challenges condominiums face when raising large sums of money. Welcome Mohammed.
So you are working with a high rise condo that needs about $7 million for facade work. It has about 300 units. If they can borrow the money from a bank, what are the terms they're going to be offered today, and how does this compare with simply assessing all the unit-owners?
[00:01:43] Mohammed Salyani: As you know, at the moment, rates are increasing, so banks would probably offer them between possibly a 10-year to 15-year loan. I think the rates currently are probably about 4.5%, maybe 5%. So a 300-unit association with a 10-year loan at 4.5%, you are looking at a monthly fee that the association has to pay the bank. The monthly mortgage installment would be about $72,000, and that would be then spread amongst all the unit-owners there. If they decided not to do the loan, then they would have to pay a little over $23,000 each at one go.
[00:02:24] Carol Ott: Give me some perspective. Given the condo’s operating budget, adding $72,500 a month is what percentage of its current budget? How much of an increase is that going to be for them?
[00:02:36] Mohammed Salyani: That would probably be about a one-third increase to their operating budget.
[00:02:41] Carol Ott: So now the board is faced with increasing the monthly common charges, perhaps 30% for a period of time. Or maybe going to the unit-owners and saying you can pay up front. Can the board offer different payment plans? And are there any trip-ups to doing that?
[00:03:04] Mohammed Salyani: Yes, the board can offer different payment plans, but then the issue would be accounting, because you have 300 units. If you decide to offer different options, one person is paying upfront the whole amount. Somebody else may pay maybe $10,000 off the amount and then pay the balance. Or you want to pay it in two installments. And if you're going out and getting a loan from a bank, then there is the interest rate that you have to pay, so you have to calculate interest on any other options that are given to people other than either paying upfront or following the loan and paying it through the 10-year period. So it does become almost like an accounting nightmare to record it and keep track of each and every unit and what options they're using.
[00:03:52] Carol Ott: If the board said, I'm going to split the $23,000 and allow you to pay in two payments over two years, the board would have to add, let's say, 4.5% interest to that?
[00:04:07] Mohammed Salyani: Yes, because if the board collects half that amount from that unit-owner up front, they're not borrowing that money. But the remaining amount, that is the $11,500 of the $23,000 that they are collecting, they are borrowing from the bank. They are paying 4.5% on that amount for that one year. So if the board decided not to charge that unit-owner that interest, then the association is paying for that interest.
[00:04:38] Carol Ott: I see. So that contributes to the accounting challenges. And if the board decides to not offer options and basically says, you know what, we're going to increase our common charges 30%, and over the course of the decade, people sell. What happens?
[00:04:57] Mohammed Salyani: There are two options available to the board. One would be that when you sell, you pay the amount that is the principal portion that's due from you at that point in time. Then the board has to make sure that when it collects that money, it turns around and pays the bank right away because now the unit-owner has paid up their principal portion. They are no longer paying interest on that part. But if the board does not pay that money to the bank, it would be charged interest on that amount.
[00:05:29] Carol Ott: Now you're prepaying — the condo would be prepaying on the loan. Is it typical that banks allow that?
[00:05:35] Mohammed Salyani: Banks normally would allow that only if it is money that's generated internally, meaning from your unit-owners. If the board decides it’s going to go out and look for better terms and decides to refinance through a different bank, then there would be some prepayment penalties because the banks don't want you to go somewhere else, take money from another bank and pay them off.
[00:06:03] Carol Ott: So there wouldn't be prepayment penalties if a unit-owner sold and you took that money and prepaid part of your loan down.
[00:06:13] Mohammed Salyani: Normally they would not.
[00:06:14] Carol Ott: I have to say, accounting wise, figuring out what is the best option seems pretty complicated. What would your advice or takeaway be for boards facing this?
[00:06:26] Mohammed Salyani: Give as few options as possible to the unit-owners. If possible, try and actually let the loan go with the unit so that if somebody is selling their unit, they can negotiate with the buyer about the payoff amount through the price, and let that new unit-owner continue to pay the maintenance fees.
Because the one thing you do have to remember is that once it becomes a term loan, the amount that the association pays every month will not change. So even if units are sold and the association collects the principal and pays down that amount of the loan, its monthly installment, like in this example we had of $72,000, that will not go down every time a unit is sold. It's still the same amount. It may reduce the number of installments that you pay at the end, but they may end up having a cash flow issue in the meantime because they still have to generate this $72,000 month.
[00:07:32] Carol Ott: Is it good to pay it down if somebody sells?
[00:07:37] Mohammed Salyani: You would definitely save on interest. If an association is in a financial position to be able to continue to pay that $72,000, then that is an option. But if it would cause financial hardship to the association, it may be better off not to pay.
[00:07:57] Carol Ott: I see. Well, I think that most boards presented with this are going to be slightly overwhelmed and are going to need the advice of an accountant and a lawyer.
[00:08:09] Mohammed Salyani: Absolutely.
[00:08:10] Carol Ott: Okay. Thank you so much for joining us today.
[00:08:13] Mohammed Salyani: You're welcome.