How A Small Condo Tackled A Shared Expense Problem

It's not uncommon for condos with commercial space to find the owner of that space isn't contributing adequately to the shared expenses of the building. The board then finds itself doing assessments for residential owners while the commercial owner's monthly payments stay flat. The question is, how to get out of this situation without discord or a lawsuit? Avi Zanjirian, CPA and partner at Czarnowski & Beer shares how a 15-unit condo-op on Manhattan's West 3rd Street accomplished this. Habitat Magazine's Emily Myers interviews Avi Zanjirian.

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Transcript

Emily Myers: Welcome to Problem Solved, a conversation about challenges facing New York Co-op and condo board direct. I'm Emily Myers with Habitat Magazine, and I'm joined by Avi Zanjirian, CPA, and partner at Czarnowski and Beer.

It's not uncommon for condos with commercial space to find the owner of that space isn't contributing adequately to the shared expenses of the building. The board then finds itself doing assessments for residential owners while the commercial owners' monthly payments stay flat. Avi, this became a problem for a 15 unit cond-op on West Third Street.

Can you share what happened? 

Avi Zanjirian: Sure. I would love to, and also nice to be speaking with you this morning. So we had this building on West Third, small building, and the way the cond-op was set up was that the commercial space which is part of the condo. Just to give a slight, very short background on cond-ops — it's set up that the condo has two units. It has the commercial space and a residential space. The residential space is a co-op. And they share expenses . That's gonna be my quick summary. There are shared expenses between each other. The co-op does operate as its own separate co-op and has its own expenses, but it shares expenses with the condo.

So that's the quick summary. But what was happening in this building specifically was that the board, the previous board, when looking at the expense allocation-- commonly in these situations, the offering plan will outline for the building what expenses are shared, what expenses aren't shared, and you might even have in some situations these expenses are based on this percentage, but these expenses are based on that percentage.

And what will happen is just to keep, cash flow coming through in the building, the commercial unit owner will pay a flat amount every month, and then at the end of the year there'll be a true up where they'll look and say, okay, based on the actual expenses and the percentages in the offering plan, this is what you should have paid. This is what you paid. So either they were to get a credit if they overpaid and or if they would owe money if they underpaid. 

Emily Myers: So a true up is basically the balance or gap in funds that needs to be paid. 

Avi Zanjirian: Correct. That is correct. Okay.

Whatever was left over or not. Or if it was too short, whichever way it goes from what actually happened. So it is a look back. After year end, you look back to see how the year went. 

Emily Myers: So what you've described is the difference in the way that funds were being sought from the residential and the commercial owners? 

Avi Zanjirian: Correct. In this situation, the commercial owner had a set amount let's call that $3,000, $5,000, whatever the amount was.

And they paid that amount. And at the end of each year, it was a small amount, maybe a thousand, maybe 500, they would pay it and there really wasn't any fluctuation. The expenses were pretty flat, some years up, some years down. And then it started to grow as the environment we're in there has been inflation and expenses were going up.

Insurance costs was a big driver, but other things as well, repairs around the building that were shared. And the board decided at, at the time , he's been paying his 3000 or 5,000 a month. We don't wanna ruffle any feathers. We'll just let him continue paying that and we'll true him up at the end of the year.

We don't want to change that monthly amount. I tried helping, putting my 2 cents in as the independent auditor and just saying, Hey, it'd be a good idea if you did increase, so that there wouldn't be a big gap. And it just started to grow, year after year the gaps would get there.

Emily Myers: And did it become difficult to pay for capital repairs then? 

Avi Zanjirian: Yeah it caused issues. Because the operating funds weren't there. Money the cond-op set aside for capital projects was being used for operations.

'Cause again, it was like I mentioned, it was a small building and to, to continually seeing increase for operating costs was a big burden on everybody in the building. 

Emily Myers: So what happened next? 

Avi Zanjirian: What happened next was happened to be that board sold, that board member had sold, who was the president at the time.

And a new board came in and inherited this situation, brought us in to give them a recap. They changed managing agents also during this period of time. And I took the opportunity that with a new board and with new agents, say, Hey, by the way, this is what's going on.

You really need to clean this up. Because at one point, it was coming like $15,000 or $16,000 true ups at the end of the year. And remember, they're only getting this amount when we do our financial statements, so at the end of December they may owe 15,000, but we're not gonna get the financial statements out until April or May.

By the time a board approves it and they send out the true up and bill it on his account and he decides whether or not he's gonna pay it or not, it could be August, September, it's nine months of delay and cash flow that on a small building could really affect it. And you perpetuate this year after year.

It becomes a cashflow problem for the building. 

Emily Myers: So what then was the process and how did you support the board to make the changes? 

Avi Zanjirian: So the first process was let's figure out today, right? Obviously we had calculated the true ups over a period of time that the commercial owner had owed.

He had paid some, but he was asking for backup on some, which was obviously reasonable. He wanted to see, to make sure you're asking him for a 15,000, $20,000 check. He wanted to make sure that he verified the information, rightfully but we said, okay, what, where we are today and, let's say in 2023 2024, how much should he be paying based on the current expenses and the current budget?

And they figured that out. And it was a big increase. It was about, I think a $1,500 a month increase in his monthly to catch him up. And they went and they were able to go and implement that increase to him to close the gap. So when we get to the end of 24, or they got to the end of 23 last year they weren't looking at this big 15, $20,000 true up.

So that was step one in getting it and implementing it to him and having him approve it, which I think did happen. 

