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I am looking to bounce an idea of everyone’s head, please review and let me know what you think.
We are a small building in the Bronx (60) apts, with the sponsor holding 55% of outstanding units. We are ok financially, with no planned maintenance increase this year, and a healthy reserve fund.
We now have some required work by the city/insurance company/ and underlying mortgage company.
After discussing with residential owners, many favor an assessment of $3 a share, with tax abatement paying 60%, and the owners paying 40%. This is not cheap, but will allow us to fund all required work etc. The building has not had any assessments ever - went co-op in 83, and has had regular maintainace increases.
The sponsor wants nothing to do with any assessment and says we should raid our reserve fund to pay the work - or use "cheaper alternatives".
The board wants the work to be done correctly, effectively and is trying to avoid a situation where the sponsor sells out and we are left with a shell of a building...
We do have a line of credit available, but the sponsor does not want to draw down anything on this line as well.
Note the reserve fund would be depleted by 50% with required work, and we have a mandatory refinancing approaching in the next 3 years which will require a reserve fund that is funded. Funds from operations can contribute slightly to the reserve fund or paying for additional work.
I appreciate any ideas, suggestions or even just similar situations.
What are you thoughts?
Thank You for your comments, yes currently the owners have the majority of voting 3 vs 2 sponser reps with a total of 5 memebers.
DBO, I'm afraid my reply to your question on required work and your sponsor would be very long. Maybe I can write an abridged version after we hear what some posters have to say.
But I have a few questions for you. If you went coop in '83, how can your sponsor own 55% of apts? Didn't he have to sell a higher percentage of them to get approval for coop status? And why does he still own so many after 26 years? I assume that means 55% of your apts are still rentals and only 45% represent shareholders. (??) Just wondering.
I have been in the building two years and have asked myself the same question. The building went co-op in 83, yet the sponsor still owns and rents 55% of the apartments in the building. IN fact more worrisome - they have been sitting with about 6 apartments empty for more than a year - 3 of them with monthly charges of more than 1K...
I have seen no effort to attempt to sell them, let alone a serious push.
We continue to increase the pressure slowly, and I think an assessment will be good medicine for them, as we will be able to use at least the current abatement and just pay a small amount, the sponsor will need to pay up out of pocket... It’s an odd situation which will end one day I hope, but as a new board member, I don’t want to be stuck with a shell or patched up building that will reduce our value over the long run, or raise our maintenance to a level that is not sustainable...
Thanks for your ideas/feedback, much appreciated.
Hi,
We have 111 units with 11 rentals left (which we own) and sell when they become available. We also have almost 3/4 of a million in reserves. When we had an engineering study done, we realized that out reserve level is not enough and we are looking to add to it. A reserve fund can give a board a false sense of security. We are looking at a Capital Funds Replenishment Fee (like a transfer tax) of 2-3 % off of gross however that means a super-majority for us which may not be obtainable for you.
I agree that 'doing it right' with the repairs is the best way to go and will be cheaper in the long run. My suggestion is to use the current reserve funds since you have them and then either phase in additional maintenance increases (putting the excess in reserves) or a lower annual assessment over three years to replenish the fund. Conceivably, you will need more in the end than just the 'mortgage reserve' as new repair needs will become evident.
Also, the tax credits of which you speak may lag the actual expenditure so that you may have to pay 100% for the repairs before you see the cash flow from any tax credits. Also, if you are seeking J-51 credits, all violations must be cured before the city approves the credit.
In my opinion, when the mortgage comes up, I would suggest buying out the sponsor. This puts your destiny into you own hands.
Finally, I would like to see you move towards sustainable finances. An engineering study of needed replacements within the next 5 years (incase the city/insurance company list is not comprehensive) and then establishing a 5-10 financial plan off of that for funding would be a start (for example: 5-year plan cash needs times two and a ten year plan to pay for it).
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DBO,
I have a few questions for you regarding your post. The first is whether or not the current Sponsor holds a majority on the Board of Directors or if per the Offering Plan, majority was given up 5 or so years after the initial offering. Since it is a 1983 conversion, I'll assume that the Board is Shareholder controlled.
If the Shareholders hold the majority, then the Sponsor would be held to your decisions, whether or not you decide to go on with an assessment. If the Sponsor still holds a majority and the Sponsor refuses to do anything but use the reserve funds, you can always in the future draw upon the line of credit for any emergencies that come up. That's a worst-case scenario.
I don't think that in this market you'll have an issue with the Sponsor selling out. Prices are not in their favor right now and they'll probably hold onto their position for the foreseeable future.
Since you have been given the directive from the insurance/mortgage and city to do the work that has been noted, you have an obligation to do it and will need to resolve a way to get it funded. It seems as though the Sponsor won't have a choice as long as they don't currently have a majority of the Board.
Please let me know if you have any other questions.
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