Looking at condo with approx. $180k in reserve and a projected operating deficit of approx. $110k for 2012. Nothing unusual in the budget, but a lot of staff and only 35 units. 2003 condo conversion, so fairly new. The operating deficit is throwing up red flags for me. They don't budget for reserves in the monthlies, and reserves are added with a 1% flip tax, which was implemented in 2006. This sounds like a sure fire path to higher common charges and, ultimately, large assessments. Plus boosting reserves based on sales volume in the building doesn't seem very prudent since there is no guarantee how many of the 35 units will turn over in a given year. Is the picture I'm painting here common and not a big deal (as my attorney and broker are suggesting) or should I really be holding out for a better managed building? I'm a financial guy and the numbers don't look good to me. I recognize that assessments will always happen and common charges only move in one direction, but this building seems like it's on verge of higher monthlies in near future.

Depends on whether you're talking $5M or $500K apartments.

Either way, that $180K in 2011 cash is going to be only $70K in a few months. When something breaks, it's better to have the cash on hand rather than fuss with assessments. On the other hand, the building's policy might be that the owners can take care of their money better than the condo can, so would rather assess when the need arises.

You're probably better off steering clear of a building where your attitude towards money is not in sync with the current board's. Their not jacking up the CCs for 2012 by only a few hundred bucks per average unit says a lot.

Thank you. It is an expensive building, with lowest priced unit around $2mn. It's the combination of a low-ish reserve and operating deficit that bugs me; either one in isolation would be more reasonable to me. I'm just of the mindset that budgeting for a loss on an ongoing basis is indicative of poor financial management (they did same thing last year and were bailed out by higher than expected "other income" so the deficit wound up only being $10k or so).

What is the deficit relative to the annual revenue? If it's a percent or two, then you can just assume a small increase in common charges will solve the issue. If it's 10 percent, then you should assume the actual common charges will be quite a bit higher then the stated charges. This is a common issue in NYC these days...

The projected deficit is just under 10% of budgeted revenue.

Just assume the maintenance Is increased to cover the operating cost and there will be special assessments for the major stuff (eg, roof, boiler, etc.)

If you still like the apt, then you are good to go.

You could also use the budget to try to renegotiate a bit...

Since the deficit is 10% of revenue, CCs need to go up by 11%.

Some lenders when qualifying a condo for mortgages require 10% of revenue to go to reserves, so may as well add that in when figuring what CCs might/should be.

I'm with you: those numbers bother me, too, regardless of the price-point of apartments in the Condo. It smacks of bad management.

Do the notes at the end of the financials indicate the reason for the deficit? Is this the first time they've run at a deficit? If it's a planned capital improvement that would allay my fears a bit, although I would have liked to see management collect more towards reserves in advance of a planned capital improvement.

What does the CPA say is being done to correct the deficit?

What's the deal with the underlying mortgage? Have they refinanced at all?

Is there commercial space on ground floor? If so, what types of businesses and how do the lease terms shape out?

Trevor Curran
NMLS #40140
Mobile: 516-582-9181
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PowerHouse Solutions, Inc.
185 Great Neck Rd, Suite 240
Great Neck NY 11021
Licensed Mortgage Banker – NYS Dept. of Financial Services
NMLS#3528

It's a condo, so no underlying mortgage.

The condo might have a mortgage on the super's apartment, though, if the sponsor sold it to the condo rather than include it in the common elements.

E.g., the condo at 310 West 52nd just re-fi'd their super's apartment for $533,000. They'd originally had a mortgage for nearly $900,000 from the sponsor.