The Real Deal New York

The Real Deal Webcast: Boards grapple with requests to defer monthly maintenance fees


March 31, 2009

In a Webcast last month, The Real Deal’s Jen Benepe spoke to Marc Luxemburg, attorney and chairman of the real estate department at Snow Becker Krauss, and Eva Talel, partner at Stroock & Stroock & Lavan, about how co-op and condo boards are dealing with the downturn. Some boards have residents who have been hurt by the falling stock market and the Madoff scandal, and are now asking to defer monthly maintenance payments. Meanwhile, boards are opting to postpone nonessential improvements, such as renovating lobbies, and in some cases are beginning to relax subletting rules. Log on to www.therealdeal.com to see the segment and to access the archives. Every week, The Real Deal posts a new edition of the Webcast, which features exclusive interviews with industry insiders.

The Real Deal (Voice-over): Many Manhattanites with high-profile addresses have seen their stock portfolios shrivel or their life savings disappear at the hands of alleged Ponzi schemer Bernie Madoff. Now that pain is trickling down to their building boards, which are dealing with residents looking to defer their monthly maintenance payments.

Marc Luxemburg: Lots of upstanding people have suddenly had the rug pulled out from under them by the Madoff situation and other situations, and obviously that’s going to present a threat to a number of co-ops.

Eva Talel: The goal in seeking to get a deferment of the maintenance obligation is not to make it up later, it’s to have enough time to sell an asset.

TRD: Between the declining Dow and job losses that continue to pile up in the financial industry, many more owners could begin looking for deferrals, said Talel, who acts as legal counsel to a number of building boards. And that, of course, could put more boards in a tight position.

ET: If X number of shareholders aren’t paying their maintenance, either the other shareholders have to pick up a greater share or the building has to go into its reserve funds or borrow money.

TRD: Talel said New York City boards will ultimately get paid because in New York State they have what’s called a “first lien of repayment.” But that doesn’t help the building pay for essential building services or repairs.

ET: The problem is a cash-flow problem. How are we going to pay for the fuel, pay the workers, the employees, the real estate taxes, the mortgages, etc., if we’ve got too many shareholders not bearing their fair share?

TRD: Luxemburg, who in addition to heading the real estate department at his firm is president of the Council of New York Cooperatives and Condominiums, said some buildings may not be able to bear the brunt of deferred maintenance.

ML: Already we’ve seen reports of maintenance increasing 3 percent to 15 percent in the last year and putting a strain on shareholders to begin with, and now [with] this double whammy of the financial markets, a lot of buildings are going to be strained for cash.

TRD: Boards also are beginning to forgo improvements unless they are essential, and they might start loosening their subletting guidelines so that owners can continue to pay the maintenance.

ML: We have already seen some indications of subletting requirements being relaxed, and I would expect to see more of that.

ET: There is consideration being given in buildings to defer those nonessential capital projects. Essential capital projects must go on. There are local laws that require certain [improvements] to go on that have to do with maintaining the condition of a façade so that there’s no accident. …Those kinds of projects, as a legal matter, must continue.

TRD: Talel, who is chair of the city bar association’s cooperative and condominium law committee, said that if an owner can’t raise enough money to pay the maintenance, a board can try other legal remedies before starting default proceedings.

ET: Basically, [there is] a legally binding document by which a shareholder basically admits, “Yes, I am in default, I am not paying my maintenance and you may treat me as someone who is in default.”

TRD: The lawyers we talked to agreed that this is probably not the end of shareholders asking for maintenance deferments. But the question is, will the worst come to pass? Will there be any co-ops defaulting in the near future?

ML: I certainly hope not. That hasn’t happened in a long time. But on the other hand, the downturn now is as bad as any we’ve seen in a long time, so anything is possible.

TRD: If a building does default, Luxemburg summed up what happens in two words.

ML: It’s ugly.

Compiled by Sara Polsky

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