Show Me The Money: Strategic Options for Co-op and Condo Compliance Costs

One of the most pressing challenges facing NYC co-ops and condos is how to  fund expensive local law compliance requirements. In this episode Armin Radoncic, principal at Venture New York Property Management, outlines the primary funding strategies used by New York’s co-ops and condos. Corporate structures require different strategies, but no matter what yours is Radoncic emphasizes the need to set aside emotional responses when making crucial funding decisions. Habitat’s Paula Chin conducts the interview.

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

Transcript

Paula Chin: Welcome to Inside Track, a conversation with New York's leading property management executives. I'm Paula Chin with Habitat Magazine, and my guest today is Armin Radoncic, a principal at Venture New York Property Management. Complying with New York City's long list of local laws, especially Local Law 97 and facade repairs, is a financial challenge for many co-ops and condos.

Local Laws also place an extra burden on managing agents, in particular helping boards budget for repairs and retrofits. Can you tell us what your process is when working with boards on this challenge? Let's start with when you step into the picture. 

Armin Radoncic: Absolutely. So it's definitely something new that boards have to prepare and plan for. A decade ago, and even furthermore, there weren't these laws, such as your Local Law 1 26, your Local Law 97, and obviously your normal FISP report, which was once known as Local Law 11. And these laws are becoming more elaborate and more expensive due to the cost of inflation, materials, expeditors, permits, and obviously some violations that are even preexisting because boards haven't complied with it in prior years, and some of them haven't even known about it.

So, when it comes time to get things done, they get hit with the whirlwind of different scenarios from these local laws that they have to comply. So the, so I guess the big question comes, how do we pay for it and how do we plan for it? And there's many ways that you can plan for it.

And I can tell you some of the ways that I've been helping my boards plan for it. 

Paula Chin: Let's talk about that. I imagine it's a relatively short list. 

Armin Radoncic: Yeah, it is. There's only so many avenues that you can go. Number one as most co-op and condo boards know, you have an assessment. Cut and dry.

Number two is a more strategic way of doing it, where if you're in a co-op, you have an underlying mortgage that you have to refinance every seven or 10 years, depending on your term. So one of my strategies and suggestions have been is that first we, we tap into our underlying mortgage and we understand what terms we have, such as is there a line of credit? Is there a capital working reserve that the board wasn't aware about that's sitting there that we can use?

Or can we refinance the mortgage? And when I say refinance the underlying mortgage, I mean that instead of having a large assessment or a larger maintenance increase, one of the ways that we've been able to do this is we make a capital reserve study and we understand we're gonna need $250,000 for Local Law 11.

We're gonna need $150,000 for new windows and $200,000 for a roof. So collectively, if a building needs $600,000, we put that into our application on our refinance. And we take the money that we need for all of these projects and whatever our new monthly mortgage payments are, whatever that difference is from the prior mortgage to the new mortgage, we put that into our new budget and we increase maintenance based off of that new mortgage and principle and interest.

And so we go to the shareholders, we say, hey guys, there's gonna be a maintenance increase. No one likes it, but it's inevitable. However, the good news is that we were able to refinance our underlying mortgage. We were able to get money to do all of these projects that we have to do, and we're not gonna have an assessment because we were able to get the money out from our refinance. 

Paula Chin: What's another option than refinancing the mortgage? Particularly with how punishing interest rates are right now. 

Armin Radoncic: Another option is to have an assessment, and nobody likes that because you have to pay a large chunk of money every single month.

There's only so many streams of avenue for these co-ops and condos. 

Paula Chin: And I understand condos have an added restriction in that they have to take out a certain minimum and then you're paying a fee on top of that. So perhaps that's not always their best choice. 

Armin Radoncic: No. And specifically for condos, I don't like that avenue. Many condominiums that I've worked with in the past that I've helped obtain loans, you have to have a majority of the unit owners sign off. Usually it's 51%, or in some cases it's 75% and that's very difficult to get. And the minimum normally is anywhere from 250,000 to 350,000.

That's not including the fees associated. So you're gonna spend 50 to $75,000 to obtain this line of credit or this loan. And then when you have a condominium you don't wanna have a loan because one of the benefits of living in a condominium is sometimes you have lower maintenance than co-ops and when it comes time to sell or refinance your unit or things of that nature, it's not as attractive. 

Paula Chin: Okay. So we said there's the options of refinancing. There is the option of assessments and essentially taking out loans. Is that right? 

Armin Radoncic: That is correct. You have a loan and you have a line of credit.

Paula Chin: So you have to do your math, right? Every building is different. So what is it you're trying to balance when you're doing the math? 

Armin Radoncic: I think the goal here is to create a budget that is healthy, a budget that will reflect very well on the audited financial statements. 'Cause that's another important element here because people that are refinancing, buying to selling, they're gonna look at this stuff.

Number three is conveying this information to the shareholders so everyone understands the process that the board of management went through, and the processes that we've explored . And we've made this decision because it's the best decision for the co-op. So it's really just trying to take everything, put it into numbers that the board of directors and that the management company feels will not burden the shareholders to a point where there'll be an uproar, to a point where people will have a hard time paying maintenance, where we don't want to overcomplicate people's lives. And that's the reality because everything is just going up, and we have to do it in a way where we don't hurt people.

