Monday, April 30, 2007

Objectives for a new board

TedT-NJ
Objectives for a new board
Mon Apr 30, 2007 11:00AM
199.43.48.131
http://disc.server.com/discussion.cgi?disc=94379;article=8158;title=Habitat%27s%20Board%20Talk

Establish a long term objective (ten to twenty-five years) with a plan to meet the objectives.

1. For instance, one objective could be never to reenter the debt market.
2. Another objective is to eliminate all long term debt ten in twenty years.
3. Still another is to fund capital reserves and capital projects via assessments each year.
4. Eliminate any outstanding receivables greater than thirty days to less than 1% of monthly income.
5. Ensure that all contracts are put out to bid and assessed by competent outside consultants.
6. Reduce dependency on single suppliers


The plan can be:
1. Obtain an engineering assessment of the infrastructure within four months as required by AICPA rules.
2. Obtain a line of credit to be used only for "capital improvements" until the assessment income is available, to then be repaid each year without fail.
3. Increase monthly maintenance each year between 3% to 5.5%.
4. Establish a program to require capital assessment each year equivalent to one time or one and one-half times the gross monthly maintenance; to be collected over a six to nine month period such that funds are isolated from maintenance for IRS purposes.
5. Establish committees with friends of the "board" and with one or two board members on the committee for key areas: capital projects, maintenance of hallways and lobby; maintenance of heating and cooling plant; etc.
6. Establish a rigorous program with attorney to require payment of receivables.
7. Employ "industry experts" to assist in creating and evaluating "bid packages" as part of standard program for all major contracts bid.
8. Require that all purchases be made from multiple suppliers (round-robin) so that dependency is eliminated and maybe, not nice to say, collusion.

Use a few simple rules such as above to be the guiding light. Too many and it will be difficult.

Saturday, April 28, 2007

How to read financials

Steve
Financial tibits
Sat Apr 28, 2007 5:39PM
199.181.174.146
http://disc.server.com/discussion.cgi?disc=94379;article=8143;title=Habitat%27s%20Board%20Talk

Both BP and AdC are absolutely correct in both their points.

Let me add a couple of things to look at on your financial statement.

Under "Assets," check to see how high the "Cash & Cash Equivalents" is. That's the money in the bank -- savings. It's the money that pays the everyday bills, and it's the money held back for a pipe break, facade work, or boiler breakdown. That is, major expenses. The bigger the amount, the less likely shareholders will have to face an assessment.

(So how big is big enough? Our accountant says a rule of thumb -- and it's just that, not a rule -- is to have reserves equal to three months' maintenance. If you don't have that figure, and if you want to know how to find it based on your financial statement, respond to this post and I'll walk you through it.)

Second, under "Liabilities and Shareholders' Equity," look at the Income category. This will show how much money comes from sources other than the maintenance fee. There are probably several categories.

You may see an assessment or a surcharge, for example. Those are typically added to maintenance fees, which you will pay (unless those charges have ended; ask your lawyer or a neighbor).

Of all the other income categories: Add them together. Are they together more than 25% of the maintenance income (called "carrying charges")? If so, that's a good sign that the building makes money in ways other than charging shareholders. Typical categories are rental income from retail space and the fee from having cell phone attenae on the roof.

Then, below all the expenses, look at "Excess after depreciation and amortization." You want that number to be positive, because it's the co-op's profit (in very general terms). That's money that goes in the bank to save for a rainy day -- for emergencies, capital improvements, or a remodeled lobby.

Finally, read the supporting notes. Accountants say that these are the most important parts of the financial statement. The notes will tell you what's going on financially, what the big purchases were, the size of the mortgage, whether the co-op has other loans or a line of credit, how many apartments are still owned by the sponsor (if any), and any significant event that happened in the new year by the date of the accountant's letter (the cover letter).

For example, an accountant told me that in one of his client buildings, he had to include mention of a fire that happened in, say, January 2005, even though the financial statement was only for 2004 and 2003. That's because repairs to a fire would have a financial impact on the building.

Good luck!

Sunday, April 8, 2007

The importance of checking on a building's finances

The New York Times
April 8, 2007
Just Ask
By TERI KARUSH ROGERS
http://www.nytimes.com/2007/04/08/realestate/08cov.html

New Yorkers consider themselves among the savviest and nerviest consumers in the world. But when it comes to buying real estate, what they forget to ask is startling.

