Rising Insurance Costs and Budget Solutions for NYC Co-ops and Condos

Carol Ott of Habitat Magazine interviews Carl Borenstein, president of Veritas Management, about managing rising costs in co-op and condo buildings. Borenstein shares strategies for handling double-digit maintenance increases, particularly focusing on creative uses of co-op abatement programs to generate additional income. He discusses the dramatic rise in insurance costs, especially umbrella policies, and advises boards on choosing appropriate coverage levels. Borenstein recommends implementing small annual maintenance increases to avoid larger hikes later, noting that 80% of building budgets are fixed costs.

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

Transcript

[00:00:00] Carol Ott: Welcome to Inside Track, a conversation with New York's leading property management executives. I'm Carol Ott with Habitat Magazine, and my guest today is Carl Borenstein, president of Veritas Management. Many co-ops and condos are facing the need for double digit maintenance increases. But translating this need into action is tough. Carl, to start, what are the top budget items that are causing this need?

[00:00:27] Carl Borenstein: So I would normally give you the answer, it's the typical items that you see every year: real estate taxes, water and sewer, payroll. But over the last few years, the bigger items that have taken even a bigger jump and bigger bite outta the budgets have become insurance, and the cost of energy, meaning heat, electricity. The rates have, you know, gone up dramatically.

And so those have really escalated quite a bit to really force these budgets to require double digit increases over the last few years. 

[00:00:57] Carol Ott: For boards, it's always a difficult path and sometimes an impossible ask to actually raise the maintenance, certainly double digit. Can you suggest ways to raise funds that aren't as painful as a double digit increase?

[00:01:12] Carl Borenstein: So the quick and easy answer would be if you're fortunate enough to be able to get ancillary income, like a cell site suddenly coming on your building, that generates income. Creating storage when none was there or something like that, that would generate income. But the reality is, is that cell sites are not just jumping into any building right away, and creating the amount of extra income is just not an easy task.

So being creative is the answer and trying to come up with a combination of a maintenance increase and an assessment has usually been some of the ideas the way to go. The problem with an assessment, is an assessment is really used more to fund a one-time expense and then goes away. If you use an assessment to fund your operating budget, you're only going to need the money again the following year.

So what we have found that's the least painful is the co-op abatement program to use that as a platform to create an assessment that's actually larger than what the typical assessment would be on a co-op abatement. So to try to explain that in layman's terms, let's just say a co-op had a $50,000 co-op abatement and they were gonna give that money back to the shareholders, they would normally create an equally offsetting assessment of about $50,000 or maybe a drop more if there was a sponsor in a building who wasn't eligible.

The extra income. Where does it hurt to these shareholders if you're not a primary resident and aren't getting the co-op abatement? Well, then you're going to get the full assessment hit. I see. If you're a sponsor, you're not getting the co-op abatement, you're getting the full assessment hit. But for a board, the idea of a co-op is cooperative living, that you're supposed to be living there and being your primary apartment.

And if you're not and you're subletting and you're getting the income on that end, that's your offset. So what we found is that this is one of the least painful ways to try to generate the income and lessen the maintenance increase on shareholders. 

[00:03:00] Carol Ott: And would you be comfortable with that assessment, which sounds like a pretty clever way of doing it, going into the operating account, or would you wanna see it in the reserve account?

[00:03:11] Carl Borenstein: No, it's going into the operating account. It's helping to fund the building's operating budget. So therefore, it's not a, it's not like a typical assessment, this goes away and it doesn't fund your operating needs. It's actually part of your budget. So your budget's gonna have a line item of a loss of maintenance of X being the co-op abatement credit, but it's going to have a income line there as well as the co-op assessment versus the abatement.

And it's just gonna be a larger number than what the credit is that you're losing against the maintenance. Therefore, you're increasing the net income on your budget. 

[00:03:43] Carol Ott: And have you found that boards that adopt this plan, get less resistance from their residents? 

[00:03:50] Carl Borenstein: Yes and no. They get much less resistance, but the bigger shock is that so many people have been used to getting an $800 assessment, but a thousand dollars credit.

So they actually netted , once a year, one month, like a hundred dollars, $200, or $300 as a credit. So they had one month where they've always paid less. Now in reverse, they have that one month where they're actually paying more. But the good news is you're not paying that whole $1,300 of an assessment as the example more.

You're only paying the difference against the co-op abatement credit. 

[00:04:19] Carol Ott: For those buildings in this example that you just said, they were not taking that co-op abatement credit and applying it as an assessment. They were not using it. They were giving it back to the residents? 

