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Your Co-op’s Annual Financial Statements

Guzov's Good Advice, Real Estate Legality

 

Every year, your co-op, through the managing agent or board of directors, sends you an annual financial statement.  For most co-op shareholders, there is a very real temptation to just ignore it.  However, these statements, while unexciting, contain information valuable to you.

What are you paying for? Each annual financial statement typically contains numbers for the past two years so that you can compare your co-op’s finances from one year to the next.  This makes it easy to spot big changes in expenditures.  It also provides an opportunity to check the status of assessments to pay for capital improvements and unanticipated expenses, like facade repair.  If you notice large expenditures that you were previously unaware of, or do not understand why a major repair is incomplete, you should make a note of it and ask your fellow shareholders/board members during the next meeting.

How much money does the building have? These statements also provide a way for shareholders to monitor their building’s income.  Most buildings rely on monthly maintenance fees and commercial unit rent to pay bills.  However, for buildings that rely on unpredictable sources of income like flip taxes to make up a deficit, it’s a sign that the building’s maintenance may not be high enough.  If your building’s annual financial statements show a loss in most years, it should be a cause for concern.  Relatedly, your building’s financial statement should also provide the status of the reserve fund, which is used to pay capital expenditures.  In order to know whether your reserve fund is adequate, it is necessary to know something about your building’s condition so that you can anticipate expenses in the year to come.

How about that mortgage? Co-ops typically do not pay off a mortgage, as that would not benefit current shareholders, but you should pay attention to the interest rate and maturation date.  A high interest mortgage that does not qualify for refinancing should be a cause for concern.  If, however, your building refinances a high interest rate mortgage for a lower interest rate, it can and should use the proceeds to add to the reserve fund.

What else should I look for?  Pay attention to information regarding attorneys fees paid, and whether a tax abatement is about to expire, which would mean an imminent increase in your monthly maintenance fees.  Additionally, the annual financial statements should be prepared by independent accountants.  If the statements are audited, the accountants should note whether the audit meets generally accepted accounting principles – GAAP standards.  If your building’s statements do not meet GAAP standards, then they are not properly audited financials.

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