Absorbed by big-picture issues like location, light, air and the number of rooms, they neglect to inquire about seemingly mundane matters that can turn out to have a big impact.

Wilting in the compost heap of unasked questions, for example, are queries about the financial underpinnings of a building and its expenses.

"New York is a world financial capital that revolves around macroeconomics, not microeconomics," said Anthony vanEyck Miller, a vice president of Bellmarc Realty. "So you can have buyers who buy and sell companies, but the minutiae of an individual building's financial statement eludes them."

Perhaps because they are bored, reluctant to look for trouble or simply ill-equipped to understand the nuances of a financial statement, many buyers stick to rote inquiries that only skim the surface.

"Everybody asks the same questions: 'When was the last maintenance increase? Are there any assessments? Has the roof been done?' " said Michele Kleier, the president and chairman of Gumley Haft Kleier. But without enough context, the answers to such questions can be nearly meaningless.

A diligent lawyer can go where ignorance forgets to tread, but some care is in order, because too many questions can annoy sellers and brokers.

"I look at current assets and current liabilities to see whether or not there's enough money to pay current expenses," said Steven R. Wagner, a real estate lawyer at Wagner Davis in Manhattan. "I look to see whether there are sufficient reserves so that the maintenance or common charges won't be drastically affected by emergency work. Where the financial statement compares more than one year — and very often they do — I like to see that expenses are consistent from year to year, which is a hallmark of good management. And I look at the cash-flow statement to see that the building is spending money doing repairs and upgrades."

The absence of upkeep (including big-ticket items like facade maintenance, which is required every five years under the city's Local Law 11 and can cost hundreds of thousands of dollars) can foreshadow a pileup of expenses. And even though well-run buildings foresee these expenditures (check the board's minutes for a five-year plan), the plan may call for bumping up maintenance fees, a stiff assessment or a bit of both.

"Also," Mr. Wagner said, "look at the financial statement and the minutes for 'contingent liabilities' — lawsuits. Usually the lawsuits are covered by insurance so they're not that big a deal, but you want to know whether it's a litigious board."

Beyond poring over financial statements, a nearly Talmudic reading of a board's minutes (the notes taken at each board meeting) going back two or more years is an essential but, unfortunately for buyers, sometimes neglected aspect of their lawyer's job.

Mr. Wagner said he had exhumed countless skeletons — from bad neighbors to financial sinkholes — by reading the minutes.

"They can show whether there are problems with the building like mold and big fights over dogs," he said. "We've found litigation in one apartment between the seller and the neighbor over music at late hours. We've found upcoming assessments for capital work, elevators, facade work and in one case, deadly black mold in a prewar downtown apartment building.

"It told me there were leaks from somewhere. The buyers were a young couple expecting to have children, and I told the wife, 'I know you love this apartment, but I would not allow my newborn child to live here.' "

The couple chose not to buy in the building.

Other buyers would do the same if they knew how skeptically they ought to question casual assurances about their planned renovations. "Sure, it's allowed on a case-by-case basis" is a refrain often sung to buyers, said Julie Friedman, a senior associate broker at Bellmarc. But ad hoc isn't enough.

"A lot of people are interested in adding a half bath or creating a full one from a half bath, and while you can always use history as a measure and say so-and-so in Unit 5 did it, it doesn't necessarily mean you can do it again in this specific unit," Ms. Friedman said.

"You want to see the case-by-case," she said. "Have other people in the line done it? When your lawyer does due diligence, he should ask the managing agent about all those case-by-cases in this building, on this line, on this floor — like is there something that will restrict a riser?"

Aspiring renovators should check the building's alteration policy. "You should see whether the policy will make it very difficult for you and cost you money, like liquidated damages if you don't finish in time," or if the policy allows work only during the summer, Mr. Wagner said.

And then there are the renovations that have already been completed in the apartment that's being sold. Buyers who neglect to confirm that the work followed building codes and was performed by licensed contractors may end up paying to fix someone else's mistakes.

Last year, Charlie Homet, an associate broker at Halstead Property, sold a two-bedroom, two-bathroom apartment on the Upper East Side for $1 million. The kitchen had been renovated several years earlier.

