How worried should one be about building financials?

A good rule to follow is to have at least $1500 per apartment in reserve. As for assessments, see where the building stands in regards to Local Law 11 work - the reason why you see miles of scaffolding all over Manhattan and the boroughs. If they have completed this round of LL11 (which requires facade inspection and repair every five years), you won't get slammed with another major assessment (they could be assessing for that work right now). Maintenance is rising everywhere due to increased costs in fuel, insurance, taxes...etc. Wait for the new NYC water rates to kick in and maintenance will go up again.

Thanks for the advice--following your rule of thumb, this building is shy roughly $69,000 (there are 113 units). Do you think that is enough of a concern to walk? As for the current assessment, it is apparently for a new boiler. The water rates will affect everyone, though--including renters, no?

$100000 for a building that large is unacceptable. $250,000 is the minimum I'd look for and I'd be a lot more comfortable with $500,000. One thing goes wrong (roof, facade work, elevators, windows, boiler) or needs updating and you look at serious special assessment. Unless there is something highly unusual about this building that keeps costs very very low (no mortgage, for example) I don't understand why a building this size would operate so close to the line in terms of no real financial cushion.

Kyle--thanks for your reply. This building does indeed have a mortgage, which is due for refinancing in 2010. I understand that last year the building had $150,000 in present liabilities, so it keeps not paying stuff, which also makes me somewhat nervous. Although, they do have a large line of credit open which they are apparently not touching right now.

I'd be worried.

emf--I am worried. I'm running it by my bank to see if they'll even consider approving a loan in such a case. I'd rather nip this in the bud before documents are signed and a deposit has been put down, rather than go through the full process only to get a rejection.

I am going to disagree with the rule of thumb that a building needs to have X amount of reserves in place.

Some coops keep a lean reserve under the premise coop members would rather have the cash to invest as they please rather then the coop controlling their money. If a major expenditure comes up they can use the line of credit or do an assesment on the share holders.

My coop is extremely well run (in my opinion) and the reserve misses the benchmarks suggested here.

In your due diligence I would take a look in the board minutes and see if there are any complaints from tenants about basic services. I think this is more telling of a poorly run coop.

Without adequate reserves you can indeed dip into a line of credit. The problem is this: you then have to service the LOC debt. That means special assessments or maintenance increases. Special assessments are good because they can be deducted as capital expenditures when you sell, but there is a downside. Selling with a special assessment in place is a turnoff to many buyers. And depending upon the size of the assessment, you may strain the resources of some shareholders. Not everyone can cough up a ton of money all of a sudden. If you suddenly learn that the sidewalk vault has to be rebuilt for $300,000 or the windows replaced for $500,000 or the facade overhauled under Local Law 11 after decades of only cosmetic repairs for $2,000,000, what are you going to do? Come up with thousands upon thousands of dollars per shareholder? Get special assessments every 10 minutes for every nickel and dime improvement/repair that is needed? A $500,000 reserve is a nice cushion to allow assessments to be smaller and well-spaced out without costing the building senseless interest payments on a line of credit. All things being equal, I would absolutely not get myself into a situation where a building had a miniscule reserve. I don't want to trust that all my neighbors have the ability to come up with major money if the building needs it, and I like predictability in my monthly expenses.

what about a CONDO that was just formed, new development that took over a couple of months ago, there have been some issues, where property manager has been changed over 4 times, (one mishandled funds), other conflict, third is incompetent, and 4th is beginning in a 2 weeks. the question is since there is no handle on what the real maintenance is how do you value the property? do you just run away from the building? or do you grind out and plant your feet? i just don't know where the maintenance will be? and there are no reserves, does the condo need the same reserves? no underlying mortgage? No line of credit? NO clue what to do?

One other thing to consider bramstar is that 2007 was a very expensive year for most buildings. Fuel costs have doubled, labor continues to increase, and Local Law 11 impacted a lot of buildings last year. My building ran closer to the red last year than any year prior. It would be a good idea to check the last 3-5 years reserve history to determine if this is anomaly or concerning trend.

JuiceMan makes an excellent point about building history; at the same time, check the composition of the board to see if it has shifted recently. It would say different things to me if a building was suddenly running lean under a sitting board than if it had gone close to the bone under a new board.

I would find the latter case a sign of a change in philosophy and/or inexperience, and I would regard it as much more of a red flag.

ali r.
{downtown broker]

I'm aware of a building that decided to spend down the reserve fund and use a line of credit for liquidity. They have no concept of the repairs and maintenance they are facing, the building continues to become shabbier because of lack of maintenance (squeezing each nickel because they have no money) and fuel costs and other costs will be through the roof. They think they are being smart about financial management, but every decision they make scares potential buyers, and the prices are hurting significantly.

This sounds like a poorly-managed building. Even with a LOC available, you're probably paying a higher rate than you would otherwise because of the lack of cash on reserve. Many people like consistancy in what they have to pay, i.e. maintenance, instead of being hit up w assessments or increases all the time.

Speaking of which, bramstar what's the current maintenance per sq foot? Is it reasonsble?

Also, you can't really rely on coop meeting minutes. Many boards don't provide detailed minutes because they don't want to be held liable for something.

