In the past, our building operated pretty much hand-to-mouth. The previous board depleted our reserve fund to avoid raising maintenance, deferred important repairs to avoid assessments, and refinanced us into an interest-only underlying mortgage in a vain attempt to balance our budget. As president of a recently elected slate of new board members, I am determined to restore our cooperative’s physical and financial health. However, I must admit to being a little overwhelmed by the hard choices before me. Some board members think that a new mortgage will solve most of our problems. What do you think?
Co-op board members, just like the management of any corporation, often confront difficult or controversial decisions. However, unlike the anonymous shareholders of other corporations, co-op shareholders have to deal with the familiar faces of friends and neighbors. This familiarity adds another dimension to a co-op board member’s decision-making, but this does not diminish his or her fiduciary responsibility to run the property in a prudent manner for the benefit of all shareholders – not just the vocal ones or the ones down the hall. The previous board seems to have forgotten this fact. You clearly understand it.
First, all board members – and shareholders, for that matter – must understand that their cooperative is not some form of residential welfare state. It is a real business, and it must run like one. To that end, board members need to bring the same careful planning, hard work, and sound judgment that they use in their day jobs to the management of their co-op. To do any less is a breach of their fiduciary responsibilities.
A new underlying mortgage certainly could provide money for needed repairs. But taking that step without careful analysis could put you deeper in the hole. Therefore, your second step should be meetings with your managing agent and accountant to review your property’s performance over the past five years. Look for trends and problem areas, and also assess how past emergencies were handled. Remember the old saying: “Those who do not study history are doomed to repeat it.”
Third, prepare a realistic budget for each of the next five years. Each year’s budget should include allocations for routine and preventative maintenance, contributions toward major capital improvements, plus an allowance for unexpected items. For reliable projections of future capital items, hire an engineer to perform a roof-to-cellar inspection of your building. The engineer’s report should contain four categories:
(1) Work needed now.
(2) Work needed over the next five years.
(3) Work needed in years six to ten.
(4) Work needed after year ten.
Within each category, the engineer should list items in their order of importance, together with their estimated cost. Why a ten-year period? Because most underlying mortgages run for at least that long. Therefore, if you later decide to refinance, you had better know your capital needs over that period so you don’t run short of funds.
Fourth, involve your shareholders. Find out what owners are thinking by contacting them on a regular basis to gather their opinions on budget priorities, spending plans, and policy changes. Understanding the relative importance of shareholder concerns will guide you toward decisions that will be supported by a majority of residents. It is rarely possible to satisfy everyone; but giving shareholders the opportunity to express their fears and desires will go a long way toward gaining acceptance for the tough decisions you’ll be making. Without that acceptance, achieving your goal of a solid building with sound financials will be much more difficult.
Finally, combine all of the information provided by your managing agent, accountant, and engineer to develop a long-term plan for your building. This plan should include specific, measurable goals. Some of my clients have set goals like:
• Sustain higher apartment values relative to neighboring properties through rigorous cost control, regular cosmetic improvements, and annual preventative repairs. Limit annual maintenance increases to the greater of the CPI increase, or three percent.
• Build a working capital reserve equal to three months of budgeted operating expenses, plus a separate reserve for roof and boiler replacement. Pass a special assessment to fund the roof and boiler repairs and collect it over the next 18 months. Begin work the following spring.
• Complete all repairs and system upgrades recommended by the engineer within three years. Obtain needed funds through a mortgage refinancing before the end of next year.
Your specific goals will be different, but you must have them to assure your success. A long-term plan provides the framework that channels every board decision toward your ultimate objective.
Planning is hard work, but it is relatively painless. Implementing your plan, on the other hand, will be more challenging. However, by enlisting professional help from the start, educating your shareholders up front, and then communicating with both groups regularly throughout the process, you will maximize your results and minimize shareholder resistance. Keep your eye on your goals. A comprehensive, financially sound, long-range plan is one of the most valuable legacies that a board can leave to future boards. Your work will not be easy, but it will have far-reaching and long-lasting effects on both the financial stability of your co-op and the market value of every unit in your building.