Brownstoner on 111 Hicks

Brownstoner posted a property at 111 Hicks as their co-op of the day and remarked on the INCREDIBLY HIGH MAINTAINENCE in the building. 

At first glance, we were wondering what a 1,320-square-foot apartment in Brooklyn Heights was doing on the market for only $625,000. Then we notice the monthly maintenance of $1,975 and it all made sense. Other than that, there are high ceilings, big windows and new appliances in the plus column and a low floor in the minus column. The building also has the added benefit of housing the Eastern Athletic Club and possessing a killer views from the common roofdeck. Anyone know why the maintenance is so bad in this building?

A commenter on B'stoner directed folks to the 111 Hicks website where it's explained:

Our Operating Budget

A common question asked by shareholders concerns the maintenance fees – what do we spend them on? The maintenance fees pay the costs in our operating budget, including payments on the underlying mortgage, real estate taxes, staff payroll, electricity, fuel, administration, insurance, repairs, and so forth. In addition to maintenance fees, the rent payments that we receive from the health club and restaurant also go toward paying our expenses. Our total operating budget is over $4 million per year. As you can see, real estate taxes and mortgage payments represent major portions of our costs. Just as with payments on any type of residence (house, condo, co-op) these two payments are tax-deductible and you can claim a portion of your maintenance fees as a deduction on your annual income tax return.

pie chartLike any household, we have to pay monthly bills for the mortgage, taxes, electricity, supplies, and so on, in addition to our other expenses such as administration and payroll. The only way we can do that effectively is to collect the maintenance payments in a timely manner so that money is available to pay bills. This is why it's important to pay your maintenance on time each month. If we can't pay bills on time, we incur additional, unnecessary fees.

Our Underlying Mortgage

Another question shareholders often ask concerns our underlying mortgage – what is it, and how is it structured? When the St. George was originally converted to a co-op, the amount borrowed was $11.5 million and the mortgage had a balloon payment plan (a typical approach for commercial real estate). The mortgage was re-financed in the late 1990s, again as a balloon mortgage, and with an increase in the amount owed in order to build up our reserve fund. The current mortgage is due in 2008. At that time the outstanding principal will be about $8.75 million.  

During the volatile economic conditions in the US in 2002 and 2003, mortgage interest rates dropped dramatically. Many householders nationwide, including many of our own co-op shareholders, refinanced their individual mortgages to take advantage of the lower interest rates. During this time, we did not refinance our underlying mortgage because the pre-payment penalties involved in refinancing would have been uneconomical and would negate any benefits of a lower interest rate.

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  • Heights97

    How is having Eastern Athletic Club an asset? I was a member there years ago and was constantly shocked by how bad their facilities and customer service were–musty locker rooms, broken equipment, staff with bad attitude, etc. What I found particularly irritating was the way they would shut down every year for a week in the middle of July for “maintenance.” You’d return to the club afterwards and it would be as run-down and depressing as ever. Maintenance at the St. George will go even higher once EAC goes out of business. And with Equinox, New York Sports, the Y, and the Casino in the neighborhood, I imagine that day can’t be too far off.

  • BP

    First, EAC won’t be closing anytime soon (whether you want it to or not) as they have (If I remember correctly) 10 years left on their lease which is significantly below current market rates. By significantly, I mean way, way below current market rates.
    Second, if EAC were to go out of business, or when their lease ends, the St. George Tower should be able to increase their rent roll on the space, thus avoiding a maintenance spike.

  • Ernesto G

    I am a current member of the EAC and think you should give it another shot. They recently completed a million dollar renovation and have added raquetball and squash courts. The facilities are always clean and I find the staff fine. I never have seen any broken equipment and run and use weights 3-4 days a week.

    I am also a resident of 111 Hicks, and received a very nice check from the IRS this year. 60% of the maintenance is tax deductible. Most buildings are 20-30%. While you pay more monthly, you get a lot more back.

  • wayne

    but aren’t you just getting back a portion (less than 100%) of the excess you already put in, making it still more expensive?

    consider this, would you rather pay 10% on a mortgage or 5%? Granted, your tax deductibility on 10% is double that of what you pay on 5%, but your tax benefit only partially offsets the extra money you already spent on interest vs equity.

    A higher deductible dulls the pain, but it is ultimately still a higher cost.

  • Jason

    Wayne, not to get technical, but your comment doesn’t really make sense. The real question is whether you would rather pay a 2000 dollar fee that is 60% tax deductible, or a 1200 dollar fee that is 20% tax deductible. If your gross income puts you in a 35% tax bracket and the first example allows for a 1,200 dollar deduction, you are saving roughly 425 dollars, where as with the former example you only save 85 dollars (.35 x 240). Granted it’s still a difference between an after tax expense of 1575 versus 1115, but if the maintenance is driving down the price of the apartment, I think the point being made, is that it isn’t as bad as it appears.

  • wayne

    Jason, yeah, you eloquently put into words the jumble i posted. What i was essentially driving at is i’d still prefer a low maintenance with low deductibility, than a higher maintenance with high deductibility, b/c the cash outflow still hurts on a monthly basis, while only partially recouped once a year.

  • bill

    a mortgage deduction is useless under AMT.