New York's Cooperative and Condominium Community

Habitat Magazine Insider Guide



Planning Your Financial Future

I was treasurer of a building in which the incinerator broke. While we were debating whether to repair it or replace it with a compactor, the staff placed garbage cans lined with plastic bags in each service hallway. Several times a day, they would collect and remove the trash, using the service elevator. To everyone's delight, this was more pleasant than trying to punch a bag of garbage down an eight-inch square hole. Cockroaches disappeared. The service hallways smelled better. We liked this new arrangement so much that we decided to stick with it.

After three or four months, however, our electricity costs had increased 30 percent, plastic-bag expenses had jumped $5,000, and payroll overtime had gone up 20 percent. In all, operating expenses would have gone up by five percent a year. Considering that a new compactor would cost $8,000, our plan wasn't that smart.

Almost all board decisions have monetary consequences -especially in times like these, with falling real estate prices, rising fuel costs, potential labor trouble, and deteriorating city services. For associations, which need to take control of their future and shape it to their liking, the best way to avoid surprise maintenance increases and assessments is with a long-range financial plan.

A financial plan is meant to maximize wealth. It refines and clarifies your financial objectives, and can help you avoid a dangerous assumption: that you should leave things up to your, lawyer, accountant, insurance broker, engineer, or managing agent because he or she always has your best interests at heart. Financial planning lets you preview your most probable future circumstances and forces you to evaluate each decision you make and assess its impact on other choices. A well thought-out plan rarely fails, but failing to plan can mean disaster.

Are you ready?

Do you have what it takes to create a financial plan? The recipe includes a good measure of common sense, a lot of legwork, some real tenacity, a modicum of math skills, and a large quantity of reality checking. It means setting goals, collecting data, identifying alternatives, ranking properties, negotiating compromises, and communicating complex ideas clearly. And don't forget: no matter what you do, you won't make everybody happy.

The critical skill, however, is getting your building ready. Some signs that it's not set up for a financial plan: expenses are out of control; the managing agent isn't following the board's instructions; maintenance is escalating at an unacceptable rate; you suspect that the sponsor/developer maybe misappropriating money; or the super marches to his own drummer. If any of these are the case, you first need to shape up your short-term finances and your daily operations. Here's what you'll have to take care of:

(1) Control tool, supply, and equipment purchases. Be sure your building has effective, working controls. One board member (not a committee - too much dickering over who did what) must approve every purchase in advance. Do this on a duplicate form. If the superintendent presents a written request to the treasurer for a dozen new grommets and five doormen uniforms, the board officer should sign it, keep one copy, and give the other to the managing agent to make the purchase. At the end of the month, the treasurer should reconcile the approvals with the bills from the managing agent and with a delivery log - a physical inventory, taken by the treasurer of supplies, tools, uniforms, light bulbs, gallons of oil, and so on (the super keeps a log of oil deliveries and gauge readings).

In addition, someone on the board should periodically spot-check retail prices and compare them to the managing agent's "bulk purchase discount benefit." If you can buy a bottle of Windex in the supermarket for $1.99 and the manager's "deal" is $2.49 a bottle, something is wrong.

(2) Control your repair bills. Look at your proprietary lease. There will be a section that tells you which responsibilities the board handles and which are up to the individual tenant. Translate this into plain English and publish it once a year. Include a statement that says the co-op will not pay for any apartment repair (except emergency plumbing work) unless the house committee has given prior written approval and certified that it is to be done at corporation expense. No exceptions.

Repair-request forms (which should include date, apartment number, nature of requested work, disposition, and initials of the employee or house committee member who addressed the problem) should be posted near the front door, accessible to all tenants. Make it a published policy that no work of any kind will be done in an apartment without a written request. This way, you have a check on what is being done, by whom, and how frequently.

Have the super keep a file of guarantees, warranties, and contracts covering major repairs and capital expenditures. This way, you won't have to guess five years from now whether the D-line's water riser was replaced; when your new roof leaks after a year, you'll know whether the roofing company is obligated to do a free repair.

Keep a log sheet in or near the service elevator. Make sure that every delivery person and worker signs in and out - including the time, date, and apartment number - in the presence of a building employee.

Once a month, the treasurer should reconcile the bills from the managing agent with the house committee's approvals for repairs and with the service elevator's log/time sheets. Something is wrong if the painter charges $800 for plastering a bathroom leak and two time sheets show he only spent two hours in the apartment. You'll be amazed at the goods and services you're paying for but not receiving. You'll also be surprised by how readily contractors reduce their bills when they hear you've got a time sheet with their employee's signature on it.

