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Show Me The Money

Maybe that’s what you should start asking more often. Most owners assume their building has a stash of cash in reserves sitting in the bank safely earning interest while they sleep (even though at current rates they’d have to snooze as long as Rip Van Winkle to see any returns.).  You’d be surprised to know that may not be so.

  • Take the case of the hedge fund trader at a building in the West 90’s, who no sooner got voted in as treasurer than he set about investing in a variety of stocks, telling the board (who didn’t regularly review statements) that their nest egg was growing – till the bottom fell out of the market, and the losses couldn’t be hidden.  “We were flabbergasted when we did the audit,” said Carole Newman, a CPA whose firm represents 250 co-ops and condos.  The first reaction of the chastened directors was to “just dump” everything.  “But I said, no.”  They eventually transferred what was left to a Merrill Lynch advisor familiar with the requirements of co-op/condo investing. Luckily, as Ms. Newman explained, they could withstand the loss without a problem because they had a virtual annuity from shares they’d bought from the sponsor, that generated profits whenever they sold vacated apartments.
  • Another building purchased auction rate securities, which it couldn’t sell when it needed the money for Local Law 11 work because the commercial paper market had dried up after the 2008 financial debacle, leaving their reserves as frozen as a Shake Shack concrete custard.
  • A sophisticated treasurer at one of my co-ops, asked me why there was a marketable securities note in the financials, explained Richard Montanye, a CPA  whose firm specializes in co-op and condo auditing. It turned out the managing agent had gone out and bought mutual funds for the building’s cash reserve account, and then claimed they were FDIC insured, which, of course, they were not. It was “politically disastrous” to present to shareholders .

Sure, these are the exception, not the norm.  “Less than a handful of our buildings invest in vehicles other than CDs and money markets,” said Ms. Newman.

“We represent 80 buildings, advised CPA Mindy Eisenberg Stark, “and none invest in speculative vehicles or anything not strictly capital preservation.”

Still, it’s small consolation if your building is one of the mavericks. No matter what you think, no building is immune, mine included. No, I wasn’t on the board when a financial wunderkind who wasn’t even treasurer, decided he’d supersize returns by investing in exotic instruments like structured investment vehicles, only he shrunk them instead (fortunately only a relatively small percent of total reserves).

So what can you do to prevent the board from losing your money?

Impose an Investment Policy: It’s not something most buildings do till after the fact, to improve credibility with shaken shareholders, like that co-op with the hedge fund trader. “It’s the best way to focus board attention,” said Mr. Montanye.  Ms. Newman agreed that boards are finally getting the message, though most still rely on “unwritten tradition.”

Stick to plain vanilla: I like rocky road because I never know exactly what I’ll bite into.  Surprises are OK with ice cream, not money, where simplest usually works best — according to Mr. Montanye a portfolio of laddered CDS, which right now he favors over treasury bills.  “I still have buildings getting 5%, and the money’s there when it’s needed.”

If you see something, say something: Even if you don’t look at those annual financial statements, read the notes.  If you see the term marketable securities or stocks or mutual funds — or anything other than cash or cash equivalents — to describe how your money is invested, that’s a pretty good indication your board has put the principal of some of it at risk.. At the annual meeting, if not before, ASK: WHAT IS THIS? You’re more likely to get a candid answer from the building’s accountant than from the board that put your money at risk in the first place.

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