Table of Contents
Latest posts by Larry Rothman (see all)
- Understanding a Co-op Ownership Structure and Proprietary Lease - July 17, 2018
- New Construction Final Walk-Through Punch List - July 16, 2018
- Evaluating a Building’s Financial Statement - July 13, 2018
Living in New York City is unique. One of the features is the plethora of apartments for sale, particularly in Manhattan, most of which are co-ops, although there are condos. Living in a co-op or condo involves extra fees, which are called maintenance for the former and common charges in the case of the latter.
It is important to understand how these are set and what it covers in order to make an informed purchase decision.
The Condo common charge calculation
In a condo, the board sets the common charges based on a percentage of common interest. The Board has latitude, but generally, it is based on the square footage of your unit, although more desirable locations can also raise the percentage. For instance, a penthouse apartment is likely to have higher common charges than a similar apartment on a lower floor. This percentage is multiplied by the total operating cost of the building, which can vary wildly based on amenities. The more upscale, the higher the common charges, but more services are included.
The Co-op maintenance charge calculation
For a co-op, the maintenance charge is set by the board of directors based on the number of shares you own. A co-op is a corporation, with a set number of shares, with each unit allocated a certain amount. Similar to a condo, the charge is based on the size of the unit and other factors such as location. Aside from operating costs, the maintenance fee also includes property taxes.
What you get for paying common charges and maintenance
It is important to understand what the fee covers since the services covered varies wildly. Both maintenance and common charges include the building’s real estate taxes, mortgage, insurance, and any operating costs for the building. Operating costs may include upkeep of for common areas such as the lobby, trash pick-up, snow removal, and salaries for the cleaning crew. Utilities may also be included.
Beyond that, fees can climb rapidly, particularly for more upscale buildings. A 24-hour concierge, pool, high-end appliances, a gym – these are nice things to have but will cost you. Only you can determine if these items are worth it, but knowing what’s included allows you to make a fair comparison and assessment.
Remember, for a condo, you own the airspace between the walls, and are responsible for the unit’s upkeep. If the plumbing needs to be repaired, be prepared to pay for this out of your pocket. However, in a co-op, you own individual shares, not the unit. Therefore, maintenance fees include the cost of potential repairs such as plumbing and electrical.
Will common charges and maintenanceincrease?
Undoubtedly, maintenance and common fees will increase over time due to inflation. The cost for items such as salaries and repairs naturally go up as time passes. However, it is important to understand the reserve fund. This is a building’s rainy day fund. Beyond creating annual operating budgets, the board should have a capital budget to understand the cost of replacing big-ticket items over time. These include replacing the roof and the lobby flooring. There are some rules of thumb, such as having three to six months of maintenance/common charges, but you should check a building’s reputation for being well-managed. Ideally, a portion of your monthly fee goes towards the reserve fund.
If the reserve fund is inadequate, you may be charged a special assessment. This can occur if a major repair needs to be done. Unfortunately, this creates an expensive surprise. Assessments are typically paid off over time by adding the amount to your monthly maintenance/common fee.
Reviewing a building’s financial statements can uncover details to determine its financial health and help you determine if the reserve fund is adequate or whether your fees are going to go up substantially in the future (or face a special assessment). You can also check the history to see how fast the monthly fee has gone up.
New York City buyers are astute and will pick up on higher fees due to a building’s financials not being in great shape. This will lead to a longer sales process and lower price when you are ready to sell compared to a similar unit in a well-run building.
Maintenance and common fees are non-negotiable. It is not a source of profitability for your building, however. It is merely the cost to run the building. These can be offset by income generating operations, such as rent for commercial space, parking fees, and coin-operated laundries.