Building Finances: Ignorance Is Not An Option

The situation. We took over a co-op in 2021 and were asked to do its financial statements for 2020 and 2019. The co-op’s longtime accountant had retired in 2018, and the board failed to hire a new one. Getting information about those two years was impossible. I wasn’t able to get management reports. I tried to reach the accountant about the annual tax deduction letters but couldn’t. When I called the city to find out how much the co-op’s real estate taxes were, they told me the building hadn’t paid its taxes for a year and half. As it turned out, the managing agent had not been doing monthly reports, and it was unclear what the board did or didn’t know. There was no oversight.

Who’s minding the store? The first order of business was the tax deduction, which is based on the amount of mortgage interest and real estate taxes paid by a co-op each year. We finally got in touch with the bank and learned that the co-op had defaulted on the interest rate. They were paying just 3.8%, but the rate had bumped up to about 8.8%. And because no one was paying attention, that 5% increase was getting auto-debited from their operating account every month. The co-op had no money to pay real estate taxes because the account was being completely bled out since the building was paying a higher interest rate than it had budgeted for.

And that was just scratching the surface. We also called the city regarding the co-op’s water bills and found they hadn’t been paid for more than a year. The building’s employees were being paid, but some of the vendors were not. The board fired the managing agent and temporarily took over the job of collecting maintenance and paying bills. After two months, it hired a new management company, which was also scrambling to find the missing information. Usually there’s a transition between the old and new managing agents, including a transfer of documents. But in this case, the new management had to go on a wild goose chase.

Time for a reckoning. Finally, a couple months later, the board and management company held an annual meeting with the shareholders at which they finally explained what had happened. It did not go over well. The board was ousted and shareholders elected a new one, and we’re working together to steady the ship. It was hard to do, but we finally pieced together financial statements for 2019 and 2020 and were able to come up with a new budget. 

The co-op had been running at a deficit, so it had to raise maintenance by 10% and impose a $300,000 assessment to pay off all the old bills. That helped stabilize the budget. We were also able to get the mortgage interest reset back to 3.8%, which gave the board some breathing room. Real estate taxes have been paid, and there are payment plans in place with contractors and for the water and sewer bills.

Things have turned a corner, but we still have a ways to go. The co-op has some cash in the reserves, but not much. It’s also trying to recover some missing money from the previous managing agent. But now that we got the 2019 and 2020 financial statements out, shareholders are able to refinance mortgages and sell their apartments. We’re currently working on their 2021 financial statements, and things are starting to look promising. 

Take the initiative. Board members may be volunteers, but they have a fiduciary responsibility to shareholders, and that includes keeping an eye on their management company and making sure it has sufficient internal controls to prevent fraud. When we’re doing audits for buildings, we require that each management company has its own internal control structure. That means a segregation of duties. The same person does not sign checks and deposit them and approve bills. There is an accounts receivable department and accounts payable department. There is a separate department that looks at the bank reconciliations. If your management company is a small one with only a couple of agents, it’s even more important that boards are involved. 

Either way, boards have to be proactive. You have to not only make sure that you’re getting reports every month but also that you’re reviewing them to check whether expenses are in line with the budget and the balances make sense. I’m not saying boards shouldn’t trust their managing agents, but you have to monitor things closely. This co-op is a scary example of what can happen if you don’t do that.