Reading, Writing, & Financials

The board of the small Upper West Side co-op settled in for the annual meeting. For the members, all knowledgeable veterans of New York City co-ops, it was supposed to be nothing unusual. Sure, there was a new treasurer, and, sure, they needed to implement a flip tax and had to rally the shareholders to vote “yes” on it, but the members thought they had lined up enough support to pass that. But when it came time to distribute the required annual, audited financial statement, there was nothing to distribute.

How could that be? The financial statement is as crucial a part of annual shareholders’ meetings as a tune-up is for a car. Without it, the thing just doesn’t run right.

“We were trying to make a case for a transfer fee,” says the board vice president, “and so the absence of this statement – which quantifies the financial status of the building and tends to give people a sense of comfort – was a major problem. And what had happened was that a shareholder came up with some seat-of-the-pants calculations that would have been unrealistic in terms of income, but because she had figures on paper, they carried more weight than they should have.” The board managed to hold things off until it got an unaudited draft statement a couple of months later, and the flip-tax proposal passed overwhelmingly.

This Robert’s Rules of Horror story illustrates the importance of having your annual financial statements in on time, but it also addresses something broader: the need for co-op shareholders or condo unit-owners to not only get the figures but to “get” – as in really understand – them.

Good boards want that, because educated voters make better decisions. But there are reasons why many otherwise savvy boards don’t communicate – or sell – the financials.

The Big Why Not

Sometimes, boards may take the position that “We’ve been elected to run this building, so let us run it.” They don’t want apartment owners “bothering” them with questions – even if their questions might actually benefit the building since a board of real estate laypeople can’t reasonably know everything about managing a building’s finances.

“Nobody’s expected to know everything,” says Mark Shernicoff, a partner in the accounting firm of Zucker & Shernicoff. “Somebody can be an expert in his field, can be very smart and educated, but every business is different.”

Less ethically, some boards deliberately use the potentially daunting accounting figures to obscure their mistakes or misdeeds. More innocently, many board members who aren’t professional accountants or financial people themselves may simply not understand the ins, outs, and intricacies of reading and explaining financial statements.

Yet, ensuring that your constituency can really understand the annual financial statement makes sense. First, transparency builds trust and credibility, allowing boards to make decisions with a higher degree of support from apartment owners than do boards that are second-guessed and have their competence questioned. Second, it also helps apartment owners fulfill the checks-and-balances function that responsible organizations need, and gives the board extra eyes and ears to help spot potentially troublesome financial problems that it might not immediately see.

“When you make shareholders more proactive, they have better questions, and they can ask of management, ‘What is this item, is this unusual?’ and so on,” says Bob Sardis, founder of the ten-year-old finance-information website MoneyChimp.com. “Raising everybody’s knowledge improves the dialogue, and everybody would be speaking the same language – a business language.”

Figuring It Out

Once you’ve decided to educate your constituents on how to decipher the annual financial statement, how do you go about it?

“There’s no magic to this kind of thing,” says Joe Knight, author of Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean. “You want to stay away from the accounting,” he advises. “A lot of people say, ‘Let’s teach accounting and they’ll understand.’ But most people don’t have a background in this and don’t want to learn those skills – they just want to know what the numbers mean. Use metaphors and stories, and try to make the numbers come to life with real-world examples that help the [listeners] understand. Stay away from minutia,” he says. “People don’t want to know about all the details. I use [financial] stories everybody’s heard of, [such as those involving the problems at] Adelphia or Worldcom. You use examples to say, ‘Here are the indicators that show why their numbers weren’t strong, and here are the numbers that show why we’re not in that position.’”