Finally, spot check prices on repairs and maintenance periodically - it's by no means unheard of for the high and low bids on a job in New York City to vary by a magnitude of 10. You can find suppliers in the Business-to-Business Yellow Pages, the Blue Book of Building and Construction, also known as the "Contractor's Register," and in Habitat's ConnectLink website (

(3) Review your monetary controls. Every month, the treasurer should get copies of the bills from the managing agent. While you may want to give your managing agent permission to automatically pay recurring expenses (electric, heat, payroll, telephone, elevator service, contracts), the treasurer should approve, in writing, all discretionary expenditures. Put your managing agent on notice that you are not responsible for bills that don't have written authorization. Remember: if you have a policy that requires board approval only on bills over $500, there are any number of accommodating suppliers who will submit 20 bills for $500 each, in order to get their $10,000 payment and get around your rules.

All board members, not just the treasurer, should get a copy of the managing agent's monthly report. Extra pairs of eyes will always pick up discrepancies and peculiarities that just one person will miss. All board members should review contracts for capital improvements. While no one expects an average director to be an expert in concrete pouring, waterproofing, or electrical systems, collectively, most boards are able to find anomalies or loopholes.

Most important, bank accounts should be registered to the corporation's legal name. Your association's money should never be commingled with the agent's or with other associations'. There have recently been a few managing agents who have gone belly up, and buildings with funds in the agent's name either lost their money or waited a long time to lay their hands on it. Don't let it happen to you.

(4) Use Security as a financial tool. No matter how good a job you do of preserving assets and deploying scarce resources, you must protect tenants and their property. Start with the doors. Install an automatic lock on the front door; when the doorman walks out to open a taxi door, the door shuts behind him and he needs a key to get back in.

Keep the building's copy of apartment keys in a locked box, and use a blind code that your average burglar can't crack on sight. For instance, the key to apartment l2A might say 146 on it, and only the super would know which code number goes to which apartment.

Only allow the service elevator to be used when it or the service entrance is manned. If tenants get after-hour deliveries, make it a policy that the tenant has to come to the lobby. This may be inconvenient for the 90-pound lady who receives a case of champagne at midnight, but it is equally inconvenient - and potentially dangerous - to have strangers wandering your halls and staircases.

Non-residents should never get access to an apartment without written permission from the tenant. Yes, occasionally you will have a little white-haired mom from Des Moines weeping in the lobby because Junior forgot to leave a note. But this will foil the new breed of thief who arrives by taxi, wearing a suit and carrying a briefcase, who says to the doorman, "I'm Mrs. Smith's architect. I know she had to go out, but she said it's all right for me to go in and measure while she's gone." The "architect" then helps himself to Mrs. Smith's jewelry.

(5) Compare budgets. Previous operating budgets should be within two percent of actual results. There may be some nasty surprises among the capital expenditures, but everything in the operating budget is either entirely predictable (payroll costs, real estate taxes, mortgage payments) or largely within your control. If spending varies more than two percent, the unsupervised agent has probably prepared the budget by adding up last year's expenses and using some fixed percentage.

Once you've assured yourself that your building is doing a reasonably good job of controlling purchases, repairs, money, and security, you're ready to embark on the long-term financial planning process.


Starting to Plan

First, the board must explicitly state its goals. Some directors may believe these are to provide a friendly atmosphere or make sure that no deadbeats move into the building. The real goal, however, should be to preserve and enhance the market value of the corporation's real estate. If your board can't agree to do this, you'll be forever quagmired in a swamp of unspoken, conflicting purposes.

The test for every expense or saving you put in your financial plan is, "Does this action ultimately enhance market value?" If it doesn't, scratch it off your list. Some situations, though, may not be obvious. For instance, a ban on sublets could diminish market value. A co-op apartment represents a large chunk of the average shareholder's net worth: anything that makes it more difficult to convert to cash reduces its price. On the other hand, if all the buildings in your neighborhood refuse sublets, if you've had a problem with transients, or if your prospective purchasers are horrified at the prospect of a sublet, such a policy could enhance the market value.

A wise man once said, "Those who forget the past are destined to repeat it." Learn your building's financial history. Gather financial reports from the past 5 or 10 years and get a large accounting spreadsheet (paper or computerized). Try to restate each year's expenses on a comparable basis. One year, tree planting may be classified as "garden expenses," and two years later it will be called "exterior enhancements." Sort out which items belong where. In addition, read all the footnotes and the accountant's letter - you may find bad news buried there. If you can't decipher what happened in a given year, ask other tenants, past treasurers, and the managing agent. If it looks hopeless and you need more detail, ask your accountant for a copy of the year's work papers.

When you've restated all the years, total them up individually. Make sure your income and expense figures equal the ones on the annual reports. Also, verify that you can account for all collected income; if you can't, look at the annual report's balance sheet. If some category of assets has increased from the prior year, you've got a "capital improvement." Figure out what the money was spent on and reclassify it as an expense. Total it up again and make sure you can balance the year's income to expenses plus net income or net loss.