Emily Myers: And did you need a special meeting to educate unit owners about this issue? 

Avi Zanjirian: Yes, they actually did. So what had happened was there was also a big increase to the residential owners, right?

The costs weren't just going up for him. The costs were going up for everybody. So they did have a special meeting with everyone that we participated in to explain what's been going on. Why there's an increase, why substantially? They also on the residential side, just as an aside, because they kept saying he owes us the money.

They weren't increasing the residential side, even though notwithstanding whether he owed you the money or not, you still have increased costs on the residential side. So it was a, double-edged sword that they were waving. And so they finally, we had to explain that everyone's getting an increase.

It's not just the residential. It's not just the commercial. Everyone's getting an increase. And I think they set a budget going into 24 where they knew what the expenses on the residential were correct. The expense allocation on the commercial was correct. And they were able to operate at break even, which is the goal. As opposed to, they kept doing, bandaid assessments: we need 80,000, let's assess 80,000. We need 50,000. Let's assess 50,000. That's not gonna go away every year. Those expenses are still the expenses and real estate taxes are still there.

Water and sewer, utilities, those aren't going away. So that was part of it. 

Emily Myers: So were there ways in which the board was approaching the budget that changed as a result of the work? 

Avi Zanjirian: Yes, a hundred percent. They took a more realistic look at what's going on. One of the other things I forgot to mention is that there was a certain member on the board who kept saying our real estate taxes are really too high.

And I said I hear you. That's, it's obviously something that you should approach to your tax certiorari attorney and protest. And he told us that we're paying too much. I said, okay have you gotten a reduction yet? He said no. I said unfortunately you can't not pay your real estate tax. You can not pay real estate taxes, but no one's gonna advise you to do that.

And we have to be realistic that right now, when we're looking at it today, this is your quarterly payment. And that needs to be paid. And if you're gonna, if you're gonna deny the fact that the real estate taxes are what they are, which was, which is obviously their biggest expense and not increase maintenance to offset it and you're not helping yourself.

So that approach I think was, we were able to ingrain in the board to be able to say, all right we. Yes we wanna reduce it, but right now we haven't. When we do if and when we do, we'll be able to reduce it then. 

Emily Myers: And was there pushback from the commercial owner and is that what had made the board reluctant to seek out more money from the first place?

You said they didn't really wanna rock the boat. 

Avi Zanjirian: No, he always paid. I never understood. Again, I was never in, I was never privy to those conversations. He always questioned it. He said, can I see the backup? Which again, like I said, rightfully so, but he always ended up paying. So I don't know. I'm not sure what the mindset was. It could just be, it was a rogue board member who didn't wanna increase. He was blaming it on the commercial unit owner, but he didn't wanna increase it for himself. 

Because he is an owner in the building. We forget the board members , they're paying it just as much as everybody else. 

Emily Myers: And what was the cost to the board for the services that you provided? 

Avi Zanjirian: We had to meet with the board multiple times over this project.

This took about eight months between, meeting and putting the budgets together and obviously board members having their own personal lives and traveling and our busy season and stuff. It took about eight months for us to go together. I think. All in all, I think the total cost from our end was about 2,500.

Just with all of those $2,500 just for a couple of meetings that we had done and the special meeting and the extra work. 'Cause again as auditors this would be, what we consider an agreed upon procedures engagement. We're not involved in management of the building 'cause we're the auditors, we're independent.

So this is a separate engagement that we would do with the building to help them get to where they needed to get and the procedures that were needed. 

Emily Myers: So what can other boards learn from this example? 

Avi Zanjirian: I think what can be learned is that it's important if you're in a building that has this type of allocation, and I'm seeing it a lot more now than I did when I was, when I first started practicing, where this allocation is part of the budget. So where there's a schedule within the budget that says, okay, here's the expenses for the year, which calculate what the residential common charges or maintenance would be.

And here's a schedule based on those projected expenses, this is what the commercial unit owner or the commercial owners contribution should be as well. And I have been seeing a lot more recently, but smaller buildings who may not have a management company that's doing that for them or they're not aware of this.

I really think those smaller buildings should take a look to see it and then say, oh wait, the commercial unit owner has been ping the same amount the last five years. That doesn't make sense. We've been getting increases. You should get increases too. It's probably in your offering plan. There's a schedule, usually Schedule B, which details that first year budget as to what the allocations would be of the different expenses.

Emily Myers: I think that is great. Are there any other takeaways you wanna share? 

Avi Zanjirian: The other takeaway is it's more the, just a common sense takeaway where, it's nobody likes to increase maintenance and common charges. It's obviously it's coming outta everyone's pockets, but as a board member, your fiduciary responsibility is to do the due diligence and make sure that your maintenance is covering your expenses and being realistic about it. Because in the end of the day, yes, maybe you're optimistic and say, oh, we're gonna reduce this expense line item, or, we're optimistic and we think this revenue's gonna come in.

If it doesn't, you have to realize that money has to come from somewhere. It's not just gonna pop out of, thin air. And when doing the budget, especially for building smaller buildings and bigger buildings, those differences could really have an effect on everybody's maintenance.

Because even if you don't pay for this year, you're gonna pay for next year. . In an inflationary environment that we're in, right now, in 2024. You have to be careful. You have to be careful with that. 'Cause it'll hit you one way or the other.

Emily Myers: Yeah. As you point out with rising prices and imbalance of expense allocations is perhaps more and more common.

Great Takeaways. Very interesting Avi, thanks so much for joining problem Solved. 

Avi Zanjirian: Thank you so much for having me here.