You don’t even need to do this at the annual meeting but can do so at an informal forum, like the one at the Scarsdale co-op where Gary Ziprin, CFO at Midboro Management, lives. “Once a month, the board holds a forum where shareholders can discuss their concerns and contribute their ideas,” he says. “Usually one board member volunteers [his or her] time. It’s held in a small room, and a handful of people come on any given month.” Within this framework, the building’s accountant or even a financially savvy resident can give a one-hour “class” on how to read a financial statement. Offer refreshments and bill it as a social, community-building event, which it is. If monthly doesn’t work, you can do as they do at the 134-building, 10,000-resident Glen Oaks Village co-op in Queens, where, says board president Bob Friedrich, they hold an annual budget meeting, in addition to the annual shareholders gathering.

Visuals aids? Some use spreadsheets and flow charts to spell out very clearly where the money comes from and where it goes.

“I think graphs are beneficial,” says Neil Davidowitz, president of Orsid Realty. “You can say something over and over, but you show a pie chart with the operating side of a building – with the big three fixed costs of mortgage interest, real estate taxes, and payroll – and you make it really clear where dollars are going and how little of the budget is discretionary.” Friedrich uses pie charts to illustrate Glen Oaks’s $24 million budget. “We go over it line by line,” he says, “and use a pie chart to show what portion of our expenses go toward taxes, toward capital improvements, toward security, toward maintenance, toward administration, toward heat, and so on, and you can see it in an understandable, easy-to-digest format: a nice 3D pie chart.”

You can do this high- or low-tech. Joseph McDonald, president of the 346-unit Waterways at Bay Pointe condo in Moriches, Long Island, says his board makes “view-graphs – a transparency of the annual report pages – that we show on an overhead projector, like back in high school in the day.” Conversely, at the Castle Village co-op in upper Manhattan, “The treasurer and the president [at the annual meeting] do a whole PowerPoint thing on the finances,” says the property’s attorney Theresa Racht, a partner at Racht & Taffae. “I think it’s just a matter of time before you see more PowerPoint.”

To reinforce information, keep up a regular flow of it. “Maybe sometime mid-year you want to give an interim report,” suggests Abe Kleiman, a partner at the accounting firm Kleiman & Weinshank. “The biggest gripe I hear from shareholders is a lack of communication.” To combat that, add a regular, pithy, “educational corner” to the building newsletter. Recommend easy-to-follow books and websites.

As for the critical points you want to get across, “You want people to understand cash balances,” says accountant Shernicoff. “Cash is defined in accounting terminology as not just money in the bank, but money in a [financial instrument] with maturity of 90 days or less,” he explains. “An investment is defined as anything with longer maturity than 90 days.” Once you know the cash figure, he says, you look at “accrued expenses” (an expense that you’ve incurred but haven’t paid for yet, like the building’s water or electric bill) and “accounts payable” (expenses for goods and services purchased on credit).

The next and last step, Shernicoff says, is “to look at the footnotes to get the full story. There’ll be an explanation of the numbers, of contingencies such as pending lawsuits or a mortgage coming due. These are important things to know in evaluating the financial condition of your building.”

Attorney Steven Wagner, a partner at Wagner Davis, advises residents at the annual meeting “to go to the opening pages and see current assets and liabilities. Current assets are how much money you have in your pocket. Liabilities are how much you have to pay right now. Next thing I do is to have them look at the year-to-year comparison, which is important since if you see there are major discrepancies in many columns, that may be the hallmark of poor management, and I’m not speaking just of the managing agent but of the board. Do they budget well, or do they get hit with unexpected costs all the time?”

Lastly, he suggests, “Look at the table of cash flows. You want to see that some money is being spent currently to maintain the building. The reason is that things become worthless over time – they depreciate. If you allow things to deteriorate, you’re in fact liquidating your company. What you want to do is see that there are current investments in the property.”

And that takes an expenditure of time as well, to help make sure everybody understands what the financials mean – board members and regular residents alike. For, ultimately, as Orsid’s Davidowitz, says, “We’re fiduciaries to the shareholders, and if we can assist them and give them education, it’s a good thing. They have a right to understand the financial condition of the building.”