Ask Habitat: Why Are Sales Drying Up at Our Co-op?

HABITAT ANSWERS: If lenders who are scrutinizing a building's finances at the same time they're reviewing the borrowers don't like what they see, they won't make a deal. There are a number of guidelines that banks use to judge the financial health of a co-op or condo, one of which is arrears. It's great news that you've successfully tackled the problem. Here are some areas that you and the rest of the board can work on to make the building as attractive as possible to mortgage lenders.

Reserve funds. Your co-op should set aside 10 percent of revenue for a reserve fund. A small reserve fund increases the risk that the building will have to jack up maintenance or common charges for capital expenses, affecting the shareholder's or unit-owner's personal finances and potentially jeopardizing the loan. If your building does not have this line item in its annual budget, your board should establish it ASAP.

Owner-occupancy. Under the theory that more sponsor ownership (as opposed to resident ownership) can destabilize the building, a co-op or condo's sponsor should own no more than 10 percent of the units. Lenders look unfavorably upon a high percentage of non-resident ownership.

Insurance premiums. A building's budget must include a provision for all insurance deductibles. It's not uncommon these days to see lenders insist that buildings increase their insurance limits. Boards may resist these increases if they don't see the necessity for them, but buildings that see multiple borrowers rejected by lenders over insurance requirements should consider upping their policies.

Management cancellations. If a building employs a professional management company, any cancellation clause for the contract must be 90 days or less. If your management firm wants a longer cancellation term in its contract, your board will need to convince them that the shorter term is necessary to be attractive to lenders.

Take a look at these areas and see if they might be tripping up potential buyers, and talk to your professionals. Both the building's accountant and attorney will have excellent insights on how to get the building back on its feet.

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