Get Your Board Head Out of The Sand

If a co-op or condo building operates at a deficit, there are only two outcomes – payables are late and cash erodes. That’s what Daniel Wollman, CEO of Gumley Haft, found when he was re-hired at a condominium his firm had managed over a decade ago. How its financial condition eroded and the steps it took to regain financial health are shared in this interview, conducted by Habitat’s Carol Ott.

How To Run Your Building: For Co-ops and Condos

Transcript

Carol Ott: Welcome to How to Run Your Building, a conversation with New York's leading property management executives. I'm Carol Ott with Habitat Magazine, and my guest today is Dan Wollman, CEO of Gumley Haft Management. Managing money in a co-op or condo can often be a round robin of unpopular choices, and sometimes boards put themselves in harm's way.

Dan, you recently were rehired at a condo you managed over a decade ago, and you found it in sad financial shape. Can you tell us, now that you're back on scene, how they got there and what were they facing? 

Dan Wollman: When we got there, when we came back there the building had a significant amount of unpaid bills.

They were getting ready to do a significant facade project under Local 11, and they had an unbalanced budget. 

Carol Ott: Alright, now this is something I can't imagine the board intended to do. So how was it possible that they got there? How did they get there? 

Dan Wollman: I think that sometimes boards make decisions.

Sometimes they don't make good decisions. I think boards many times are interested in keeping the monthly carrying charges as low as they possibly can. Sometimes boards will modify budgets in a way that to keep the maintenance down.

And they believe or they hope that the building is gonna perform better than budget. 

Carol Ott: So I'm just curious: I presume the board had been managed by one or several previous companies since you left them. This is professional management. Tell me how a professional manager or management company let's, if that's the correct word a co-op or a condo get in that state. 

Dan Wollman: Boards make their own decisions. We advise boards all the time. Boards sometimes don't follow our direction. And sometimes they put themselves in a position just like this building did, that becomes a bad position.

I think it's that simple. 

Carol Ott: And I'm curious from the management side. So now you have a board that doesn't listen, but you are picking up the pieces. You got unpaid bills. I assume vendors are calling the management company for the bills. There's not enough money in the budget to continue.

How does a property manager continue to work with the building like that? 

Dan Wollman: I think I was in a unique position because I was invited back to the building, which in my entire career, this was the first time. And when I met with the board, I said to them, these are the three or four things that you must do, and if you want me to manage the building, then I want to make sure that the board is on board with what I'm recommending.

Some of the things I'm recommending may have to be slightly modified, but conceptually, these are the three or four things that you're going to have to do if you want me to manage the building. And I met with the board a couple of times. We reviewed those things that I thought needed to be implemented.

They hired me and they ultimately implemented all of the things that that we recommended. 

Carol Ott: And what were those things? 

Dan Wollman: So they had a multi-month assessment to cover all of the unpaid bills. So they distinguished everything that was pre 2024. They created a significant capital assessment, which was intended to cover the cost of the impending job.

That job is going on right now with a contingency. We also added to that a discount for unit owners who paid the assessment in advance because we needed to make a large deposit on the contract and we didn't have the money to do that. And then we developed what we thought was an appropriate, accurate, realistic budget for the building.

And they adopted that with also a significant increase in it. 

Carol Ott: What is a significant increase in your world? 

Dan Wollman: So they took a double digit increase in 22. They took a double digit increase in 23. 

Carol Ott: This is for their --

Dan Wollman: Monthly common charges, correct. 

Carol Ott: And you mentioned that they were financing a lot of things through assessments.

Is that because for market value they didn't want common charges to appear that much higher? 

Dan Wollman: So the major assessment they had was to do a big project, a facade project. We put in an assessment to to pay for or to raise enough cash to pay all of the accounts payable that were left over from 2022 and 2023, because there was no other way to raise enough money to do that.

If they would've raised the common charges another, let's say 10%, then to pay off those bills, the common charges would've been inflated. They would've been set at a higher level than they needed to be set. So we thought the better plan was to have a three month assessment, and it got rid of all the payables.

And then we essentially start at zero with no payables, and a balance budget and a big assessment. 

Carol Ott: And how did the board sell this to their residents or admit that they had not been fiscally responsible. 

Dan Wollman: There was a change in the board. The board did a really good job of presenting to its unit owners financial data on the building for over a 10 year period of how the building operated. There were many years that the building did not raise common charges should have, so there's only two ways to deal with that.

So if the building operates at a deficit, either they erode cash that they have in the bank or they build up payables; those are the only two things that could possibly happen. So if you're a condominium, let's say, and 50% of your budget is attributable to labor and labor increases by 3% a year, you have to have a one and a half percent increase every year if all of your costs stay stagnant. If you don't have a one and a half percent increase, then the next year you start at minus one and a half, and that starts to multiply. As we've seen, things like insurance and utilities have increased considerably.

