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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

The Marriott Makeover

I hate surprise assessments. In my opinion, they are the product of a failed financial plan and are disingenuous to the shareholders. Even if one’s plan is to assess, that is not generally disclosed in a thoughtful fashion to shareholders and prospective shareholders. For example, the disclosure in the annual financial statements that there is a “possibility of assessment” is much different from the reality that there is a “certainty of assessment” under which a lot of buildings operate.

Our co-op has learned that lesson. Nagle Apartments, my 111-unit cooperative sitting between the Washington Heights and Inwood sections of Manhattan, faces the same problems as other buildings: how to get through the year while remaining fiscally sound.

I had some experience dealing with money matters before I joined the co-op’s finance committee: I had worked in hotel accounting, followed by a stint doing accounting at a large insurance company. Eventually, I was elected to the board, serving as assistant treasurer, then treasurer, and now president.

When I looked at my co-op’s financial situation in 2005, we had less than $10,000 in reserves, negative equity, and a barely positive cash flow. My building needed a sustainable, long-term fiscal plan. I had my prototype: the Marriott hotel chain. I had worked for Marriott in the late 1980s into the early ’90s. At that time, the chain set aside a percentage of its revenue each year for capital repairs and improvements. As a result, management is able to repair and improve the property so that it stays current. Our co-op was in desperate need of a Marriott-style makeover!

My building is not wealthy. We took small steps to improve our finances and took advantage of some special items. We decided to raise our maintenance each year by a small amount in line with inflation. We started a permanent assessment of 2.5 percent of maintenance, and our goal is to raise that to 10 percent within four years (partially in response to Fannie Mae and Freddie Mac requirements). We established a self-escrow for our property taxes so we can earn interest ahead of time while saving up the cash and then take advantage of the pay-early savings for the second through fourth quarter charges (our bank, NCB, agreed to drop the bank escrow). We also established water/sewer and insurance self-escrows that we could pay off immediately and not incur insurance premium finance charges or line-of-credit charges. These are also a great source of emergency working capital.

By the time 2011 had been audited, we had current assets and reserves of over $1 million, over $1 million of positive stockholders’ equity, and a positive cash flow. Our book value is nearing $100 per share (an average two-bedroom unit has 135 shares).

That said, I have to admit that it’s not all because of superior fiscal planning. When the sponsor went bankrupt, the co-op took over 15 rental units. When a renter leaves, we renovate and sell the vacated unit. We currently have six left. With the money from the nine sold so far, we have replaced all windows and A/C units, repaired the building roofs, and raised reserves and self-escrows without assessments to our shareholders. It is one thing to take advantage of a special deal: it is another to transition to sustainable finances. Our supply of units is running out and the remaining occupants appear to be there for the long haul.

While the co-op has made excellent progress, I do not consider us out of the woods yet. Our maintenance charges need to cover our depreciation expense in addition to the (already covered) debt service. Covering the depreciation is so very important but often overlooked. Depreciation expense represents costs associated with the wearing out of the original building, previous capital repairs, and improvements. For most of these, future repairs and replacements will have to be made. The trouble with depreciation is that it represents the historical cost, not the replacement cost. Therefore, if an organization is not taking in sufficient funds to replace items at historical cost, there is little hope the organization will have the funds to cover the replacement cost without borrowing or assessing.

I encourage all boards to undertake their financial planning from the perspective of what is sustainable not just for the upcoming year but for the long haul. Ask yourselves: at which amount of maintenance will the co-op not only meet its short-term operating costs but also its long-term goals? We all need to move away from the operating model of keeping maintenance low when this level does not meet the sustainable needs of the corporation to a model of what is sustainable for the long term. That will not only save the shareholders along the way, but make the board’s job easier as well.

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