New York's Cooperative and Condominium Community
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Please begin with Part 1 above
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But let’s do the math. Our building and property have a value of about $120,000,000 as computed from the average share price of recent sales times the number of shares outstanding. We have and have had for a long period of time a recurring yearly assessment program, e.g.; no special assessments, no unplanned assessments) just regular assessments as part of the yearly financial program as noted elsewhere. Yes, again as noted, the assessment amount per share has increased slowly over the years. Today, at our current rate, the annual assessment is but 0.79% of the value of the building. What homeowner (shareholder) should be opposed to that level of spending?
So, the most viable recommendation is to assess each year such that all shareholders are attuned to the need for capital improvements, so that the board of directors can operate in a fiscally responsible manner, e.g.; improving the plant without resorting to surprise assessments or debilitating loans. It is a little like Pavlov’s dog; sorry don’t mean to insult anyone. Train the shareholders, e.g.; assessments are a recurring yearly activity, and they will come when the bell rings. Don’t overlook the fact that by posing the long term need for capital improvements and the need for the underlying funding via assessments, all residents can effectively plan their personal budgets years in advance. If we can do it in our co-op, so can others.
Finally, when the co-op is illiquid and the lending institutions decline to extend any more credit, what’s the draconian course of action? Any thoughts? It may be that the co-op converts to condo and during the course of the conversion each shareholder is then required to pay the underlying burden of the co-op’s loans outstanding and any prepayment penalties. This payoff (principal and penalties) can be made directly by the shareholder; it can be subsumed by the shareholder by adding it to the shareholder’s principal amount in converting from any existing co-op loan to a condo mortgage, or the shareholder can incur a new condo mortgage if the shareholder owned the co-op unit free and clear, save the underlying co-op mortgage burden. Oh and let’s not overlook the fact that in a conversion, there may be a need to create some liquidity for the condo association with cash reserves and a reserve fund (typically neglected).
Had the lenders declined to refinance or extend additional credit to the building with the $11,000,000 principal outstanding, the shareholders would have been faced with a condo conversion cost of $11,000,000 principal + $3,000,000 prepayment penalty + $8,000,000 for a reserve fund for failure to do capital improvements. The total, without legal fees, is $22,000,000. So now explain the shareholders that because they cannot obtain any financing, they need to convert to condo and oh by the way, the average shareholder (there are 450 units) must show up at the closing with $53,000 in cash.
So, one reads this and thinks it’s farfetched. Well, one needs to do some research about the Briarcliff co-op in Cliffside Park, NJ. They planned to convert but never did convert because of some litigious shareholders. But they were facing huge numbers for each shareholder, e.g.: underlying mortgage + purchase of garage space (to generate reserves) plus additional sums for the capital improvements never funded or performed.
These are some tough decisions. Remember emerging from fiscal irresponsibility is never easy; it is painful for all shareholders. The alternative is worse. It could mean the end of the co-op corporation.
Further, short term band aids and workarounds are only advisable if there is an accompanying long term solution. A one time special assessment is ludicrous. Capital improvements are not a one time event. Without a cohesive long term plan, it is doom and gloom.
To avoid the panic and the horror of a special assessment, the board should plan and impose a yearly assessment based on the engineer’s description of the viability of the capital plant along with the engineer’s proposed replacement program and costs. If the plant is aging and it is, the board cannot avoid an assessment if fiduciary responsibility is to be properly discharged.
By the way we have two major meetings a year and workshop meetings every other months. Why? Because we have a plan and we need not resort to firefighting and crisis management. Did I reveal, we are self managed with our own management and superintendent team and work force (porters, maintenance and doormen), though we outsource security and pool operations, along with other technical specialties, e.g.: HVAC maintenance, boiler maintenance, plumbing, electrical work, elevator repairs?
If one heeds some of the thoughts herein and embarks on a new course, Bon Voyage!
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Thank you
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