One way lenders can limit their losses is to ensure that its collateral has a water meter, thereby avoiding advances for overstated water/sewer charges. Below is the reason why.

The New York City Municipal Water Finance Authority (the “NYC Water Authority”) is empowered to levy fees against real property for the use and disposal of water and issues bills through the New York City Department of Environmental Protection (“DEP”). Pursuant to the NYC Water Authority’s guidelines, if a property does not have a water-meter, DEP estimates water consumption by assessing fees from a menu of items, including the following:

  • frontage (the front width of the building);
  • the number of stories;
  • the number of dwelling units; and
  • for each fixture (i.e. bathtubs or shower, toilet, boiler, sink, bar, compressor)

A complete list can be found here.

In addition to the consumption portion, sewer usage is charged at the rate of 159% of the charges for the water consumption. Once the aggregate consumption/sewer usage is computed, the NYC Water Authority imposes an annual surcharge in the amount of 100% of the last annual unmetered water charge.

Failure to pay the water/sewer charges can result in a lien on the property with interest accruing at the rate of 9%. Understandably, lenders and servicers often make advances to avoid this penalty. However, by doing so they may be unnecessarily increasing the debt, which, if the underlying loan is distressed, may never be repaid.

On the point of distressed debt, to further ensure its taxes and fees are paid, New York’s foreclosure statute provides that the proceeds of a foreclosure sale must first be applied to satisfy all outstanding taxes, water/sewer charges, etc. (N.Y. RPAPL §1354). As a result, estimated water/sewer charges can cause the lender to suffer increased losses. As a way to avoid increased losses, we recommend that lenders/servicers confirm the existence of a properly working meter through a property inspection. If a meter is not present, the lender/servicer should consider taking the appropriate steps to compel the borrower or court-appointed receiver, as the case may be, to install the necessary equipment.

Additional information on this subject can be obtained by contacting Keith M. Brandofino, Esq. at (212) 775-8713.

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