Paula Chin: Can you give some examples of co-ops and condos that you've recently worked with, perhaps ones that made different choices and why? 

Armin Radoncic: Absolutely. We have a smaller condominium association that's on the upper west side. It's a small 20 unit condominium. They are five stories high so they don't have to comply with Local Law 11.

However, they have a parapet wall that needs to be replaced. They have roof leaks, facade issues. The typical normal building issues. And we had a architect come in, he gave us a price of he gave us a reserve study of about 300,000. So I explored options on getting a loan and the numbers didn't make sense.

So we decided to have an assessment. That worked out well for that condominium because we conveyed it to the owners and then the owners felt comfortable going that route. Because the loan would've increased their monthly common charges significantly.

And just the idea of having a loan, people didn't like it, and then having to pay that loan back over, 10 years, people didn't like that either. So people were willing to pay the increase over two and a half years, but when it's done, it's done. So that was Avenue one with that condominium. Avenue two was a cooperative that we now we manage on the Upper West Side.

 It was a different scenario where we had to redo the lobby. We had to reconstruct our hallway, hallway floors and we obviously had to deal with Local Law 11, your FISP report. We ran the numbers of having a maintenance increase and we ran the numbers of having an assessment.

What the board and I decided was best was, to refinance the underlying mortgage, and on top of that, we actually implemented a small assessment and we broke it up into two years just to help replenish our reserves which the shareholders were thrilled about. Because again, this all reflects on your audited financial statements.

So it shows that the building is very healthy. It shows that we're being extremely proactive, and even though we have the money, we're still gonna have an extremely small assessment, which is not gonna burden anyone. It's not gonna bother anyone. And that assessment money is gonna go right back into the reserves, so in two or three years, if we have to do something else, we don't have to tap into the money that we got from the refinance. We can use the money that we have from the assessment. 

Paula Chin: I see. Is there anything else that boards should know or that you factor in when you're making decisions or helping boards make decisions at their buildings?

Armin Radoncic: That's a great question. So you have to understand that emotions play a big factor here and boards have to understand that as well as management. I think boards, they don't get a break. They have to pay the assessment just like any other shareholder or unit owner does.

And it's funny because when you convey that information, people say, oh, okay. So they feel a little better about it because they understand that it's a critical decision. It takes a lot of concentration, it takes a lot of due diligence and for the boards, they have to set aside that emotional factor. I've seen boards , they'll make a decision if they need a increase of maintenance for X amount of dollars or an assessment of X amount of dollars, they'll lower that number because they feel bad.

And that's when I have to come in, and then that's when a board president has to step up and say, guys, I feel bad too, but we can't hurt the co-op. We can't hurt the condo. This is what we need. This is what is required. It comes to the point where you have to understand that you have to be strong.

You have to learn how to convey information in a very professional way so people can understand that this was a hard decision to make and it wasn't made lightly, but this is what we need to do, not what we want to do. 

Paula Chin: When you say not what we want to do, can you give us an idea of what kind of interest rates we're seeing now, which obviously, might make taking out a loan or refinancing a little harder to swallow?

Armin Radoncic: So interest rates are based off of the world capitalization rate, and right now they're anywhere between the sixes and even the low sevens, unfortunately. Three years ago, four years ago, I've had, buildings that refinanced at three and a quarter.

And when you take three and a quarter versus six and a quarter that's a significant jump within your operating budget. And we don't foresee that interest rates are gonna go down significantly. We think that they're gonna remain this way for the next, 3, 4, 5, 6 years even.

And unfortunately we can't wait to do these local laws. Buildings have to upkeep their general maintenance, their repairs, because you have sales comparables happening. You have people that are buying you have city inspectors that are coming in, people are calling HPD, 311.

So boards understand ramifications of the interest rates. And nobody likes it. It's terrible. But unfortunately this is the cards that were dealt with. 

Paula Chin: To sum up, what would you say your final words of advice are for boards?

Armin Radoncic: I would say to my boards that, you really have to do what's best for the business, meaning the association, because it is a corporation, it is technically a business. You have to understand that buildings get audited and you have to look at things from not just today, not just from a year, but you have to look at things from, three to five to seven years. And I say that because these laws are due every three to five years, and you can't just be prepared to do everything this year. You have to be prepared to do things within three years from today. Because it takes several months or even a year to prepare for your FISP report. Now it's probably gonna take even longer to prepare for these Local Law 126 garage inspections because these engineers are saying that it's a lot more elaborate than ever, and they're due every three years, not every five years, such as your Local Law 11 if you do file safe. So my words of advice are, do what's best for the building, do what's best for the shareholders. It's a hard conversation to have, but people will respect you more because you're doing what's best for the building and they can understand that when you convey it to them in the right professional ways. 

Paula Chin: I think that sounds like great advice. Thank you so much for joining us today, Armin. 

Speaker 3: You are most welcome. Thank you guys for having me.