Your Commercial Unit Owner May Be Secretly Costing You Thousands Every Year

Surprise! You might be subsidizing your commercial unit owner's expenses. This eye-opening conversation with property management expert Greg Poverelli, senior property manager at Harlem Property Management, reveals a costly mistake that's bleeding money from countless condo buildings across New York City.

Many boards discover too late that their commercial units have been dramatically underpaying common charges for years — sometimes by tens of thousands of dollars The culprit? A dangerous mix-up between offering plans and actual governing documents that lets commercial owners off the hook for their fair share of building expenses. In this episode, Poverelli shares real examples, including one Harlem building that recovered $7,200 in a single special assessment and thousands more in ongoing monthly charges. He explains exactly how to investigate your own building using public records and discusses the possibility of recovering years of underpayments. Habitat’s Paula Chin conducts the interview.

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

Transcript

[00:00:00] 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 Greg Poverelli, senior property manager at Harlem Property Management. I. When co-ops or condos have commercial tenants, their rent can be a significant source of revenue for the building's operating budget.

Typically, the rent a commercial tenant pays should be based on its percentage ownership in the building, but it turns out that boards are often getting shortchanged. Greg, can you tell us about it and how it happens? 

[00:00:38] Greg Poverelli: Yeah. Thank you so much. When managing a condominium with a commercial unit or multiple commercial units, it's important to look at the common charge levels of all the apartments, including the commercial units, and check on the apportionate common interest that those.

Units have within the condominium. I had onboarded a few new clients where, when looking into their financials and planning for potential budgetary changes to the common charge levels or special assessments for projects, that the commercial units had not been billed properly based on the common interests in the Schedule A of the declaration of the condominium.

Basically brought this up with the association's attorneys and reviewed it with them and found out some very interesting facts. 

[00:01:28] Paula Chin: Tell me, how does that situation happen in the first place? 

[00:01:31] Greg Poverelli: Every condominium has an offering plan and a declaration with the bylaws within the declaration.

The offering plan is basically a very large document that is a sales disclosure document that the sponsor uses to give pertinent, necessary information to interested parties when they're first selling units in the association. And there is a declaration and bylaws within that offering plan.

And that offering plan does get filed with the Attorney General. But ultimately the declaration that gets filed with the county is the governing document of the condominium. Once everybody is buying units, that declaration is noted on those deeds, and that's the actual governing document that managing agents and boards should use to govern the condominium.

Occasionally you'll find discrepancies between what was within the offering plan and what was actually in the declaration. And in this instance, you occasionally will see with specifically commercial units that there might be a schedule, maybe Schedule B, in the offering plan that gives reduced cost due by the commercial unit based off provisions that might not be in the declaration.

Certain expenses borne by the building are only residential and only certain portions of those expenses are paid by a commercial unit. Where in reality, if the declaration does not mention this and it's silent on that, you should be going by Schedule A, which shows you every unit's common interest in the building.

And sometimes that could be a significant difference in what the residents were paying. 

[00:03:11] Paula Chin: So what is the rationale for commercial tenants when they say we don't have to pay our portion of all the expenses? And what expenses are we talking about? 

[00:03:22] Greg Poverelli: So just to make sure it's clear, it's, we're talking about unit owners, not tenants, but the commercial unit owner might have language within the offering plan that says that they only need to pay towards certain repairs and maintenance items and certain utilities. Perhaps they're not responsible for the full cost of the building staff payroll. Perhaps they're not responsible for security expenses, like a concierge style security guard. Perhaps they're not responsible for elevator expenses. And the logic would be that the commercial unit does not interact with all of the residential common elements functionally, perhaps the roof and things like that. But when it comes down to what's binding and what's legal, the declaration is what should be used in these matters. And if there is no mention of such reduced operational expenses due by the commercial unit in the actual declaration, in the bylaws, then they should be charged by their common interest in the association.

So like literal example, if the budget is $500,000 per year and the commercial unit is 20% interest in the association, they should be paying their fair 20% of the total common charges in the building, not a reduced amount. 

[00:04:40] Paula Chin: How does this deal for these commercial units happen in the first place?

Is it with the developer of the building, they cut a special deal? What's the origin? 

[00:04:51] Greg Poverelli: Oftentimes the sponsor/ developer ends up owning the commercial units for an extended period of time or ongoing. Sometimes they are sold, but it tends to be the case that you'll find that the offering plan is beneficial towards a commercial unit or a sponsor.

And what this really boils down to is, a board should always make sure they have the declaration that's on ACRIS, which is the Automated City Register Information System, public records of buildings in New York City. And the managing agent should be making sure that they're citing the declaration and the bylaws, not using the offering plan to govern the building.

What this really means is if the commercial unit was paying a pro rata share of specific expenses, instead of all of their expenses that means the residential units were overpaying. And we have successfully navigated for some of our clients fixing the common charges, making sure that all units are paying the correct legal amount that they should be paying.

And I think there is precedence for actually seeking reimbursement. Because if this had gone on for years, residential units might have been overpaying, commercial units might have been underpaying. This kind of situation has been tried in New York Supreme Court. 