"We got to the final walk-through," he recalled, "and the buyer took the time to pull the electric stove from the wall to see if there was a gas line. He peered back there and literally there were old extension cords — not even ones you would use now in your house. They were kind of like duct-taped together."

Because the sellers never misrepresented the renovation — they had not claimed that it had been done by a licensed contractor, and the buyers, a young couple in their 30s, had never asked — the couple had to pay to rewire the kitchen after the closing.

"As a result of this experience," Mr. Homet said, "I usually bring a flashlight in my briefcase to do some peering behind blinds and stuff."

Well before a walk-through, buyers should make sure the contract embraces all of the objects of their affection.

"The market is hot and people walk into apartments and say, 'Oh my God! I love this apartment, and I'll take it,' and sometimes they forget to ask, 'Well, what does that mean — chandeliers, fixtures, bathroom cabinets?' " said Shii Ann Huang, a senior associate agent at the Corcoran Group. "And in terms of outdoor space, are there restrictions?"

Ms. Huang recalled the client who recently tangled twice over outdoor space. The first time involved a two-bedroom, one-bath prewar co-op advertised as having some sort of outdoor space. "We got into contract, and it turned out the roof was on loan from the co-op board president," Ms. Huang said. "There was nothing legally binding about it." Her buyers walked away.

The next apartment they bid on was in an Upper West Side condominium with a semiprivate roof deck open "only to those people who had a membership because they contributed to building it," Ms. Huang said. (Because they were short of time, her buyers bid anyway — and lost — without ever learning how much it would cost them to buy in.)

Besides getting to the bottom of roof, deck or terrace rights, buyers should also question if storage rooms or lockers can be transferred. Rights ought to be spelled out in the contract.

Christine M. Nardi, a sales associate at Bellmarc, recently had a client who bought a one-bedroom prewar apartment on the Upper West Side. The buyer, a 30-year-old financial analyst, was looking forward to using the large basement storage unit for which the seller had paid thousands of dollars a decade earlier. But at the closing, the seller reported that the co-op board had confiscated her key to the unit.

Unbeknown to buyer or seller, the board had decided that storage units could no longer be transferred with the apartments. Ms. Nardi's buyer could not even extract compensation at the closing because the contract didn't mention the storage area.

There are many more questions that buyers either forget to ask or don't even know to ask.

"Lately, I've come across buildings that permit only one dog," said Daniela Kunen, a managing director at Prudential Douglas Elliman. One pair of clients, who owned three teacup poodles, bought a condo in a pet-friendly building. After signing the contract, they received the board package — from which they learned, too late, that their new building only welcomed one pet per apartment.

"People should ask to see the board package prior to signing the contract," said Ms. Kunen, whose clients now engage in a daily charade with their dogs. "They take them to walk one at a time," she said, "or the lady carries two in her bag."

Another luxury condo building, Ms. Kunen said, permits owners to have pets, but if the owner rents out the unit, the renter may not have one. "It's the first time I've stumbled on this, where a renter does not have the same privilege as the owner," Ms. Kunen said.

To someone buying the property for investment, the distinction may matter a lot. "Someone has to call the managing agent and ask what the rules are," Ms. Kunen said, especially if the board package isn't available for review before signing the contract.

"An investor should be very specific with their attorney about what they're intending to do with the unit," she said, and should encourage the lawyer to seek out and call attention to such subtleties.

Dashing to the finish line, buyers often forget to ask about other rules that will govern life after closing, particularly if they deal with crucial areas like pets or children but even if they would prove to be simply annoying. Some buildings banish strollers to service elevators, for example. Others insist that residents lug their garbage to the basement rather than leaving it in an interior stairwell in violation of the fire code.

Still others require new owners to replace windows immediately or when they renovate. Some buildings may pay to maintain individual terraces, an expensive and not infrequent ordeal. And restrictions on sublets — which can vary drastically — can be glossed over by buyers who may imagine, probably incorrectly, that they will live in their new apartment happily ever after.

