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I live in a 120-unit coop that has been operating at a loss for 5 years now. Our maintenance income does not meet our operating expenses, and our reserve fund amounts to far less than $100K. I'm obviously distressed about these conditions, as are many other shareholders, but our Board president maintains this is all "normal" for a NYC coop and thinks a line of credit will always be there when we need it. I disagree with his assertion, but what do others think? Is this normal? If not, have others dealt with this kind of resistance to improving coop financials?
You say that "Our maintenance income does not meet our operating expenses," which is certainly a problem. The money's got to come from somewhere; depleting your reserve fund to pay day-to-day expenses is intrinsically a bad idea. You're just putting off the day when you'll have to raise maintenance -- and probably by a lot.
As for your reserve fund itself, the rule I've heard is that your reserve should contain at least three months' worth of maintenance. Lawyers performing due diligence for potential buyers are going to get nervous if the reserve fund is lower than that. "Far less than $100K" sounds like way too little for a 120-unit building.
It can be difficult to overcome resistance -- both within the Board and among shareholders -- but a straightforward, transparent approach is usually best. "We're spending $X per year, and we're not wasting any of it on unnecessary luxuries, so it's a matter of simple arithmetic that maintenance needs to be $Y per share to balance our budget." Especially given the current credit crisis, people should readily understand that careful money management is essential.
The only organization that can survive spending more money than it earns is the federal government. All you have to do is convince your board pres to buy a printing press and then have the super crank out greenbacks.
Seriously, you're in debt and you're going deeper in debt. How on earth is that normal? Remember that a "co-op" is just the cute name for your Corporation. Corporations need to make more than they lose or else, well, ask your board president if he remembers AIG and their ilk.
Ask your corporate accountant to attend a board meeting and tell her/him to give you the benefit of his/her professional experience.
I'm guessing you're going to have to increase your maintenance and find other ways to broaden the revenue base. A flip tax did wonders for our co=op. Good luck.
A negative budget, e.g.: planned operating deficit, leads to disaster
If a board votes negative budgets year after year without wresting itself from the abysmal situation, the board of directors is plainly abrogating its fiduciary responsibility. The board can be sued and one can further assert that the BD&O insurance does not cover malfeasance by the board, e.g.: fiscal irresponsibility.
Why do so many boards feel they can operate in a laissez faire atmosphere? In some cases its naïveté. In other cases, boards are obtuse or live to please their constituency, e.g.: not raise maintenance, not impose assessments. To what good purpose?
If a bank reviews the budget and the history of the co-op in anticipation of a line of credit or a loan, it will ask for several years of annual reports as well as the currant year’s budget and pro-forma.
What can the co-op pledge to the bank as collateral? The answer is the maintenance income. But if maintenance income does not cover the costs day-to-day, how will the co-op repay any loans or lines of credit?
A series of operating deficits as well as planned losses can preclude the acquisition of operating funds and lead to bankruptcy. In truth, there is a condo nearby to our co-op. It was a co-op, but the board ignored all the deficits over and over again. They went to the well one more time. This time, the bank said absolutely NO. In turn, the co-op was forced to convert to condo. Besides the normal transformation costs imposed upon each shareholder, e.g.: several thousands of dollars for each shareholder, the owners (shareholders) were required to absorb their prorate burden of the outstanding debt and payables of the co-op. These amounts were in the tens of thousands of dollars for each shareholder. Many were required to increase their loans by substantial amounts. So who won?
The monthly maintenance must cover all expenses, all payments for loans and lines of credits as well as fund and maintain a modest operating (cash) reserve fund. In addition, a board is remiss if it does not have a yearly ongoing assessment and sadly most co-op boards ignore the need for this capital reserve fund; even in the face of bylaws that define such a fund.
How many have read the AICPA document dealing with co-ops and condos as noted elsewhere in this board talk?
So, a co-op always needs to have its house in order.
What about the case where we have massive deficits each year which occasion massive increases and assessments each year and nothing is done in the building - and money disappears - should you not question the board, accountant and management company, but apparently this situation is not that uncommon yet apparently nothing can be done about it - any advice will be welcome
Run for the Board.
Only when you can work from the inside will you feel comfortable. And only then will you have access to the information you seek without legal proceedings.
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You mention the president, but what about the rest of the Board? If shareholders are concerned, what about a change in the guard?
AdC
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