NYC managing agents weigh in with their annual report on residential buildings

They say apartment complexes are in better financial shape than they were a few years ago, but are still watching their pennies
By Melissa Dencke-McGill | October 01, 2012 07:00AM

They are the gatekeepers of New York City’s residential buildings. And as such, they have a front-row seat for the financial ups and downs — of which there are plenty in this post-recessionary climate — that the city’s residential buildings are experiencing.

This month, The Real Deal talked to the managing agents that make sure New York City’s co-op, condo and cond-op buildings run smoothly. What we discovered is that while the majority of buildings are in far better financial shape than they were during the downturn, most are still watching their pennies.

Indeed, many of the capital improvement projects that residential buildings are investing in are either required by the city — such as upgrades in the type of oil they’re burning — or are other energy upgrades to deal with soaring water and sewage bills that the buildings will make back over time in cost savings.

In addition, one source noted that a handful of new construction buildings have cut back on amenities like concierge services that were dreamt up by developers. But whether it’s a good idea to make those cuts is up for debate.

“They are being shortsighted in my opinion because they are cutting back on a service, even if it is only a perception of service, which does indeed increase property value,” said David Kuperberg, the CEO of Cooper Square Realty.

Management companies say maintenance fees and common charges have gone up steadily — even through the downturn. But they say that tenants understand that those increases are needed to offset the increase in fixed expenses.

For more on how these companies are faring, for the new types of litigation co-op and condo boards are pursuing against some residents and for a look at how buyers’ board packages are being analyzed these days, we turn to our panel of experts.

David Kuperberg
CEO, Cooper Square Realty

As managing agents, you are the gatekeepers of NYC’s rental, condo and co-op buildings. So how is the fiscal health of those buildings now compared to the recent past?

While our buildings didn’t struggle during the bust, many individuals did, and that may have affected the decision-making by some boards. The few buildings that didn’t increase maintenance or carry costs during those years have now seen double-digit increases. If they had kept increases on pace with costs, this wouldn’t be happening now.

These days, are NYC building owners spending more or less to maintain their buildings?

Over the last few years a handful of new construction buildings have cut back on some of the developer-initiated amenities in order to reduce their carrying costs. Over time that may not prove to be the best course of action. New buyers will likely perceive value in those amenities as the original purchasers did, and resale value may suffer. Some are cutting back on the concierge service because they feel no one uses it. But they are being shortsighted in my opinion, because they are cutting back on a service, even if it is only a perception of service, which does indeed increase property value.

What kinds of new capital improvements are NYC co-op and condo boards spending money on today?

Energy efficiency projects — they provide the best financial return on investment. … Energy costs account for as much as 30 percent of the building’s operating expenses, and many energy projects have three-, four- and five-year paybacks, which are a 20 to 30 percent return, so it’s one of the best investments a building can make.

Are management firms expanding into new arenas to stay competitive? If so, what are they offering now?

Absolutely. For instance, we issue energy report cards for every building comparing energy use and cost to other buildings in our database. We are purchasing energy in bulk which is significantly reducing costs. We are doing and financing energy retrofit projects. We have also created reserve fund investment programs for co-ops and condos, which increase their returns.

How do maintenance and common charge fees compare today to a year ago, two years ago and during the boom?

The primary cost-drivers in buildings such as payroll, utilities and co-op real estate taxes continue to increase every year. Those costs did not go down during the bust. On average, maintenance in co-ops has typically gone up 4 to 7 percent over the last two years and 2 to 4 percent for condos — the difference being that co-ops pay real estate taxes, and for condos the real estate tax is paid by the individual owners.

What is the most worrisome trend when it comes to managing buildings in NYC today? 

By far the most worrisome trend is the continued imbalance in real estate taxes for co-ops and condos. The tax rates are drastically different for single-family homes versus multiple dwellings and the net result is that a co-op or condo owner pays real estate taxes at nearly six times that of a single-family homeowner. Co-ops and condos are taxed as for-profit, multi-family, landlord-owned buildings. They are not taxed based on their value as a homeowner or the purchase price; they are taxed based on an artificial stream of income that is generated as if the apartments were rented out. There have been citizen groups and professional organizations fighting for years about this. It is state law and it is proving nearly impossible to change.

Are there any new (and financially burdensome) laws that residential buildings in NYC have to deal with these days?

