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Steven R. Wagner, Partner, Wagner Davis. How important is it for a cooperative to have a sound financial plan in place?
BACKSTORY The board of this 170-unit Mitchell-Lama co-op is between a rock and a hard place. Many of the shareholders are older and on fixed incomes. The building is 60 years old and experiencing the kinds of breakdowns that buildings of such vintage typically encounter, including plumbing, exterior envelope, and mechanical issues. Meanwhile, the building has not increased maintenance for years. In order to balance the budget, the New York State Division of Housing and Community Renewal mandated an increase in maintenance charges of more than 75 percent.
High winds from the recent hurricane caused further damage to the parapet walls and roofing system, which were renovated nine years ago but were improperly installed. The guarantees provided by both the manufacturer of the roof and the contractor that repaired the parapets and installed the new roofing system are not being honored. The manufacturer claims that its materials have not failed but were improperly installed and mistreated by the co-op.
The contractor submitted a one-year guarantee rather than a twenty-year “no dollar limit” guarantee as required by the contract. The president of the board had been asked to sign the guarantee, and he dutifully did sign the guarantee without noticing that the contractor added a sentence that said the cooperative agreed to accept the one-year guarantee instead of the twenty-year one.
Not surprisingly, the contractor is refusing to return calls. There was insufficient money available to make the repairs to the building. Except for reserves mandated by the state, the building’s reserve fund and operating account were completely depleted after years of operating without an increase in maintenance.
At the annual meeting of this unfortunate cooperative, the shareholders wanted to know what the board was doing about leaks, and even though the shareholders had already been informed about the maintenance increase, there was a lot of unhappiness among the shareholders. Everyone was demanding answers and solutions, and the board had neither. Eventually, the shareholders quieted down when they realized that anger and yelling would do nothing to ease their situation.
COMMENT This is an extreme example of a cooperative that has operated too many years without a clear business plan. Like any other business, a cooperative must invest money to keep the building in proper operating condition and to properly budget for both capital and operating expenses in order to keep the cooperative healthy. In the case of a cooperative, the investment is made by ensuring that capital improvements are identified, budgeted, and performed. We recommend a five-year capital plan, which includes a building survey to identify major capital items that will require repair and a plan for funding the repairs.
In addition to maintenance charges, refinancing and assessments are tools available to cooperatives to create reserves needed to pay for expensive capital expenditures.
On the operational side, delaying needed maintenance increases to meet operating expenses is never a good idea. The longer the increase is delayed, the larger the increase is going to be in order to “catch up” on paying the bills. Vendors like to be paid on time and often charge interest if payments are late. Poor planning costs money. Drawing from reserves to pay operating expenses is also ill-advised. The reserve funds are “rainy day” money that will be needed for capital repairs.
The contractor’s actions relating to the guarantees were reprehensible. Still, there is no excuse for signing a document that you have not read or do not understand, or, at the very least, not ensuring that someone on your behalf review it and explain the document before it is signed: a lawyer for legal documents, an architect or engineer for building applications and construction documents, and an accountant for tax documents.
We are assisting the cooperative in the process of applying for grants and loans to cover the cost of capital repairs. Because of the lower interest rates and the payment of the principal of the mortgage over many years, it may be possible to create reserves to pay for the needed repairs without further increasing maintenance charges.
From the Desk of SRW:
The noise complaint was made by a downstairs neighbor against a newlywed couple when he sought an injunction to stop them from lovemaking. At his deposition, the downstairs neighbor testified disapprovingly that the newlywed husband should have held his wife longer after they made love.