As part of our continuing Problem Solved series, Habitat spoke with Avi Zanjirian, a partner at the accounting firm Czarnowski & Beer.
Changing of the guard. We can always learn from mistakes, and hopefully other boards can learn from what happened here. We were engaged by a co-op board in early 2021 to do their 2019 and 2020 financial statements. Their accountant had retired after the 2018 audit, and my understanding was that the accountant, the managing agent and the board had been there for many years.
Digging in. The first order of business was taking care of the annual tax deduction letter, which is given out for co-ops at the beginning of the year to deduct real estate taxes and mortgage interest on a per-share basis. We tried getting in touch with the managing agent, but he wasn't answering phone calls. So I called the town offices to find out how much their real estate taxes were. The person on the line said, "Oh, we're so happy someone is reaching out to us. The building hasn't paid real estate taxes in a year and a half." The managing agent, because of COVID I guess, was able to get away with not presenting monthly financial reports.
Bleeding the budget. The attorney finally got in touch with the bank, and we learned that the board had not provided information that was required under the loan agreement, so they defaulted on the interest rate. Their interest rate jumped from 3.8% to 8.8%, and because no one was paying attention, they didn’t realize that the 5% increase was getting auto-debited from their operating account every month for almost a year and a half. That’s why they had no money to pay real estate taxes — because the account was being completely bled out by paying this higher interest rate.
When we learned that the water bill had not been paid in over a year, the managing agent was fired and the board took over managing the building. Usually there's a transition between managing agents, a transfer of documents, but when the new management company came in, they had nothing. The new managers went on a wild goose chase trying to find things. Finally, a couple months later, the board held an annual meeting with the shareholders where they explained what had happened. As you might assume, it did not go over well.
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Time to clean house. The shareholders were able to elect a new board, and the new board is working to right the ship. The interest has been reset back to the original rate, the real estate taxes have been paid, and they have a payment plan with water and sewer.
The saddest part about this was that people couldn’t sell their apartments because any sale requires financial statements or a tax return. And the banks were saying, "The last financial statement is 2018. We need something in order to close these deals." These people had already bought their new apartments, so they were paying two mortgages. Once we got the financial statements together, the new managing agent and the new board were able to put together a new budget. They had to do a big maintenance increase, about 10%, and a $350,000 assessment to pay off all the old bills. They were able to get the mortgage interest rate back to the original term, and apartment sales started closing.
The importance of monitoring. The real takeaway here is that there's a fiduciary responsibility when you're on a board. If you're not getting these financial reports, then raise your hand as a board member and say, "Hey, what's going on?" Go to the managing agent’s office. Take the initiative to monitor — that's the keyword. When you don't do that and don’t ask questions and don’t look at the financial reports, this is a very scary example of what can happen. The board that's currently in place is trying to make sure that this doesn't happen again.
Co-op and condo board business broken down into bite-sized bits - 2 stories each week. Read now on all digital devices.