The Landmarks Preservation Commission’s proliferation across the city was intended to preserve the historic architecture of neighborhoods. Instead, it’s actually lowering values, stifling development and diminishing affordability. To comply with Landmarks Preservation Commission rules, everything has to go through longer and more difficult approval processes. It costs more money in terms of materials and construction methods, and oftentimes rendering improvements is either not possible, or certainly not economically possible, and therefore discourages property upgrades. I think the city would be significantly better served with an architectural review board for new construction than with the Landmark Preservation Committee for all buildings within large neighborhoods.

What sort of new issues are unit owners and boards suing over these days? 

Noise and odor complaints and subsequent litigation remain at the top of the list. We are also seeing an increase in litigation resulting from renovation projects undertaken in individual apartments, as a result of faulty workmanship with subsequent damage like leaks to other apartments. During the boom, a lot of people renovated and upgraded their apartments and sometimes their workmanship was faulty.

Ira Meister
president, Matthew Adam Properties Inc.

Ira Meister

How is the fiscal health of NYC residential buildings now, compared to a year ago, two years ago and during the boom?

I would say buildings today are in better shape. People were shocked [during the downturn], and they had to tighten their belts and make some changes. So I think financially, many of the buildings are in better shape today.

How much have NYC building owners been spending to maintain their buildings today in comparison to previous years?

Every building is watching their pennies. They have been doing their maintenance and many of the buildings that were burning No. 6 oil are going through conversions right now to gas or No. 4 oil or a combination of oil and gas. They are in the process of working on it right now, but they are spending very wisely.

What other kinds of new capital improvement projects are boards spending money on today?

Green projects, which are payback projects — better light for people in the building, upgrading electrical systems. We are reducing the use of toxic cleaning chemicals, we are doing different projects for improvement-focused infrastructure and we are looking at a lot of new technology right now. Water bills are insane, so we are looking at the new technology on how to reduce water and sewer charges. The upgrades do play a role in the value of apartments.

Is there generally more or less competition to land residential building management jobs — or to keep jobs — than there was in the recent past?

There is less competition in the business due to the mega-companies that have bought up other companies.

Are management firms expanding into new areas in order to stay competitive?

A lot of firms are trying to make money by selling oil, gas and electricity, and they do make money, but there is no way that you can go out there and get competitive bids when you have self interest. I don’t think it’s the right thing to do. We go out and actually shop the market — we pick our energy companies, gas, oil and electric. They are the people paying the bills, so you have to be loyal to your master.

What sorts of new demands are being placed on managing agents at NYC residential buildings these days that didn’t exist a few years ago?

A lot of our buildings have us doing internal audits and labor audits just to see if there are ways to reduce staff or services.

How do maintenance and common charge fees compare today to a year ago, two years ago and during the boom?

Maintenance fees have gone up and there are major contributing factors — property taxes, power, sewer and water. We are already doing our budgets for 2013 and we are seeing an average increase — primarily based on real estate taxes — of as much as 3 percent just to cover fixed costs, so that’s a lot. I just worked on a very large building that I manage myself, and they are a very conservative building. They are going to have to go up 4.5 percent because of fixed costs. The tenants understand. Everybody reads the papers and uses the Internet, so they hear the news and they know about the real estate taxes. When they go to a gas station to fill up, it’s almost $4 a gallon now.

What are you seeing in terms of foreclosures and financial distress of tenants/unit owners now, compared to a year ago, two years ago and during the boom?

I think it has pretty much quieted down. Our boards have really been very aggressive in collecting money. They normally don’t let things go beyond 60 days. We have had very few foreclosures, and the banks have been very cooperative with us. People pay on time now, and many buildings have instituted late fees.

What kinds of new trends are you seeing with boards when it comes to approving new buyers?

I have been doing this for 35 years and I have never seen boards go through packages the way they are now. I was just reading a blog from Fred Peters of Warburg Realty. When we do a deal with them they submit impeccable packages. He called 2012 the year of the turndown. They have seen their board turndown rate up 40 percent over last year. So boards are really on top of the packages and they are not relying on bonuses anymore.

What are fees like today for third-party managing agents, and how does that compare to fees in the past?

We have had basic increases in many of our buildings. They know that our costs go up and that we have to pay and insure people. If we cut their service, it hurts, so we have been getting our increases.

What sorts of new rules are you seeing co-op and condo boards institute these days that you haven’t seen in the past? 

