Looking Ahead: Energy Costs & Property Taxes

A: Lets change things up a bit and see how the commodity bust may affect maintenance costs in the months to come. In addition, given the evolution, or de-evolution I should say, of wall street firms and their hefty revenues, one way the city will be forced to makeup for tax revenues collected will likely be in property taxes. It's already expected that the 7% Bloomberg Property Tax cut will be scrapped.

Monthly Maintenance Costs

If we look at a building as a private company, which co-ops technically are, a building's maintenance charges cover all the expenses to operate the business. With that said, every business (any one individual building) is managed differently and as such the ultimate maintenance charges you end up paying are a result of these variables:

a) financial health of the building / size of reserve
b) need for capital improvements on the building
c) amenities offered by the building that add to the overall expenses for residents
d) savviness of the board who controls building funds and makes decisions using building funds / wasteful spending
e) mortgage held by the building
f) salaries paid to porters, resident manager, anyone assisting in the overall upkeep of the building
g) revenue generating usefulness of the building (i.e. storage revenue, streetfront revenue, rooftop revenue from wireless carriers, etc..)
i) raw costs to operate the building (energy, water/sewer, electrical, etc.)

...these are the basics, there are more as indicated by the building financials that are reviewed before any purchase. As in the business world, some companies are better managed than others.

From 2003-2008, most residents noticed annual 'energy assessments' contributing to rising monthly maintenance costs. This was the lagging result of rising oil prices, as the global boom occurred. In short, the price of crude rose from $22/barrel in 2002 to a record high of $145/barrel only a few months ago. Today, the price of crude is off by about 50% in three months time (chart on the right shows you the fall in the past 3 months & today's last quote)! Yes folks, that is a dramatic correction measured by any investment standards. Here is the selloff in oil as the commodity bubble collapsed on itself:

The End Result: falling oil & natural gas prices for buildings

The Wild Cards: whether or not your building locked in a longer term delivery contract at or near peak oil prices over the summer

Assuming your building decided not to lock in your oil delivery at a higher price, you should see a nice dropoff in energy costs in the months to come; the real question is how long $70/oil will last and which way it's going to go next. For now, consider it a tax break for buildings whose finances/costs have been properly managed.

Property Taxes

Not as rosy a picture. The Bloomberg 7% property tax cut has been in effect for a year, and as of early 2008 there was hope that the cut would continue in effect for a second year. In May, to the delight of property owners, Bloomberg declared the tax cut in effect for a 2nd year. But the party only lasted a month.

In a mid June article via Reuters, "New York property tax cut may be history: Bloomberg":

A 7.0 percent property tax cut was enacted last year, and Bloomberg in May extended it another year, but it might now have to be reversed.

"We may very well have to put it back for this year. Or we can balance next year's budget but it would be so onerous," he said on a local radio show, explaining that he wished to avoid cutting programs.

There is no choice here. With the extinction of wall street, and the billions in generated revenues that came from investment banking and a securitization based credit model, the city is facing a looming budget crisis.

Just as I pay estimated quarterly taxes, if I know my salary will be higher than last years reported income, so did wall street. Well, last quarter the estimated taxes paid by wall street firms in New York was down a staggering 96% from previous years levels. Simply astonishing.

For the 2009-2010 fiscal year, Governor Paterson recently called an emergency session in response to the state's current budget deficit, seeking $2,000,000,000 in budget cuts (via Newsday.com):

"We're more than in a recession, we are in a very serious economic crisis," he said.

The governor said immediate "drastic action" will be needed for making the cuts for the 2009-10 fiscal year, which begins in April. Paterson said he would not address the shortfalls by raising taxes. But given the grim projected forecast, he added that nothing would be taken off the table beyond the 2009-10 budget.

"Our fiscal condition continues to deteriorate," even after about $1.8 billion in cuts this summer, Paterson said. "Our financial service industries are rattling at the core."

'Rattling at the core' is right. Our wall street is now small street. It's a new world, and just like the credit markets had to adjust to a world without a housing/lending/structured finance boom, we will have to adjust to a world without these cash cows. The need is for business acumen to address the business problems of the very big corporation that we call home; New York City.

Expect property tax hikes (estimated between $308-$358 for co-op and condo owners; would be received by residents in the form of quarterly bills that would start to be sent out in DEC of this year), starting with the elimination of the 7% property tax for a 2nd year, to be the easiest attainable source for funds to help makeup for shortfalls in the years to come (in addition to event tax hikes, parking ticket hikes, DOB violation hikes, and other little areas like these). After the revenue earning hikes, spending and service cuts will be decided upon to make up for the rest. Hopefully it doesn't spread to personal/business income & state taxes, but nothing is out of the question these days. The state & city budget challenge is likely to be a mult-year one as we transition to the new world without peak credit and wall street casinos.