Low reserves due to boiler/roof updates

What has your attorney found in the board minutes on this? (If you are that far along in the pre-contract process...) At minimum the basics should be there.

You might ask to review a few more years of prior financial statements to verify the reserve was large previously, and what it was spent on recently, if your assumption is correct.

My amateur impression is that reserves do run 'low' after major projects but that this seems very low. You could do a little math based on the per-share assessments announced so far, which appear to be sizable on top of regular maintenance, to see how much more cash could be required to bring the overall reserve back to a healthier %.

You should also ask about what other major repairs/replacements are being planned for. For example, new or replacement machinery in elevators? That goes on for months. Lobby renovation/decor? Individual floor hallway decor/refurbishing? And you should also investigate the history of what has happened in the building when an assessment ends. In my Co-Op without fail, the day an assessment ends, the Board raises the maintenance the exact same amount!

My attorney doesn't have a copy of the board minutes and asked me to contact the management directly. I also reached out to the seller's agent and was told that the attorney need to go to the management office to view them. I'm still trying to sort that part out.

Based on the financial statements, in the beginning of 2012, the reserve was less than 1%. Then the co op went into mortgage refinance and received hefty proceeds from the event. This inflated the reserve to more than 50% of annual expenses at year end. The projects started in 2013 and that sucked the reserve dry - got depleted to only ~15% of annual expenses, subsequently, in 2014 to less than 5%.

Note that there hasn't been any increase in maintenance in the last 3 years and expenses seems consistent year over year. There are no plans in the foreseeable future of other renovations. There were other assessments in prior years but it doesn't seem like it resulted in any maintenance increase.

I don't understand the low reserves. Is the board not collecting enough maintenance fee from the shareholders? If so, it seems very likely that they'll increase the maintenance fee in the near future. I can do 5% but 20% increase in maintenance would be insane...

I'm not very knowledgeable about what lenders require, but you might want to run those numbers past your lender to see if they are acceptable. BTW our condo building imposed a 100% assessment for a year. I had a colleague whose building imposed a $100,000 assessment on her TriBeCa condo, an expensive property yes but it was still an amount that literally drove her to tears. So just realize these boards can do whatever they damn well please, unless a condo's by-laws require a super majority for an increase beyond a certain threshhold.

I believe Fannie Mae requires the reserves to equal 10 % of the budget. It might be a good idea to get a preapproval from a bank.
Some of the banks I work with issue this at no charge.

Ellen Silverman
E.S. Funding Co.
Licensed Mortgafe Broker, NMLS #60631
esfundingco@aol.com

Your attorney MUST to go to the management office to review board minutes. Some send an experienced paralegal but there is generally no other way (the management won't send copies). If this attorney won't, get another fast.

The repairs/reserve is a known issue and who knows what else they may uncover -- maybe the board is suing the apartment above for cigarette smoke persistently leaking into adjacent apartments, or something like that. Or there was an employee injury two years ago likely to result in a lawsuit/settlement shortly.

Some boards take the minutes as if writing haiku poetry. Might be a good idea to ask your atty how detailed the minutes seemed to be before you sign.

I think due diligence is essentially impossible in some buildings. I've read the minutes in a couple of buildings where I've owned, and I was shocked in one building how much of vital importance was left out of the minutes.

I now feel buyers would need to search DOB records themselves, and look for HPD violations and complaints, and search court records directly. However, mandatory arbitration often comes with confidentiality requirements, as can settlement agreements. As justice becomes privatized with arbitration, there is less and less available in the public record.

I know an attorney who sends his paralegal to read the board minutes. That particular paralegal is not good at this, for reasons that became obvious later. With all due respect to paralegals, buyers need somebody with enough experience to read between the lines. Very few paralegals have that, some attorneys don't have that.

The larger problem is, no body has any incentive for buyers to know the truth about a building--certainly not the real estate agents, not the attorneys, certainly not the sellers, not the people currently living there. Usually the buyers themselves don't want to know the truth. They want to buy a home, this pretty apartment, they've been looking for months or years, they're tired of the game. They just want to close.

Everybody has to live somewhere. Co-ops and condos are for gamblers. If you want more of a sure thing in NYC, you have to rent, or perhaps buy a row house.

Some boards choose to run their building with minimal reserves, working under the understanding that owners have access to cash reserves and can pay assessments upon demand. This is better economically for the unit owners, as they can put the money to more productive uses than sitting in a reserve fund. It does require that residents have access to liquid funds, and works better in a small building of multi-millionaires.

My building (which is large, and not full of multi-millionaires) chooses to maintain a large reserve, and not hit up the residents with large one-off assessments.

Your broker and/or the sellers broker need to find out what the general financial 'tone' of the board is, and their approach to managing the building's finances, and then you need to decide how their financial management fits in with your own resources. It's often hard to do from the haiku of board minutes (love that phrase!), but figuring out whether you and the building are financially compatible is a key piece of due diligence.

That is a very low reserve amount. Many co-ops use a combination of reserve funds and assessments to pay for capital projects. If the reserve fund is running low after the recent boiler and roof work, then to the extent that the co-op has capital projects coming up, the shareholders will likely shoulder the majority of those costs in the form of an assessment. Many co-ops also have lines of credit to draw down on in the event of unforeseen repairs or replacements. If there are no foreseeable capital projects on the horizon (and every well-managed co-op should have a capital plan, so the managing agent should be able to tell you), then the reserve fund should have a decent opportunity to be replenished before it needs to be tapped again. Typically, reserve funds are replenished with assessments, flip taxes and/or a mortgage refinance (which you said recently occurred) – they are not often replenished by increased maintenance charges. This is all information that will not be gleaned from the board minutes, but rather from a detailed questionnaire presented to the managing agent and review of the financial statements.

Whatever you do, you need to continue conducting extensive diligence on this co-op before proceeding so that you can get as comfortable as possible about what you are buying into.

Regarding your mortgage loan, Citi and Wells will typically approve a co-op at no charge to you. Even if you have a mortgage contingency, it is always advisable to contact your mortgage lender to see if a building is approved before proceeding.

Dan Gotlieb
Digs Realty Group
www.digsrealtynyc.com

Reserves should be 10% + of the annual budget at a minimum - a financially strong building would have 15% as a goal

10 % of the budget for reserves are required by the banks. It is a Fannie Mae requirement. A lender could make an exception. But no lender can preapprove you without a completed co-op questionnaire. It is possible that they could have the co-op on their approval list if there are many sales. That said many lenders issue preapprovals that are not very binding. For instance they don't ask for proof of income. There are a few lenders that actually issue a commitment before a contract is signed, but it's not Wells or Citi.
By the way what is the existing maintenance of the apartment you want to purchase.

This is a 1br coop with maintenance in the $600s that includes all but gas. This led me to believe that the coop finance should be good considering the low maintenance. There has been over half a dozen sales in that coop this year shown on streeteasy...Not sure how the mortgages were approved with such a low reserve unless it's all cash purchase.

which building is this?