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We had a Board Members vote on whether or not to refinance our building early for much more than our current mortgage in order to pay some debts and future improvements.Our current loan is good for another three years.
At the meeting, it was revealed that two of the five members on the Board will be moving within the year. Is it proper for them to be voting on an issue as important as this one, which will increase our debt twofold when they are selling their shares so soon? Is it a conflict of interest? They do not want to discuss it with Shareholders beforehand. The vote was 4 to 1, I abstained as I do not feel we have enough information and, as treasurer, I have questions about the details of the refi they are going to greenlight. What should I do?
This refi is actually being done to pay off huge legal bill that blind-sided us. Does that change your very well reasoned and sound advice?
Dear MR,
Thank you for the information. I don't know the circumstances surrounding how the legal bill legal bill was incurred however it sounds like your co-op does not have sufficient reserves to cover the amount due. I would never recommend capitalizing, into a mortgage, legal fees unless they were associated with getting the new mortgage/property/building.
It would help at this point to see the corporation's most recent Audited Financial Statements. I have made my e-mail address public. You can e-mail them to me if you want. I am President and former Treasurer of my Co-op. My Co-op's Audited Financial Statements are publicly available at: http://www.naborsapts.org/purchasers/key-documents/
My background is that I work in the Accounting Field with a very large pension fund with over $3 billion in assets.
Regarding the activities of your two Board members who want to sell in a year or so, it is possible that they are trying to keep the cash needs of the corporation low (either assessments or maintenance) in order to increase either the value of their units or the speed at which they might obtain a sale. There could also be other legitimate reasons too. If their reasoning is at odds with fiscal prudence, there could be conflict however a lawyer would need to be consulted.
Steve
I think Steve's advice is excellent--particularly about not capitalizing non-mortgage-related legal fees--but I differ on 1 point: "if their reasoning is at odds with fiscal prudence," as he theorizes, then the question about conflicts of interest is moot. You're the Treasurer, & your responsibility is to the shareholders, not to the Board. You don't need a legal opinion...you need common sense & a conscience.
Your own judgment here is what matters, & refinancing is NOT an issue on which a Treasurer can legitimately abstain. If you still lack info you feel essential to reach a decision [which is particularly disturbing, since you should be the point person on this task], you must oppose. Whether you simply vote "no" or work to find better terms &/or alternative financing depends on your building's circumstances, & we don't have enough detail.
However, if you're not convinced that the financing package makes sense, voting against--when you know you're alone in opposition & the vote will carry--is not enough. You have suspicions about this deal, & about the motivation of some of your fellow Board members, or you wouldn't have posted here. You probably can't consult building counsel, whether because the attorney is in the pocket of the Board President, or for the simple fact that the attorney's large & unexpected bill [it would sure help to know more about this] is what put you in the financial bind that started all this.
Seems to me that you can responsibly choose between: a] carefully bringing this entire issue to the shareholders, expressing your concerns; b] resigning, publicly explaining your discomfort with the loan, etc.; c] resigning quietly. Of course, once you make your decision, discussing it in advance with the Board may cause them to rethink & open a new path to resolution...
It sounds like there's a lot more going on here than just the refi issue, but if you boil it down, that's what counts...& you can fight it, or quit.
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Dear MR,
Your question is a tough one for the same reason you feel uncomfortable with the new mortgage – lack of information. A building generally has four ways to fund capital repairs: sell treasury stock (owned units); assess; use operating excesses; and borrow.
Loan rates are generally low right now. So, is the fee for paying off the old mortgage early less than the savings on the interest rates minus the new loan fees? If so and in my opinion, then it could be a good deal. If not, then I would question it if no urgent life/safety repairs are needed.
Also in my opinion, the loan balance is not generally that important (though it can give one sticker-shock) except if the building is reaching the point where it can't borrow anymore. I would look more closely at the proposed monthly payments – can the building afford these would be the more relevant question?
In my opinion, if you are Treasurer and you are not informed of the terms and fully understand them - this gives me great concern.
Regarding conflict of interest: many times the collective building's interest and the individual interest of a shareholder/board member are aligned. I would say that if the 'future improvements' include life/safety repairs or cost saving repairs they would probably be fine. However, if the repairs are entirely cosmetic (a lobby re-do, for example) which might drive up the value of their units prior to sale you may have a point. However, even here if it drives up everyone's value, it still could be valid.
My suggestion would be to become more comfortable with the loan terms. In my opinion, this will allow you to make a more informed decision. I would also place a call to your corporate Lawyer and CPA to obtain their opinions on the matter.
Good Luck!
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