From the Editor:
 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
pat@firstfunding.com. I welcome your feedback.
Patrick B. Niland
President
First Funding of New York
©1998 by Patrick B. Niland |
The Business
of Running a Cooperative
The planned approach to a solid financial future.
Like the executives of any corporation, co-op board members often are confronted by
difficult or controversial decisions. However, unlike the decisions of other corporate
boards whose shareholders are rather anonymous, those of a co-op board have the real and
familiar faces of friends and neighbors. While this familiarity may complicate a board
member's decision-making, it does not relieve them of their fiduciary responsibility to
run their property for the benefit of all shareholders-not just the vocal ones or
the ones down the hall.
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.
2. Work needed before year 5.
3. Work needed in years 5 to 10.
4. Work needed after year 10.
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:
- Sustain higher apartment values relative to neighboring properties through rigorous cost
control, regular cosmetic improvements, and annual preventative repairs. Limit maintenance
increases to 2% per year.
- Build a working capital reserve equal to three months of budgeted operating expenses,
plus a separate reserve for roof and boiler replacement. Pass a special assessment to fund
the roof and boiler repairs, and collect it over the next eighteen months. Begin work the
following spring.
- Complete all repairs and system upgrades recommended by the engineer within three years.
Obtain needed funds through a mortgage refinancing before the end of this year.
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. |
