The financials of your co-op are extremely important. Your board of directors mails them to you once a year, usually in the spring, and there is a very good reason they mail them to you—because you are suppose to review them!
As a shareholder of the co-op corporation, the financials are very important to you because they are the main indicator of the financial health of your shares, that is, your co-op apartment. Simply put, the healthier your co-op’s financials are, the more valuable your apartment is and the less likely there will be maintenance increases or assessments imposed.
Reserve Fund
The reserve fund is one of the most important things to look at when reviewing your co-op’s financials. The reserve fund represents the money set aside for major capital improvements and emergencies.
For instance, if the building’s boiler breaks down, the reserve fund would help pay for the costly repair.
Typically, a decent reserve fund should be equal to about 25 percent of the building’s prior year operating income, and a good reserve fund would be equal to or greater than 50 percent. At a bare minimum though, a reserve fund should at least be 10 percent of the prior year’s operating income.
A reserve fund can become depleted for a number of reasons: major capital improvement, the board’s mismanagement of the co-op’s finances, increasing cost of fuel, necessary repairs, and so on. … Whatever the reason, a depleted reserve fund means that the next logical step for your building is to either increase maintenance or impose an assessment.
If the depletion of reserve funds was due to a one-time or short-term issue, the course needed to be taken will be to implement a temporary assessment in order to get the reserve back to a healthy level.
If the reserve fund has been affected by long-term issues, then the board will institute a permanent increase to maintenance fees.
Mortgage Structure
Another thing to keep in mind is how your co-op’s underling mortgage is structured.
Most co-ops will often take out a mortgage on the building itself. This mortgage is different than the loan you received to purchase your co-op apartment.
A good majority of the maintenance fees the co-op collects will go toward paying this mortgage off, which means the building’s mortgage is directly related to your maintenance fees.
You will want to know whether your building’s mortgage is a fix rate or adjustable rate mortgage (ARM). With a fix rate, your maintenance fees with regard to the mortgage will remain consistent. If your building has ARM mortgage, you may see fluctuations in your maintenance fees.
Another thing to look out for is whether the mortgage is a spread mortgage or one that will require a balloon payment. If the mortgage requires a balloon payment, this may be problematic for a co-op owner as it may adversely affect the price of the co-op apartment and lead to a large assessment when the balloon payment needs to be made.
Operating Losses and Profits
Operating at a loss is not necessarily bad and operating at a profit does not necessarily mean your co-op is healthy.
When viewing yearly financials, you need to think about things in a larger context. If your building operated at a loss, you need to ask why this was the case and is this a recurring problem.
The building may have operated at a loss for a year or two because it took on several necessary capital improvements that increased the buildings long-term health and value, which is probably a good thing.
On the flip side, the building may have operated at a loss because the building was mismanaged or the mortgage rate skyrocketed, which should cause some concern.
If your building made a profit, you need to look in to what made the building profitable.
For instance, the building may be profitable because it took advantage of a one-time tax benefit or collected an abnormal amount of flip taxes for the year, which means little for the long-term stability of the building. Conversely, the building could be profitable because it is well operated.
The point being, though, looking at the profit or loss of the building alone will not give you a full idea of how your building is doing. To truly understand the financial health of your building, you need to know why the building posted the numbers it did.
Land Lease
In addition to the above mentioned, there are a few other things to keep in mind. You should take a look to see whether your building is paying for a land lease or lists the land that the building stands on as an asset.
If the building has a land lease, this could be problematic as your building could be in jeopardy when the lease expires. Another thing to consider is the accuracy of the financial reports. Co-ops are private corporations so they can submit either audited or unaudited financial statements.
Audited statements are best because they must be conducted by an independent CPA, certified as true, and use generally accepted accounting principles (GAAP). Most larger co-ops will have audited financial reports, and if they don’t, you may want to question why.
However, smaller co-ops tend not to have audited reports because these reports are often cost prohibitive for small co-ops. If your building has submitted to you an unaudited report, you should carefully review the numbers. If you suspect something off kilter, you should contact a real estate attorney or accountant to go over the document.
All in all, the financials of your co-op are important because they affect your money and wealth.
Andrew Tran is a lawyer with Kanen Law Firm, a fast growing New York City law firm based in Midtown Manhattan specializing in corporate, real estate, health care, and bankruptcy law as well as estate planning and asset protection.