And if you don't raise your common charges. In a way that covers that, then again, you start either eroding existing cash or you build up your payables. Those are the only two things. So in this building, they eroded most of their cash and they had significant payables. 

Carol Ott: So you also have had experience with another building who similarly handled their budget in a way that didn't work out for them.

Can you explain what happened there? 

Dan Wollman: That's kind of a different story and that story hasn't really ended yet, but that building depended significantly on their flip taxes. It was a building that was a Mitchell Lama building, and it came out of their Mitchell Lama program about 25 years ago.

So original owners paid a much higher flip tax than subsequent owners, and the building significantly depended upon that money to keep their budget balanced. At some point in time, that money was going to begin to dry up and their maintenance was going to be short of what it really needed to be.

So in the marketplace, their maintenance is low, understandably, but now on a budget basis because their flip tax situation has decreased significantly, they're at a point now where they're gonna need to make some very difficult decisions about how to fill the hole in their budget.

Carol Ott: And, this building and the building that you came back to. It sounds, if I'm gonna step back and say, so what were these board directors thinking? They really were managing their money for the short term. Would that be accurate? 

Dan Wollman: I think that's pretty accurate. I think, sometimes boards lose sight of what their roles really are, that their roles are fiduciary for the rest of the building.

It's not a popularity contest. And if you lived in a single family home and your roof was 25 years old and your house was leaking, you would replace your roof. It's no different than if you live in a large multifamily house . So boards sometimes lose sight of, I think, what their real roles are. Sometimes they're reluctant to raise charges as much as they might need to because they think they're gonna have , not a revolt, but they think it's gonna go poorly with the rest of their residents. But there is no alternative. That's the part that they sometimes just don't see.

There is no alternative. It doesn't magically get better. As I said, it's no different than if you had a single family home. 

Carol Ott: To sum up what boards face today with having to meet the city's regulatory requirements with the facade and then climate mobilization and then looking at their gas pipes and should they go to electrification.

This kind of scheduling out what decision to make and then what kind of money and where it's coming from seems like it's way above the pay grade of an average board director. So how do they move forward? 

Dan Wollman: I think a part of that is they rely upon their professionals, whether that's us or their engineers, their accountants, their attorneys.

I think in the future, all of the issues that you just raised are all now moving to the surface and buildings are starting to plan for some of these things. Certainly the climate mobilization. We see that Local Law 11 projects used to be small projects. Now they're all enormous projects. Gas piping is another thing that you raised; the garage, the new local law on garages; now that we have an annual parapet inspection law. So all of these things are, at the end of the day adding more and more costs to running buildings. 

Carol Ott: And finally, I just wanna ask about the buildings who refinanced a decade or so ago when interest rates were low, and perhaps those buildings took out more, or built up their underlying mortgage 'cause dollars were inexpensive then. What happens as those underlying mortgages come up for refinance and instead of now maybe having a 4 million underlying, you now have a 6 million underlying. What's your thinking on what's gonna happen to those buildings? 

Dan Wollman: Some of those buildings are going to see fairly significant increases in maintenance. We have a client whose mortgage is expiring in October. And it's a double digit mortgage. And one of the things that they've done is they're going to have an assessment prior to the refinancing of the mortgage to bring down the mortgage balance.

That's certainly one strategy. They have a couple of other strategies. They have a large construction fee. They have a flip tax, and they think that they may be able to utilize some of that money on a going forward basis to continue to pay down the mortgage, but they're gonna need to balance that against what their capital needs are over the next 10 years, because historically, that money was used to fund their capital programs.

So in 10 years, we can talk about how that worked. 

Carol Ott: So bottom line as a takeaway. Just give me your thoughts on what is the stance that boards should be taking with financial planning? 

Dan Wollman: I think boards have to develop, accurate, realistic budgets and plans for their building.

As I said, it's no different than if you had a single family house. And I think when you try to fool yourself, into believing that things might be different than they're more likely to be, then you start heading down a path that's not gonna be a great path.

Carol Ott: Do you think those in the property management industry are losing their patience with boards that aren't gonna be realistic and maybe say to them, if you can't be realistic, we can't manage your building? 

Dan Wollman: So I haven't, I haven't gotten to that point yet. I think it's possible. I think it's certainly possible.

 You know, as we've been talking, there are greater and greater financial demands upon buildings. And I won't say some boards stick their head in the sand. You have to be a lot more realistic today because there's just that much more going on today than there was 10 and 15 years ago.

Carol Ott: Okay. Thank you so much, Dan Wollman. This has been really interesting and insightful. 

Dan Wollman: Thank you. A pleasure.