With the excitement of the holidays now behind us, our thoughts soon will be drawn to the joys (and warmth) of spring. These thoughts of spring will, in turn, lead most boards to discussions about repairs that must begin once the weather breaks.
Planning carefully for those repairs now--including setting priorities and determining where the money will come from-will help boards avoid expensive problems later. Therefore, it is essential that every board develop a long-range plan for their co-op. Like computer equipment, buildings need periodic servicing and upgrading to maintain peak efficiency. By deferring maintenance, an imprudent board will inevitably lead their co-op down the path to diminished shareholder values.
The lead story in this issue, "The Business of Running a Cooperative," provides a helpful guide for board members who would like to create a long-range plan for their building. This guide explains the steps that are necessary to develop and implement a plan that really works.
Board members who fail to develop a long-term plan will likely spend their time handling one emergency after another. On the other hand, those who do implement such a plan will ensure the structural and financial stability of their building for many years to come.
As always, thank you for reading. Please e-mail me your thoughts and ideas at firstname.lastname@example.org. I welcome your feedback.
Patrick B. Niland
©1998 by Patrick B. Niland
The planned approach to a solid financial future.
It's a Business
First, all co-op board members need to disabuse themselves of the notion that their cooperative is some form of residential welfare state. They need to look in the mirror each morning and say, "My co-op is a business, and I will run it like one." Board members need to bring the same careful planning, impartial analysis, hard work, and sound judgment that they use in their "day job" to the management of their co-op.
Call in the Pros
Board members should sit down with their managing agent and accountant to review their property's performance over the past five years. Look for trends and problem areas, and even evaluate the way in which any past emergencies were handled.
The managing agent and accountant also should collaborate on the preparation of a realistic budget for each of the next five years. Each year's budget should include allocations for routine and preventative maintenance, contributions toward major capital improvements, plus an allowance for unexpected items. For the best projections of future capital items, the board should hire an engineer to perform a roof-to-cellar inspection of their building. The cost of such an inspection will run from $2,000 to $3,000 for a 10-unit building to $5,000 to $6,000 for a building of a hundred units. The engineer's report should contain four categories:
1. Work needed now.
Within these categories, the engineer should estimate the cost of eachproject and then list them in order of importance.
Ask the Shareholders
The board of every corporation must be responsive to its shareholders. This is especially true for co-op boards. When I was president of my co-op, I quickly learned that a proactive (versus a reactive) approach was best. To find out what shareholders are thinking, board members should contact them on a regular basis to gather their opinions about budget priorities, spending plans, and policy changes.
Understanding the relative importance of shareholder concerns will guide boards toward decisions that will be supported by the majority of their neighbors. It rarely is possible to satisfy everyone; but giving shareholders the opportunity to express their fears and desires will go a long way toward gaining acceptance for tough decisions.
Assemble a Plan
Finally, boards should combine all of the information from their engineer's report with input from their other professional advisors to develop a long-term plan for their building. This plan should include specific, measurable goals like:
Make it Happen
As the management gurus often preach, "Plan your work, then work your plan." Sounds easy, right? Unfortunately, most boards will discover that implementing their plan will be the most challenging part of the process. However, by educating their shareholders upfront and then communicating with them on a regular basis, the board can attain its long-term goals with few serious problems.
Leave a Legacy
A comprehensive, financially-sound, long-range plan is one of the most valuable legacies a board can leave. It certainly will not be easy, but such a plan will have far-reaching and long-lasting effects on both the financial stability of the cooperative and the market value of every unit in the building. Boards that fail to plan for the future will be battered by unexpected emergencies and repeated financial crises. Those that plan wisely will reap tremendous rewards and enjoy peace of mind.
|Building Name or
62-92 SELFRIDGE ST.
A 6 story, 66 unit building with garage that was converted in
|Forest Hills||$1,300,000||25 years||9.37%|
|1110 CATON AVE.
A 4-story, 32-unit building in the Midwood/Flatbush neighborhood that was
converted in 1987.
180 EAST HARTSDALE AVE.
A 6-story, 48 unit brick
apartment building with garage that was converted in 1982.
|27 PROSPECT PARK WEST
A classic 16-story, 32-unit prewar apartment building facing Prospect
Park. It was converted in 1970.
|Park Slope||$1,000,000||15 years||7.83%|
Q. How early should we begin looking for a new mortgage?
A. Unless your existing loan has a very high interest rate, or you need extra money for major repairs, you should enter the market no earlier than 18 months and no later than 6 months before the maturity of your current loan.
Q. Our co-op is considering hiring a mortgage broker to refinance our underlying mortgage. How should we go about finding one we trust?
A. You find a good mortgage broker in the same way you find a good managing agent, attorney, or accountant. Ask your professional advisors for a recommendation, interview two or three candidates, and check their references. Then hire just one broker (never two) to represent you.
Q. What is the minimum difference between prevailing interest rates and our existing mortgage rate that would make it worthwhile to refinance our underlying mortgage?
A. There used to be a rule of thumb that a difference of 2% was enough to justify a refinancing. But today's complex loan structures and yield maintenance prepayment penalties make such generalizations obsolete. For some situations, 1% is enough; for others, 3% isn't. Now, more than ever, it pays to "do the numbers."
If you have a question for "Refi Whys and Wherefores," please e-mail it to email@example.com, fax it to the publisher at (716) 473-6305, or snail-mail it to our office.