Uptowngal--the maintenance is currently $2127 for roughly 1800 sq ft. About $117 of that represents an assessment for capital repairs in place til 2010 (why am I not surprised?).

I've had my attorney look at all the documents as well as clarify with the building's manager and accountant, so I'm confident that the cash reserve figure is accurate.

They have a paltry $100K in reserve, have already instituted a 2-year special assessment, and have no contingency plan other than to immediately borrow money for repairs/fuel costs or raise maintenance as the winter fuel bills come in? I don't like the sound of any of it. Why are you still considering this building? Have apartment values been tracking the market for the past 3 years or are sales figures out of whack too?

They have a paltry $100K in reserve, have already instituted a 2-year special assessment, and have no contingency plan other than to immediately borrow money for repairs/fuel costs or raise maintenance as the winter fuel bills come in? I don't like the sound of any of it. Why are you still considering this building? Have apartment values been tracking the market for the past 3 years or are sales figures out of whack too?

Kyle--

You raise good points. The reason we're still chewing on this is that we do like the apartment very much. As for sales figures, it is a bit hard to tell, as there haven't been a great number of recent listings. It does appear that a couple of recent sales were roughly on par with market ($1.3ish for a 2-BR, 1.5 bath, less for 1-BRs). The place we're looking at is asking the highest price (by about $1 mil) that I've seen for the building, presumably because of the unusually good views. It should be noted, though, that the same unit (on a higher floor) sold in 2002 for roughly half of the price of the place we're looking at, which also gives me pause.

It sounds like you are happy with the building and happy with the sales price but (appropriately) concerned about the maintenance. Here are a few things I would ask:
Does the building have a real budget?
What have they done or will they do about locking in fuel costs for the coming winter?
Do they have a five year plan for capital items?
What is the level of deferred maintenance? In other words, what have they been neglecting?
How old is the boiler?
How old is the roof?
How old are the elevators?
Are they done with the latest round of Local Law 11?

This is just a start. All it will tell you is whether there is a greater or lesser likelihood of significant costs about to hit them. Even if there is a low likelihood, it could still happen--a narrow, but deep risk. So, you should also think about what happens if there is an unexpected problem with the building. Can you handle a 5% increase in maintenance? 10%? Where is your breaking point, both from the point of view of what you can afford to pay, and what you would be willing to pay. Because with essentially no reserve, if there is a problem with the building's finances, it will come to the owners very rapidly.

My question is why wouldn't you be worried about the bldgs financial. This is probably your largest purchase and you're not sure if you should be worried. Common Sense!!!!

I agree, Julia, but my question was whether having such a small reserve was truly something to be concerned about--honestly, until reading these posts I wasn't fully aware as to how problematic it potentially could be.

innocentbystander--Thanks for the suggestions. I do know the building recently replaced the boiler (and tenants are currently being assessed accordingly), so that is not a future project, luckily. Lobby and elevators 'look' great, but who can say whether they'll need any updating. Local Law 11 is all done for this building, which is encouraging. No clue on any 5-yr plans. I do know they have present obligations, though apparently no deficit.

You really love the apartment & that's great, of course, but are those views that you're paying for secure or will you wake up some day & find a highrise there? Also, on the financials, we're talking about our homes so I think we're activating a different part of the brain but with co-ops, particularly, you're really investing in a BUSINESS so is this a business that you feel good about investing in, the way it's run & the business philosophy? Good luck!

I'm now considering lowering my offer based on the concerns about the building's financials--that would allow me some extra pad if there are future maintenance increases/assessments. Does that make any sense at all?

I would also be concerned about future valuation of my apartment in that building. If maintenance starts soaring and special assessments are constantly issued and the reserve fund doesn't grow, value will most surely be impacted. Yes, lowering the price to give you financial resources to personally hold in reserve for rainy days is wise, but I would be considering whether the unit will hold its value or if instead the building is on the cusp on taking a serious hit to the value of the units. Personally, way too much risk from what you've described for my liking. It's a big city. I'd find something with fewer question marks and more conservative management and stability. I don't have a stomach for headaches involving the fundamentals of my largest asset.

Kyle, you make a very valid point. I do know that the building had better reserves in 2006 and 2005 ($244,000 and $268,000 respectively), so this extremely low reserve may be unusual. But, it still gives me major pause for concern, and the '05 and '06 reserve figures aren't stellar either.

The recent boiler update may be part of the issue, plus I understand their local law 11 work is now completed, which also could have taken a bite out of the reserve. What's frustrating is it is simply impossible to know what their future plans may be. They might be able to create a more sufficient reserve when they refinance their mortgage in 2010, but who knows?

As of now we've told the seller we aren't comfortable with the original asking price, given the apparently weak financials, and are reconsidering our offer.

Update--

We withdrew our original offer, submitted a lower price, citing our concern about the weak building financials. Seller agreed to the lower price, but insisted on a non-contingent deal, giving us a deadline to sign (today) or 'the deal is off'. We're not concerned about financing for ourselves, BUT worry that something could affect the our being able to get a full loan, such as a low appraisal. So, we're sticking to our guns, and the deal may just go poof.