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The mysteries of the annual financial statement explained.
Cash vs arrears, lender restrictions, lawsuits, settlements, increased maintenance – how do they all fit into the mystery of the financial statement?
If you’re like most co-op and condo boards, you distribute your building’s annual financial report long before the annual meeting, knowing that your residents will go over it carefully, understand everything, and will offer suggestions or ask questions politely when the time comes.
Ha! Just kidding. In reality, no matter what you do to inform your shareholders or unit-owners about your budget or expenditures or the need for an assessment, you’re almost always going to find attendees who have never looked at the report before the meeting. And, even if they had, most are not going to understand the special language of accountancy.
“The financials are required to be in accordance with GAAP [Generally Accepted Accounting Principles], a strict set of rules that are not intuitive or logical to most people,” says Alex K. Kuffel, president of Pride Property Management. “As a result, unit-owners, [and] even [many] board members, often have no idea what they are looking at.”
“Usually, at the annual meeting, there’s very little conversation on the financials except [by] the same people who always ask the same questions, like, ‘Why is maintenance going up?’” notes Alan Levine, board president of the Lexington, at 288 Lexington Avenue.
That said, there are effective ways to present the financials at the annual meeting. Here they are.
Who Should Talk?
The person at the annual meeting who initially presents the numbers and explains what they mean should, ideally, be your accountant. “That’s generally something we do as a presentation at the meeting,” says Stephen Beer, a partner at the accounting firm Czarnowski & Beer. “We go through important changes and highlight specific benchmarks so people can get an understanding as to how the building is doing. Every now and then a treasurer will do it,” he says, “but I don’t usually see that [as something done by] board members.”
What’s the clearest order in which to present the financials? Managers and accountants say it’s best to simply go down the list, rather than skipping forward and back.
“As the financial statement flows normally, the balance sheet comes first, so you’re talking about cash on hand,” says David Amster, president of PLI Management. “Next is the income-and-expenses portion.” And so on. “If you follow the order of the financial statement,” he says simply, “that’s a good way to go.”
Within that order, however, the board should choose what it wants to emphasize to shareholders and unit-owners. So what are the most significant points you want to give residents as a takeaway?
“I think one of the most important things is whether the building has generated a profit or broken even for the year,” says Michael Esposito, a partner at the accounting firm Kleiman & Weinshank. “That speaks to whether the level of maintenance or common charges was proper and whether there will be increases in the next year or years.”
Explaining the Maintenance Increase
Making it clear to residents that maintenance has to go up is important because many of them, and even many boards, have the unrealistic expectation that monthly charges should never go up. “Unless there’s a unique situation,” says Esposito, “I laugh when I hear a co-op or condo [board] saying, ‘We haven’t raised the monthly charge,’ because in general, expenses go up from year to year,” with rising staff salaries, property-tax increases, and such unavoidable expenses as those for fuel, electricity, and insurance. “Some prudent boards build in a nominal increase, one or two percent, just to get shareholders used to it,” he says, adding: “Maintenance [and common charges] still must be competitive with maintenance [and common charges] in the area. It’s a balancing act.”
“I tell boards that maintenance and common charges have to keep up with expenses,” says Amster. “It’s a lot easier to do a small increase, one or two percent a year, even if you don’t need it, because it prevents a large increase when something happens. I remember taking over a co-op where they needed a 15 to 20 percent increase just based on operating expenses. One of the questions that comes [up] at meetings is ‘How can that be? We haven’t had an increase in 15 years!” Which answers that resident’s own question, of course.
“Most of the increases have been in the three to five percent range in the last couple of years,” observes Beer. “With buildings keeping costs down and [instituting increases] below that level, that’s something boards should share – how hard they’re working to keep increases low in comparison with other buildings.” This puts a positive yet fair spin on maintenance or common-charge increases. You can get a sense of other buildings’ increases by asking your property manager and accountant.