Some building rules "are so bizarre I question the legality," said Mr. Wagner, the lawyer. In one Harlem building, he recalled, "they required residents to sit at the front door as security in order to get a discount on the maintenance. It was passed by a bunch of people on the board who were retired and they would sit around in the lobby all day and night." (An examination of the minutes would have uncovered the policy, said Mr. Wagner, who represented a group of residents who sued to overturn the rule and lost.)

Another often overlooked issue concerns water: does the apartment have a history of leaks, and, particularly in older buildings with water tanks on the roof, how forceful is water pressure, which can be a problem above the eighth or ninth floor?

"Check it, and if there are old faucets, get a plumber for a more in-depth check," said Barbara Fox, the president of the Fox Residential Group. That's because newer faucets installed in a later renovation can need more water pressure to work properly. Otherwise, you may need to install pumps costing several thousand dollars each and may have to find a place to put them.

As for leaks, "you want to ask the seller whether there has been any water damage in or from the apartment," said Robert DeLeonardis, the managing director of Fenwick Keats Goodstein Real Estate and the president of the Manhattan Association of Realtors. For example, if the sellers expanded their bathroom in a combined unit, or if they expanded or moved a bath or kitchen, "I'd want to know whether there have been any problems," Mr. DeLeonardis said. "The seller could say no, but the attorney should check the minutes of the board."

Board minutes might also reveal that an entrance to the new Second Avenue subway line is going to bite a chunk out of your lobby, but neither the seller nor the minutes are very likely to warn you about plans for a view-blocking tower across the street.

"People should really walk around the neighborhood and ask patrons and store owners what's coming up in the area," said Ms. Kunen of Prudential Douglas Elliman. Similarly, buyers curious about what kind of building they are buying into — is it a stroller or a wheelchair crowd, for instance — might consider staking out the entrance during morning or afternoon rush hour or even knocking on potential neighbors' doors.

That's because fair housing laws prevent brokers from answering questions about residents' ages and family status as well as about race, religion or sexual orientation, said Neil B. Garfinkel, a real estate lawyer at Abrams Garfinkel Margolis Bergson in Manhattan. (Brokers may identify smokers and discuss the income levels of neighbors because neither is a legally protected category, said Mr. Garfinkel, who also acts as outside counsel to the Real Estate Board of New York .)

Buyers who treasure peace and quiet might be curious to learn more than whether small children live in the apartment upstairs.

"Some buyers have actually asked where the garbage is distributed," said Heather Stein, a broker at Brown Harris Stevens who often sells in Battery Park City. "Where is the back door, where does the garbage get assembled and where do the trucks come? If the apartment is at a cul-de-sac or the end of the block, they know the truck has to back up, which could take time and have more noise effect."

When to ask questions is another great question.

"Ask once you have an accepted offer," said Ms. Huang of the Corcoran Group. "After you sign that contract, that's not the time to negotiate whether you have access to the roof deck. So just because you love the apartment, don't lose your head, because you don't want to be sitting at the closing table negotiating something that should have been negotiated before the contract."

Whom to ask is less clear. Well-organized buildings give buyers a handbook including all bylaws, rules and policies; some even post this information online. This is a good way to double-check information obtained through brokers, whose knowledge is usually second- or third-hand and may be given a spin to promote a sale. Alternatively, your lawyer can ask the seller's lawyer, but that can mean expensive billable time. A building's board is the most reliable source, but co-op buyers up for approval can be understandably skittish about raising questions.

For all of these reasons, turning to a building's managing agent may be the most practical solution.

To be sure, there's a downside to too much probing. "The more you ask, and the longer you take to sign the contract, the higher the chances are that the apartment will get snapped up," Ms. Huang said.

And then there's the risk of alienating a seller. Asking a lot of questions can translate as doubt — or from the seller's point of view, can foreshadow an unpleasant transaction.

"Sometimes people ask questions when they're trying not to buy the apartment, when their heart really isn't in it," said Ms. Kleier of Gumley Haft Kleier.

And, she added, when brokers are peppered with questions, "it makes them feel irritated, and they believe the buyers will be difficult with board packages."


Suzanne DeChillo/The New York Times

Words of Caution Christine M. Nardi, a sales associate at Bellmarc Realty, recently sold a one-bedroom prewar apartment on the Upper West Side. At closing, the buyer found out that the storage unit he thought he was getting had been confiscated by the board.