For the more interesting categories, figure the year-over-year percentage increase. Show the results of this exercise to the board. Is your annual increase in expenses way out of line with the Consumer Price Index? Do you make the same repairs over and over again and never get value for your money? Do you purchase enough uniforms on an annual basis to outfit a small army? Are you using twice as many gallons of oil as you did five years ago? Has the super's petty cash expense increased exponentially every year? Are you cleaning the same amount of space with 10 times the cleaning supplies you used to buy? Did you fail to pay your vault tax in some years? There should be some surprises. If your association is at all typical, there will be some unpleasant ones. But the purpose of this exercise is to make sure you know where you stand, where you should intervene, and where you're going.

Now take your multi-year restatement and do a "linear regression" - a common math function that helps project underlying trends. With the advent of financial calculators and Lotus, almost anyone who has the right numbers in the right place can do it. The assumption in a linear regression, or any other prediction, is that the future is just an extension of the past. To see your destiny, enter the oldest year first and the most recent year, last. Now, of course, this is just a math technique, not a crystal ball, so limit how far a look you take into the future. If you started with 10 years' restated data, then you can probably predict the next seven or eight years with some validity. If you started with three years of material, don't try to predict more than a year or two. The machine will dumbly spit out numbers until the year 2355 or beyond.

The purpose of a long-term financial plan, though, is to show that the future doesn't have to be based on the past. Where you've got better data than the projection gives you, use it. Then re-total this combination of trend numbers and actual numbers and calculate what the per-share maintenance would be if you continued along as you are now: If your expenses increased 8 percent a year, then you would see your maintenance double every 8 1/2 years, quadruple every 17.


Ahead: Creating the Plan

The next step is to package the results and show them to your board. You want them to see where the building is going, and you want to get an iron-fisted grip on their attention. You want them to understand that they all must act in concert now to pave the way for a less bumpy, more orderly future. Most of all, you want to get them psychologically prepared for your long-term financial plan.

Now it's time to cut to the chase to take a good look at what your building really needs, to set your priorities, and to get the money to do the work. It won't be a walk in the park, but it will be worth the effort.

Before you embark on the final phase of this plan, keep the following three aphorisms in mind. In fact, consider embroidering them and hanging them in the room where your board holds its meetings. They could save you from doing the wrong thing:

(1) "If it ain't broke, don't fix it." There will be someone on your board who wants to make provisions for replacing the elevators 15 years from now, because we all know that elevators don't last forever. But the useful life of an elevator can range anywhere from 10 to 100 years. The elevator Monsieur Eiffel built in Lisbon more than 100 years ago is still working just fine. If you don't see clear signs that something is on its last legs, don't make plans to replace it.

(2) "Never buy an investment you don't understand." This is as crucial for co-ops and condos as it is for financial markets. If you don't know how an investment works or the ways in which it is possible to make or lose money on it, don't touch it with a 10-foot pole. If the engineer or the electrician can't explain to your board, in plain English, exactly how a new 4500-amp service panel will work and what it will do for your building, don't consider it.

(3) "Cui bono (Who benefits)?" Ask yourselves who benefits from an expenditure. If it isn't all the occupants of your building, think twice. If it's the plumber, forget it.


Taking the Tour

Pick a Saturday morning. Tell every board member - the dowager Duchess, the silver-haired doctor, the guy immaculately turned out in the Seville Row suits - to put on sneakers or hiking boots. Assemble all of them in the lobby, along with the superintendent, and make sure they have pencil and paper for taking notes. Go through the entire property, all the common areas, just as if you were thinking of buying it.

Go as low as you can. Start in the basement or the subbasement or however far into middle earth your building is planted. Look into every nook and cranny. Check out the storage rooms, the paint lockers, the employees' bathroom, the boiler room, the super's office, the electrical room, the laundry room, the elevator machinery room, everything. Have the super give you a running commentary about what's been acting up, what he's been meaning to get to, what repairs have to be done over and over again. Ask questions.

Proceed up the service elevators, the passenger elevators, the mailroom. Go up into the hallways, the fire exits, the compactor rooms. Make your way to the roof. Check out the pavers or the tarpaper under your feet and the caps on the parapet. Look at the flashing on the chimney. Stare up at the bottom of the water tower. Look over the edge and see what condition the brick is in. Go out to the street. Take a good look at the front of the building, the sidewalk, the trees, the condition of the grout on the facade. Look into any inner courtyards, garbage holding areas, ground-floor windows. And finally, scrutinize the lobby.