We have a brand new condominium on East 93rd Street, and in its bylaws it states there is no smoking and people can’t smoke outside the building. … On rental properties we have been doing much more in-depth background on people we rent to. Many of our landlords are doing in-depth searches going several landlords back. Some of them are even having us do home visits to rent to prospective tenants. They are very concerned not only that they can pay the rent, but also the type of tenant they are going to be getting. Many years ago, we used to do home visits, so it is interesting to see this come back.

Are there any new (and financially burdensome) laws that residential buildings in NYC have to deal with these days?

Those buildings burning No. 6 oil have to go through the boiler upgrade process, and it is going to be extremely expensive. The stack that goes to the roof … can cost up to $10,000 a floor to install. That’s a tremendous expense when you are talking about a 20-story building, plus the boiler must be changed.

Neil Davidowitz
president, Orsid Realty

Neil Davidowitz

How are NYC building owners spending money to maintain their buildings today?

Rising costs in real estate taxes, labor and energy have led to a careful review and ongoing monitoring of discretionary expenses. It is a difficult balancing act. We are constantly looking for cost savings, but do not want to detrimentally affect the value of individual apartments and quality of life for residents.

Are management firms expanding into new arenas to stay competitive?

Management firms are offering new techniques in communication, energy management, expanding financial reporting, compliance monitoring, construction management and insurance and risk management. Although there are benefits to be realized, buildings should be cognizant of potential conflicts of interest.

How do today’s maintenance and common charge fees compare to past fees?

Management fees and condominium fees have continually increased. The primary factor has been increases in real estate taxes. Labor and energy have also affected increases.  Costs have increased an average of 4 to 7 percent per annum.

What is the most worrisome trend when it comes to managing buildings in NYC?

Controlling operating costs to protect residents on fixed income and to avoid costly and divisive litigations.

Are there any new (and financially burdensome) laws that residential buildings in NYC have to deal with these days?

The city’s newly enacted site safety requirements are causing delays and significantly increased costs on façade and Local Law 11 projects. The city is making it difficult, costly and sometimes impossible to maintain our buildings.

Paul J. Herman
president, Brown Harris Stevens Residential Management, LLC

Paul J. Herman

What sorts of new rules are you seeing co-op and condo boards institute these days that you haven’t seen in the past?

Smoking is the main one; restricting open houses and film crews for marketing purposes; escrows for all sorts of reasons.

How are NYC building owners spending money to maintain their buildings today?

Boards have reviewed expenses and considered costs, but when cost-cutting measures have been presented to the owners/shareholders, nine times out of 10 residents want to maintain service levels at the same standards. This has been true since the boom.

Michael Berenson
president, AKAM Living Services Inc. and AKAM Associates Inc.  

Michael Berenson

How is the fiscal health of NYC residential buildings now compared to a year ago, two years ago and during the boom?

As with the entire real estate industry, a few of our managed properties have experienced financial challenges owing to unit owners/shareholders whose personal finances have been affected by the economy. In co-ops where subleasing had been restrictive, we might suggest a more lenient policy to allow shareholders the opportunity to cover their obligations to the building [as one possible solution].

What kinds of new capital improvements are boards spending money on today?

We see boards very interested in introducing FiOS into their buildings these days, which is a cost-free [service] that adds value to buildings.

What are fees like today for third-party managing agents?

Our contract calls for a standard periodic fee escalation, so our fees are keeping pace with general cost-of-living increases. Co-op, condo and cond-op decision-makers who are shopping for new management and are attracted by very low fee quotes should beware because management companies whose fees are very low are either struggling to stay afloat and are quoting low fees out of desperation or are not providing the level of service their clients need. In management, as in all things, you get what you pay for.

What is the most positive trend when it comes to managing buildings in NYC? 

The rapid development of communication technology is the best thing to happen to property management. Because we must be on-call and available 24/7/365, being able to be in touch at all times.

What is the most worrisome trend when it comes to managing buildings in NYC ?

We heard from new client buildings that their prior management company managed their building finances by co-mingling them with other clients. We had thought that unseemly activity had been eradicated in the 1990s, but apparently some firms have reactivated it, most likely for the benefit of no one but the management company.

What sorts of new issues are unit owners and boards suing over these days?

Loud noise, pets, illegal washing machine installations, unapproved structural or mechanical alterations — all of these are standard causes for litigation in communal buildings like the co-ops, condos and cond-ops. The smoking issue is really heating up, and a few buildings have invested a great amount of money and energy to create a smoke-free environment.