Identifying Cash Assets: A Tale of Three Co-ops

1) Super Apartment No More

A White Plains cooperative had two free-standing buildings, each with its own superintendent, porters and doormen. During collective bargaining with the union representing the employees, the cooperative negotiated a document that consolidated the staffs of both buildings under one contract. There would now be one superintendent and one staff that would be freely assignable to each property. The other superintendent would be retained as a handyman at his super's salary. However, he quit shortly thereafter to take a super's job at another co-op. Thus, his apartment was available for sale.

In this instance, the co-op's goal was to increase the efficiency of the staff. After finding that the buildings operated efficiently without the handyman and with a freely assignable staff, the board identified the former super's apartment as a non-performing asset. After determining that shareholders were not disrupted by the reduced staffing levels, the board identified only minor collateral costs to assign shares and incur brokerage and legal fees for the sale.

The cooperative then sold the apartment, creating a one-time cash infusion with recurring maintenance income from the new apartment. In addition, because the staff was reduced by one employee, the board also realize recurring savings in labor costs.

2) Studio for Sale

The second example took place in 1995. With sale prices depressed, another White Plains cooperative purchased a studio apartment that had been on the market for two years. The co-op got it at a low price, retired the stock shares, and rented the apartment for more than twice the maintenance charges. In 2004, when sale prices more than quadrupled, the co-op sold the apartment, generating a tidy profit it used to finance capital projects.

Here, the board acquired the asset, which was depressing shareholder values : Since the apartment had not sold, the price was reduced several times, and the shareholder was repeatedly in arrears. The board identified a potential asset, negotiated a contract to purchase, then identified collateral costs for brokerage, apartment clean-up, repairs, and the lost interest on the purchase price. These costs were greatly outweighed by the rental income, which was more than double the maintenance the cooperative had previously received. No disruption or cost to the shareholders was identified.

3) Apartment for Rent

In the final example, a White Plains cooperative identified a superb candidate for the new super, who also happened to live in a two-family house in Scarsdale. (He preferred to have his children educated in its nationally recognized school system.) The co-op hired him and rented out the now-unnecessary super's apartment. The super was paid half the rent as a housing allowance. This highly qualified man also saves the co-op much more than he is paid in salary by performing capital projects while managing the staff and outside contractors for greater efficiency. In addition, the cooperative receives rental income on the superintendent's apartment, which previously generated no income.

This cooperative board identified several assets : a person highly qualified as a superintendent who possessed hands-on work and management skills; a potentially rentable apartment; greater staff efficiency and productivity; and more effective oversight of contractors. The board identified the minor collateral costs of brokerage fees and the super's longer response time on emergencies.

The board has since learned that the staff operates with greater efficiency and has more time to tackle many low-skill jobs, such as fire stairwell painting, extra cleaning, and minor repairs. Costs for outside contractors are reduced. The superintendent is highly responsive to emergency calls. Careful tenant selection has minimized brokerage costs, as the tenant has renewed her lease. Finally, the cooperative still has an apartment should it need to hire a new superintendent.

In the final analysis, a board must always be alert to opportunities because "cashing in" is not always an obvious opportunity. Moreover, a board must exercise due diligence and thoroughly investigate collateral effects before plunging into a poorly thought-out opportunity. Boards that fail to adequately investigate these effects will quickly learn that sometimes cashing in can become cashing out – with disastrous results.

James Glatthaar is a partner at Bleakley, Platt & Schmidt.

Adapted from Habitat February 2008. For the complete article and more, join our Archive >>

Art by Liza Donnelly