All-Cash HDFCs - Any upside?

The answer - it depends.

In most instances, it is a substantial red flag. I did one HDFC sale where the building owned the unit, was selling it at a discount to the market- and didn't want to deal with the added paperwork and headaches of a bank. The building owed some money to the city- but the sale would more than cover it, and they had additional units if they ever needed to raise large sums of cash again. This does happen from time to time and while some banks would have underwritten in the building, their cash situation wasn't great. Overall this was an amazing deal for my client. The building has since had some additional sales, and the flip taxes have given them a decent reserve.

Ultimately- if the building is all cash but has strong financials- more of a board view that they don't want buyers that could be at risk with a mortgage- then it's not too concerning. That isn't often the case with most HDFC's though.

That said, most of the all cash required HDFC sales, I come across are high risk with any potential upside being far into the very distant future. Frequently, these are poorly maintained buildings that banks don't want to underwrite in. I usually advise clients that the majority of the all cash HDFC's aren't worth the risk but there are always exceptions.

What constitutes strong or bad financials? A debt/budget ratio? Is this something a layperson could understand at a glance, or would require a lawyer?

FWIW, I'm looking at a unit at 648 Grand St that has been sitting for quite a while. It hasn't been lived in since being renovated for sale, but I'm sure looks have nothing to do with the underlying financials of the building.

You don't need an attorney, but you do need someone who is familiar with Coop financials (I once had a deal crater because a buyer insisted that the Coop was a land lease building - how he came up with that I'll never know. I've also had deals crater because "the Coop is losing money" when almost all Coops "lose money" through depreciation some they don't have to pay income tax). You need to look at the balance sheet, the income & expense statement and the cash flow. Is the statement audited? Are there warnings in the accountants notes? Remember even if it's audited the accountant works for the Coop Board.

Some HDFCs are much better than the self-claimed high end, upper class, luxury COOPs indeed.

I know some HDFCs that own the land, the building, no underlying mortgage, and having a big cash reserve in millions of dollars. Most of them are converted from run-down buildings with very few remaining tenants, so they can sell a lot of vacant units and become rich. As a result, most new incoming shareholders are young middle class. They often found a functioning board and do self-management, even though some power struggle as well, but they are much more reasonable than those sicken boards and managements in UES and UWS. These types of HDFCs are best for primary residence.

Some of these HDFCs don't want to deal with bank inquires, so they prefer all-cash deals, nothing wrong with it. Since most of them are first-time owners, they are not used to many common COOP methods, such as operate in a loss, which is a typical accounting tactic, and many of them even got freak out by the paragraph saying something like "the building hasn't conduct a study of equipment life" in the financial statement, which 99% of coops out there are like that.

On the other hand, there are some HDFCs in bad shape, owes money and no assets. But living in such building can save you a lot of money. Their advantage is , as long as they keep operating, the city would continue to bail them out by slashing RE tax, water bill, and even give them grants to pay for energy.

In my experience there are few HDFC with no underlying mortgage. There are a bunch which haven't been properly collecting flip taxes and enough which aren't doing proper management/accounting that at least 39 got snagged in that TPT program
https://www.politico.com/states/new-york/albany/story/2018/07/17/ownership-of-95-distressed-buildings-to-be-transferred-amid-broader-consideration-of-co-op-reform-515589
and the DeBlasio was a hair away from implementing strict rules which would require city monitors for oversight.

Anton presents a brighter picture than I would paint. I can't recommend these insolvent buildings to my clients without substantial warning that the building could eventually fall into that TPT program- which could result in a loss of all equity. While this doesn't apply to every all cash HDFC - it does capture a lot of them. Even if the risk of a TPT is extremely low, why would you want to invest your hard earned money into a building where the board or fellow owners aren't continuing to invest properly into their own property.

You saying under these circumstances, the city could completely repossess your building without compensation?

What compensation is due? Let's just say for example that the building owes the city $500,000 in past due water/sewer and tax bills. There are HDFC's (typically the one's that are all cash sales) that just don't have the ability to pay the city back. Instead of a traditional foreclosure- they have this TPT program. HDFC's are limited equity co-op's and most people don't understand the limited-equity aspect.

Most HDFC coops (at least when they start out) are supposed to be collecting a 70% flip tax (no that's not a typo). 30% to go to the coop and 40% to go to the city to help further fund the program. There are a number of coops which ignored this mandate so owners could cash out. If the city ever comes after these coops for that money how are they ever going to come up with it?

They'll have to sue.

For most HDFC found after 2004, I believe the 30% of profit flip tax all goes to the building, maybe for newer buildings, they also need to give some back to the city, but i didn't see such ones yet.

If most shareholders are original tenants, most likely the HDFC will go under again. But if most shareholders moved in within last few years, then this building has much potential.

I also looked at a unit in 648 Grand street and had similar reservations about the all-cash requirement. The unit I saw had been vacant for some time and IMO the asking price was far too high. Something was wrong with the whole picture.

UptownSpecialist - Thank you for your thoughtful response