Make sure to tell residents what the board is doing to reduce expenses, Kuffel advises. “The board should explain what’s being done, especially if it’s getting results. Second, how much of the property’s spending is within the board’s control?” Shareholders and unit-owners, he says, “are sometimes surprised to find out that non-discretionary expenses” such as those Esposito mentioned “eat up the overwhelming majority of the co-op or condo’s budget. Nonessential items such as a new piece of furniture or flowers for the lobby are barely a blip on the radar of most building’s finances. Sometimes we prepare a pie chart of expenses to drive this point home.”
Ultimately, the best way to handle that inevitable question about rising costs, says Michael Barbara, longtime president of Yonkers’ 528-unit Bryn Mawr Ridge Cooperative, is to “be honest and get information out there in a timely way.” Ironically, that holds true even in rare situations such as his, where the co-op, after refinancing, had such a surplus that residents are essentially being given a partial rebate on their monthly maintenance charges. Yet whatever the circumstance, he says, the same rules apply: “Get financial information out there in advance, whether good news or bad. If they know in advance, they get [to the annual meeting] with questions that are key to the agenda and not just all over the place.”
Dealing with Cash and Arrears
The next important thing? “The amount of cash that the building has in relation to future work that you need to do,” says Beer – noting this does not necessarily mean how much you have in your reserve fund. “Reserve funds can be restricted or non-restricted,” he explains, because of “lender restrictions, income-tax-basis restrictions, or even just designations by the board. For example, sometimes transfer fees [a.k.a. flip taxes] can only be used for major capital repairs. So I try to keep [mentions of this benchmark] in terms of cash on hand.”
After that, says Beer, talk about the amount of arrears. Boards, he says, need to reinforce “the fact that it’s important everyone pay their monthly charges on time, because if a person or a group isn’t paying, that creates a burden that affects everyone else.” He’s not an advocate of shaming specific residents, a tactic that a number of condominiums use when standard methods of collecting arrears have been exhausted. But he does agree that residents have a right to know of the existence of particularly large, individual arrears – what he calls “the outliers” – in the context of “what’s being done to collect it.”
Should residents be told about lawsuits, settlements, or other legal issues that can affect finances, but may or may not be sensitive in nature? There are random things like slip-and-fall cases that can happen at any building, and then occasionally a board member might sexually harass an employee. “Obviously if there’s [been] some major lawsuit,” says Amster, “it’s going to be disclosed in the financial statement, but if it’s an ongoing suit, you can’t discuss it. I would refer those questions to the board’s attorney. If it’s a settlement, it can be discussed without naming names.”
Board president Barbara says he’s never discussed lawsuits at annual meetings since, with 25 acres of garden co-ops, virtually all his co-ops’ claims involve slip-and-falls – which, he maintains, “are frivolous, yet people get payouts because the insurance company doesn’t want to defend [in such cases].”
Should You Do the Q&A?
Finally, one of the hardest things for boards to control is an audience itching to ask questions – sometimes shouting them out in a barrage of crosstalk. You can try to head that off by making clear whether you’re taking questions as you go along or at the end. But which should you do?
“I strongly believe it’s best to save the Q&A until the end,” says Kuffel. “Fielding questions midstream inevitably veers the discussion off into other areas and disrupts the flow of what could be an otherwise productive meeting. In addition, allowing the board to finish its presentation first often answers questions before they are asked.”
Amster agrees in general, but adds: “It depends on circumstances. Normally, the accountants give the report and people hold their questions until afterward. But if there were certain circumstances such as major repairs or a boiler replaced, at that point it’s important for the managing agent or board members to speak up to address those issues.”
How much time should you allot to questions? “I think you give as much time as there are questions,” Amster says. “You don’t want to cut people off. Shareholders and unit-owners deserve to get their questions out. And the last thing you want to do is cut people off on financial questions, since it’ll lead to them to think you’re hiding something or that something’s not right.” Fortunately, the first five questions usually cover points most people bring up.
“Be proactive and keep people informed,” says board president Levine. “If you communicate things prior to the meeting, fewer issues will come up at the meeting.”
Learn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments
Professionals in some of the key fields of co-op and condo board governance and building management answer common questions in their areas of expertise
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