[00:04:31] Carl Borenstein: No, they were giving the residents back the abatement, and they were creating an equally offsetting assessment, so therefore it was a wash.

Now, instead of it being a wash, it's an income generator. 

[00:04:42] Carol Ott: I see, I see. Just talk to me very briefly about insurance, which I know has really risen. And I think a lot of it has to do with the umbrella policies. Is there anything a board can do about this?

Can they take less of A policy and still be safe? 

[00:04:58] Carl Borenstein: So the answer is yes. What used to be was the umbrella policy was almost like a throw in. It's like, hey, for an extra $2,000, we'll give you a hundred million dollars umbrella. And why wouldn't you do that? However, these umbrella carriers have taken very big hits in jury awards, and most of the umbrella carriers have basically folded and left the market.

And so what used to be $2,000 for a hundred million now can be 25, 30, $40,000 for a hundred million. And so now the, question becomes to boards, well, okay, we want an umbrella policy to cover us in case we're sued on a liability claim over our million dollars that we normally have, or over the million dollars that we have in the D and O policy.

But do we really need a hundred million? And now you have to start looking at the levels. The problem that, looking at the levels of 5 million, 10 million, 15, 25, 50. Those numbers are still risen as well, and in everybody's mindset, well, we used to have a hundred million, now we only have five. Do I feel as comfortable?

And the a hundred million you never probably really needed. So it's hard sometimes on the mindset. And also the number of carriers that are out there that are even offering umbrella policies is down to maybe a handful. Some of those handfuls are actually excluding some of the items that the umbrella policies used to include.

For example, the umbrella used to go over to directors and office policy, as well as over construction. Now some umbrella policies will go over the directors and officers, but exclude construction. Or vice versa. So you're not even getting the full umbrella coverage as what you used to have. So the idea here is that yes, I think that it's wise for boards to have an umbrella. The exact or the correct number for each building is obviously going to, differ.

I do think that, it's a large expense that was never there or never calculated before. I mean, as an example one insurance company, GNY, they offer a $5 million umbrella, but it cost $20,000. Geez. And for a building's budget, $ 20,000 on top of what a regular insurance, which has been going up at 12 to 20% per year over the last few years is even higher.

So you look to lessen the umbrellas with other companies that might not have as full the coverage. So I do believe on time we're going to start to see more companies maybe coming back into the umbrella market and giving us more choices. But over the last two, three years, it's not been there and hopefully it will be there soon.

[00:07:14] Carol Ott: Would your advice for a board to say, we just have to reduce the coverage, this is just too much money to carry? 

[00:07:21] Carl Borenstein: Yes. I would definitely say that they should have an umbrella, but not to think what they used to have as a hundred million is necessary. .

I mean, the idea of an umbrella is when someone trips and falls and sues, they're not gonna sue you for a hundred thousand dollars. They're gonna sue you for $4 million. I don't know. Pick a number. The reality is, is that if an award is given, it might only be 600,000. The umbrella is there to protect anything that may escalate over the original million that the buildings carrier would normally cover. So you wanna have coverage in the event that it goes over that number. I don't think you need a hundred million or 50 million but you do want something to feel a little bit more comfortable.

Feeling comfortable is also finding something that's also affordable that you can live with and that gives you coverage as well. That magic number depends on everybody's budget, but it's not an easy number. 'Cause no matter which way you look at it, it's not cheap. 

[00:08:07] Carol Ott: Right. And just finally. Give me your, takeaway for boards really faced with having to institute a double digit maintenance increase.

Is there a more positive way to sell it? 

[00:08:20] Carl Borenstein: I think that many boards have gone for many years without giving maintenance increases at all, and I think that that's first of all part of the problem. I believe personally, that a building should have a maintenance increase every year, whether it be 2% or 3% so that they cover the cost of living, because there's very few things that are going down in price. I don't know of anything going down. Payroll keeps going up, real estate's going up, orders going up. Insurance is going up. The only thing when you do a budget, 80% of it is mostly fixed.

Your 20% that you're playing with is, will this be a better year for repairs or a worse year for repairs? Will we need more supplies this year or less? There's very little on the guesswork on the budget. So I think that what you have to do, even if you had a balanced budget the way it is, you still do the two, 3% increases so that this way later on, as things get worse in the economy, like the energy market and insurance market, it might stem to tide to needing double digit increases 'cause you've all along been building up a little kitty so that you can keep your numbers lower.

[00:09:17] Carol Ott: Terrific. Thank you so much for your insights, Carl Bornstein.