[00:06:06] Paula Chin: Can you tell me about some of your clients?

Maybe a building that you newly took over where this has happened? 

[00:06:13] Greg Poverelli: I had a condominium in Harlem where one of the first orders of business when taking on the account was to make a new budget to both balance their operational expenses and prepare for a Local Law 11 project.

So I was tasked high level with making sure that the building could be financially stable. And it required both a common charge increase and a special assessment levied against the units. And in doing so, when I was analyzing the rent roll, I saw that even though the commercial unit had a very significant portion of interest in the building, close to 20%. They were paying a very low common charge compared to the other units. And I knew something didn't make sense. So I did a deep dive into the offering plan and the declaration, and I saw that there was a schedule in the offering plan that specified that the commercial unit would not pay all expenses, it would only pay certain expenses, but I didn't see anything like that in the declaration.

So I brought it to the attention of the condo's attorney. And they brought to light that there was case law that supported this, that they should be paying based on common interest, not a specific provision of the offering plan, because it was not noted in the declaration. But it should be clear that technically the declaration could also specify such a change.

Condominiums are legally allowed to have different expenses born by each residential and commercial unit, but it does need to be cited in that declaration. And in cases like this, where it wasn't, that's when a board should look into this and make a change. 

[00:07:55] Paula Chin: If it is cited in the declaration that they have a special deal, are boards stuck with that then?

[00:08:02] Greg Poverelli: Technically a declaration in the bylaws can be amended by usually a super majority vote at a meeting called for that purpose. But sometimes if the sponsor is still in the building, such a change would also need approval on the sponsor's end. So sometimes that's not likely.

But I do also have condominiums where there is specific charges not due by the commercial unit in the declaration. I would suggest that, boards and managing agents always look at both, and discuss this when you have commercial units in your building. 

[00:08:33] Paula Chin: Just to take a step back, you're saying that it may be difficult to amend the documents even with a super majority vote, if the developer still owns some units, or does the developer have to own a certain percentage? It doesn't seem quite fair. 

[00:08:49] Greg Poverelli: Truthfully, it is challenging to amend these kinds of governing documents in the first place. Getting the quorum and getting the votes that are required can be time consuming and challenging. And there are sometimes provisions that the sponsor needs to be on board with the change in and of itself. Getting the sponsor to vote in a way that's going to increase their fees is obviously not likely. At the end of the day it should be fair and the process should be based on whatever the governing documents say.

[00:09:20] Paula Chin: So even if there is a super majority vote to change the governing documents, a sponsor can simply override that. 

[00:09:28] Greg Poverelli: It's different from building to building. Sometimes there is language that certain things cannot be amended without the support of the sponsor, yes. 

[00:09:36] Paula Chin: I see. 

Can you give us an example of a building and sort of the actual dollar figures that they were losing perhaps, and over say what utility or what special deal that the commercial tenant had?

[00:09:51] Greg Poverelli: Sure. In a real world example, I had to do a special assessment of, $40,000 to prepare for a Local Law 11 project. And the commercial unit owned just over 18% of ownership in the association. So in recognizing that it had previously not been billed correctly, we were able to, correctly bill the $7,200 that was due.

And that was a significant amount obviously. Whereas previously they have been paying a reduced rate of common charges and it would've been thousands of dollars differential. And that adjustment in the common charge level is significant as well. Because if the annual budget for the building was $200,000 and they were paying close to 10% less than they should have, we're talking significant money throughout the year.

[00:10:44] Paula Chin: I would imagine it's not possible, but once a board makes this change with the commercial tenant, can it be retroactive to get the money that you've lost? 

[00:10:54] Greg Poverelli: It's certainly the case that there could be reimbursement that's reasonable. It's the kind of thing that a board should speak to their general counsel and their attorney about.

 A unit owner that was paying the incorrect amount, I think there is precedent to go back maybe six or seven years. But this would be the kind of thing that has to be handled by an attorney. 

[00:11:14] Paula Chin: Greg, what would you say the takeaway here is for boards? 

[00:11:18] Greg Poverelli: Make sure that you are using the declaration and the bylaws within the declaration. That's the official governing document for your condominium. If you're not sure if the copy that you have is correct, you can use ACRIS, the Automated City Register Information System, to pull it using the block and lot number for your building. You could also look at the deeds of the unit owners, which are also available online, and you could see reference to what's cited on the deed. The deed will reference the declaration of the association. And make sure that you're carefully navigating Schedule A and all of the provisions for how common charge levels should be allocated in your building. There's a reason why the city has these documents as public record, and you should make sure that you're managing your building appropriately.

[00:12:05] Paula Chin: So boards need to do this obviously, because they could end up shortchanging themselves. 

[00:12:09] Greg Poverelli: And if you do have a commercial unit in your building and you notice that they're not paying based on the common interest, definitely discuss this with your board and your attorney. 

[00:12:19] Paula Chin: This has been really informative, Greg.

Thank you so much for joining us today. 

[00:12:24] Greg Poverelli: Thank you so much.