When next you meet, every board member should come prepared with the notes and lists he made during the association tour. You will probably wind up with a list of things that have to be done immediately - fire hazards to be removed, old refuse to be discarded, rooms to be cleaned. You should also wind up with a fairly long list of potential improvements for consideration in your long-range financial plan. These will range from physical replacements, such as the lobby furniture or the boiler, to procedural improvements like finding some place else to store deliveries. Don't reject anyone's ideas. Just put them on the list.



Next: prioritize. Have the entire board categorize each proposed improvement into one of the following categories:

(1) Health and safety. This will include anything that poses a peril to life or well-being: the elevator cable that is going to snap, the water tank that is growing algae, the gaping hole in the sidewalk.

(2) Habitability. Anything that makes it difficult for any tenant to experience the "quiet enjoyment" the lease promises - a leaking roof, a crumbling wall, a non-working compactor, vermin.

(3) Cost-savings, operating efficiencies. Things like setback thermometers, more efficient boilers/burners - anything that will save your building money.

(4) Lobby, exterior, and hallway appearance. Anything that will make a more favorable impression on a prospective purchaser will add to the apartments' market value.

(5) Amenities. Anything you can add to your building to upgrade its status: roof garden, public meeting room, exercise room, satellite dish.

During the next board meeting, argue out the merits of each potential improvement. For each one, ask yourselves, "Does this enhance the market value of our building by an amount greater than its cost?" If the answer is no, in most cases you will want to drop it from your list. The exception is any repair or replacement that will ensure the safety or habitability of your building; perils to health and safety are not optional expenditures. When in doubt about whether an improvement is worth its price, find someone who can do an investment analysis for you, either on a "New Present Value" basis or on an "Internal Rate of Return" basis. A financial calculator or a computer spreadsheet can do these two functions.

Eliminate discretionary items that are too expensive or that don't enhance your market value by an amount greater than their cost. Decide your timetable improvements. Plug these numbers into the long-term forecast you've previously made. Remember to adjust your old numbers to reflect any cost savings your improvements will give you. If a new burner is on your list, for instance, you'll want to revise your annual fuel bill to reflect the improved efficiency.


Getting the Money


Re-total your forecast expenses and see what your maintenance will have to be to pay for them. This may make you decide to revise your timetable for implementing various pieces of your plan in order to smooth out the increases in maintenance. If it becomes clear that maintenance increases will have to be too steep or spasmodic to carry the freight, look around for sources of money. Consider all equity sources, money that comes from selling or using something you own. This can be an asset sale, such as selling a professional apartment you own. You can decide to spend your reserve fund on this worthy cause.

Check out all possible debt sources - mortgages, equity source accounts, private loans, state - and federally subsidized loans for co-ops and condos.

Keep it in perspective. Do not let yourself get bogged down in this step of searching for sources of money. If you look hard enough, you'll find a source. As long as you're not paying usurious interest rates, it doesn't much matter where the money comes from.

Here's where the junk bond market went wrong: it generally isn't the source of funds that determines the success or failure of an enterprise; it's what you do with the money that seals your fate. Making sure you're going to spend the money wisely is more important than agonizing over whether it is going to cost you 9 or 10 percent a year. Do check with an accountant, however, to be certain that an asset sale or a capital improvement is not going to incur capital gains for you or cause you to lose your co-op status, for instance, if you are on the brink of an 80/20 problem with Section 216 of the Internal Revenue Code.

One more note of caution: don't borrow money to cover your operating expenses. It's better to put through a maintenance increase, which will be a constant source of money, than to hock Peter to pay Paul.


Making It Work

To make your financial plan work, you must communicate it clearly. Tell your owners what you're going to do. Tell them when you're doing it. Tell them when it's done. Then reiterate and tell them what you did. Tell them over and over again. If you don't, you'll have nothing but grumbling and grousing from your shareholders who won't be able to see the big picture or the benefits of long-range planning.

To keep your plan working, you must revisit it frequently. Reforecast your association's future expenses as new actuals become available. If there is some doubt about the cost or benefit of a planned expenditure, play "what if?" games with the numbers. Market prices of apartments are the best indicator of a plan's success or failure. If the real estate market is stable, your apartment prices should be going up (as the prices of similar apartments in other buildings stay flat). In a falling market, your prices should be going down slower than the rest. If this isn't the case, something is wrong with your financial plan. Maybe you just need to put some frosting on the cake by freshening up your lobby. Or maybe you need to rethink your whole plan.

Yearly, or more frequently, take a new look at your control systems and reinvigorate them where necessary. Recheck the estimates for future capital improvements in your plan in light of new technologies or new thinking. And finally, keep on taking those building tours. There's no better way to see what's right and what's wrong with your building. If it means her home will look better and her investment will be worth more, the dowager duchess will be delighted to put on her sneakers and dungarees for the annual climb to the roof.


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