A Big Piece of the Pie: New York City's Insatiable Appetite

If there is one issue about owning a co-op or condo that will take center stage over the next few years, it will no doubt be carrying costs.
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Increased real estate activity in Manhattan translates into spending more time reviewing the actions of the co-op and condo boards, perusing financial statements and speaking with account executives about the physical and economic well being of the buildings they manage. Although due diligence often reveals negative information about a particular co-op or condo, potential purchasers rarely take a pass based upon a building's metrics. It does happen, but it's the exception and clearly not the rule.

The Financials

It's getting to be the annual time when co-ops and condos issue financial statements for the year ended December 2011. At the moment, the most current financial statement reflects a building's financial position as of December 2010. Although the financials do give a snapshot of the co-op or condo's financial health, a snapshot taken 15 months ago is as stale as a week-old bagel. A lot can happen in a co-op or condo's life over a 15-month period, so simply reviewing the 2010 financial statement is not enough to get a sense of a building's current financial status. Even when the 2011 financial statement is issued, it is already three to five months old. The equivalent of driving via the rear view mirror. Accordingly, it is imperative that the property manager be questioned about the building's current status to determine whether there have been any material economic changes since the last financial statement was issued.

The Elephant in the Room

If there is one issue about owning a co-op or condo that will take center stage over the next few years, it will no doubt be carrying costs. That is, the monthly charges paid by a unit owner to cover his or her pro rata portion of the building's common expenses. With co-ops, there is one particular expense that is bordering on the uncontrollable: real estate taxes. New York City is not shy about increasing tax assessments. A review of the expense pie chart included at the end of most financial statements reveals the obvious -- real estate taxes usually account for the largest expense item on a co-op's yearly budget. In one small co-op whose financials I reviewed recently, real estate taxes accounted for more than sixty percent of the co-op's budget. Wow... Try as they might to control expenses, real estate taxes will present a huge challenge for many buildings. With a beloved 17.5 percent co-op and condo tax abatement about to expire unless it is renewed by both the City Council and the New York State legislature in June, this budget line item could increase significantly in the next few months. When you throw in commodity costs and union payroll, most co-ops have limited ability to control a number of operating expenses that continue to increase year after year.

Residential Reality: Do the Numbers

As the market finally comes back to life, there seems to be a forgetfulness about the excesses that resulted in the real estate economy blowing up only a few years ago. Buying at a discount is a hedge against the ups and downs of ownership that will certainly occur, but the purchase price is not the only issue that buyers need to consider when deciding on a property. It's all about the carrying costs -- what those costs are today and what those costs are likely to be over time. So factor that in...

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