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Is The Building Financially Fit?

In this economic climate, buildings are getting socked by a combination of forces – rising costs coupled with cash-strapped owners and defaulting sponsors, which in the worst case scenario can lead to unit foreclosures.  Co-ops are better able to weather this storm than condos because they have priority over banks in the event of foreclosure so that shareholders usually are made whole.  It’s the reverse in condos, where the banks take first, often leaving unit owners to pick up a pile of unpaid common charges. 

That’s why it’s more important than ever to take the financial pulse of the building where you want to buy. Even if the apartment seems cheap, you may not be getting a bargain if you’re buying into a co-op or condo with financial troubles.

Here are some ways to assess the health of your chosen.

OPERATING INCOME/EXPENSES

Does the building prepare an annual budget and make it available to owners? Ask to see it.  You want to make sure it’s realistically balanced. Deficit spending is an increasing problem in this environment.
Are maintenance/common charge levels adequate to cover expenses, and in line with those of comparable buildings? If not, this may signal some building-specific problem — excessive debt levels that have to be repaid, higher than normally high real estate taxes, a cash-devouring litigation.
Are non-recurring revenue streams being used to balance the budget and keep maintenance/common charges in check? In order to avoid even steeper hikes in monthly charges, buildings may resort to a variety of devices — interest from reserve funds, left-over money from capital assessments, real estate abatement refunds.  The problem is that when the source dries up, owners may be left with an even bigger shortfall and higher charges.
Is the building current in its payment obligations? An increasing issue in this economic climate. Year-to-date budget analysis should help provide the answer  You can check online yourself to see if real estate taxes (the biggest item in many co-op budgets) have been paid. (See, No Tax Free Lunch ) If not, is it due to a temporary cash flow problem or maintenance levels that have been set too low.
Are there significant arrears? Another concern in this environment. Generally less of a problem in co-ops because the lender often pre-emptively steps in to protect its collateral and in the event of foreclosure outstanding arrears get paid. A bigger problem in condos, where the bank takes first and unit owners are left to pick up the shortfall. And potentially an even bigger problem where sponsor defaults in new buildings are at issue. (See below.)
What is the history of maintenance increases in the building? A slow and steady trendline in keeping with inflation is what you want to see. No increases for extended periods sounds good, but, especially in this climate, usually means maintenance levels are being kept artificially low, and the day of reckoning may arrive along with you.  Steep, erratic spikes may also spell trouble
Are there any assessments or other revenue-raising devices in the offing that could significantly raise your cost of living? If assessments, you want to know how much, how long and for what. In co-ops if there’s not already a flip tax, you’d do well to ask if one is planned because nowadays buildings are looking for money wherever they can find it.

 CASH RESERVES

How much does the building have in reserves? The building’s financial statement should give the balance as of prior year’s end.  Ask if there have been any significant changes.
Does it meet the per unit parameters? In flusher times the desirable benchmark  was $5,000 per unit, which comes to $1 million for a 200 unit building.  But now realistically, in many buildings it’s less, in some a lot less, which isn’t necessarily cause for concern depending on what work remains to be done.
 Is it enough? There’s no one-size-fits-all answer.  It depends on whether the majority of capital improvements already have been made in which case less cash on hand may not be a problem.

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