Opportunities knock – but you may not recognize them when they come calling. It is a savvy board that, when faced with a difficulty, does not see a problem but a challenge – and a solution. If you’re in a tough financial spot, how do you do that? A co-op.condo board must, when faced with a decision:
(1) identify the non-performing or under-performing asset;
(2) brainstorm for ideas to generate funds from the asset;
(3) identify collateral costs associated with the chosen method; and
(4) work to minimize any collateral costs or disruptions. These are the stories of three enterprising cooperatives who saw opportunities with their staff housing and/or vacant shareholder apartments – and seized them.
Super Apartment No More
First, there was a White Plains cooperative that had two free-standing buildings, each with its own superintendent, porters, and doormen. When negotiating an independent, collectiv-bargaining agreement with the union representing the employees, the cooperative negotiated a document that consolidated the staffs of both buildings under one contract. There would now be one superintendent and one staff that would be freely assignable to each property. The other superintendent would be retained as a handyman, but at his previous salary. However, he quit shortly thereafter to take a super’s job at another co-op. Thus, his apartment was available for sale.
In this instance, the cooperative’s goal was to increase efficiency of the staff. After finding that the buildings operated efficiently without the handyman and with a freely assignable staff, the board identified the former super’s apartment as a non-performing asset. After determining that shareholders were not disrupted by the reduced staffing levels, the board identified only minor collateral costs to assign shares and incur brokerage and legal fees for the sale. The cooperative then sold the apartment, creating a one-time cash infusion with recurring maintenance income from the new apartment. In addition, because the staff was reduced by one employee, recurring savings in labor costs were also realized.
Studio for Sale
The second example took place in 1995. With sale prices depressed, another White Plains cooperative purchased a studio apartment that had been on the market for two years. The co-op purchased at a low price, retired the stock shares, and rented the apartment for more than twice the maintenance charges. In 2004, when sale prices more than quadrupled, the cooperative sold the apartment, generating a tidy profit, which the cooperative used to finance capital projects.
Here, the board acquired the asset, which was depressing shareholder values (since the apartment had not sold, the price was reduced several times, and the shareholder was repeatedly in arrears). The board identified a potential asset, negotiated a contract to purchase, then identified collateral costs for brokerage, apartment clean-up, repairs, and the lost interest on the purchase price. These costs were greatly outweighed by the rental income, which was more than double the maintenance the cooperative had previously received. No disruption or cost to the shareholders was identified.
Apartment for Rent
In the final example, a White Plains cooperative identified a superb candidate for the new super, who also happened to live in a two-family house in Scarsdale. (He preferred to have his children educated in its nationally recognized school system.) The co-op hired him and rented out the now-unnecessary super’s apartment. The super was paid half the rent as a housing allowance. This highly qualified man also saves the co-op much more than he is paid in salary by performing capital projects while managing the staff and outside contractors for greater efficiency. In addition, the cooperative receives rental income on the superintendent’s apartment, which previously generated no income.
This cooperative board identified several assets: a person highly qualified as a superintendent who possessed hands-on work skills and management skills; a potentially rentable apartment; greater staff efficiency and productivity; and more effective oversight of contractors. The board identified minor collateral costs: brokerage fees and longer response time for emergencies.
The board has since learned that the staff operates with greater efficiency and has more time to tackle many low-skill jobs, such as fire stairwell painting, extra cleaning, and minor repairs. Costs for outside contractors are reduced. The superintendent is highly responsive to emergency calls. Careful tenant selection has minimized brokerage costs as the tenant has renewed her lease. Finally, the cooperative still has an apartment should it need to hire a new superintendent.
In the final analysis, a board must always be alert to opportunities because “cashing in” is not always an obvious opportunity. Moreover, a board must exercise due diligence and thoroughly investigate collateral effects before plunging into a poorly thought out opportunity. Boards that fail to adequately investigate these effects will quickly learn that sometimes cashing in can become cashing out – with disastrous results.