Once you’ve found your condo or co-op, but before any money changes hands, you need to take a look at the building’s financial statements. (Your broker will be able to get a copy.) This step is important, because while you may be a financially stable person, your finances will now also be tied to your neighbors and to how the building is collectively run. If the building’s statements show anything that you do not understand, you need to have an accountant or someone with financial expertise to review them and explain to you what they mean. In other words, even if numbers are not your thing, you should understand these financials.
7 Items to Check:
1. Are the financial statements audited? If they are, it will say so right up front. Ideally, you want audited financials, but a small building (under 10 or so units) might not want to spend money on an audit and will just have their CPA prepare the statements (called compilation or review) without an audit verification. In a large building, anything less than audited financials is a red flag.
2. Is the audit opinion “clean”? Again, you’ll see it in the CPA’s report before any numbers. It should just say that the statements present fairly the financial position and cash flows of the building. If there are qualifiers to that simple statement, it’s a red flag.
3. Look at the Balance Sheet:
- Cash. Has it changed from the year before? How does it compare to building’s annual expenses? It should be at least enough to cover a month of the building’s expenses and still leave healthy amount for a reserve fund. (See #6 below.)
- Receivables. This is the money your fellow condo or co-op owners owe the building for common charges or maintenance. If it is more that 10% of annual fees, it may mean some of your neighbors are deadbeats.
- Accounts Payable. This is the money the building owes for taxes, vendors and employees. Anything more than 10% of annual expenses shows that bills take more than a customary 30-45 days to pay, indicating cash flow problems.
- Mortgage Payable. This is the building’s mortgage, not the mortgage you will have on your unit. (Note that a building-wide mortgage only applies to Co-ops.) Look at the notes in the end of the CPA’s report to see when the mortgage is due and what the interest rate is. If the rates are going up and the due date is approaching, you’ll know that your monthly fees will go up.
- Retained Earnings. A large negative number indicates that the building is run at a loss, which may lead to large common charge or maintenance increases, or special assessments.
4. Look at the Income Statement.
- Fees from owners vs. commercial rents. In buildings with commercial property, you’d like to see a significant amount of income coming from commercial rents (such as stores and a parking garage) because that helps keep the shareholders’ maintenance fees down. (The old restrictive 80/20 rule that limited commercial rents to 20% of a co-op’s total income, in order to maintain shareholders’ tax benefits, was changed a few years ago. There are now some lucky buildings where maintenance fees are more than paid for by commercial rents, as described in this New York Times article.)
5. Look at the Cash Flow Statement.
- Is the building cash positive, i.e. taking in at least as much money as it pays out? If not, your monthly fees will have to go up.
- Are there any unusual items compared to the prior year. Perhaps there are big expenses for capital improvements (new elevators, roof, hallways and the like). That would be good news because you would not be hit for those expenses.
6. Evaluate The Building’s Reserve Fund.
A well-run building will have enough money in a reserve fund to cover 3 to 6 months worth of expenses. However, there are buildings that keep maintenance fees low and use special assessments when something big needs to get done. As long as you know how the building operates, you can budget your expenses accordingly. If the building does not have much of a reserve fund, you need to have one personally. Typically, the major expenses would be heating/air conditioning systems, roof, building façade work, elevators and lobby and hallway renovations. If all of that work has been done recently, a smaller reserve may be enough. If none of it is has been done, then you’d like to see higher reserve.
7. Read the Notes to the Financial Statements.
This is the section that you will read very thoroughly. If there are any potential landmines in the building’s finances, this is where they are hidden. Watch out for statements about tax problems, pending litigation, upcoming major repairs and expiring commercial leases. These are the types of problem areas that can have severe impact on your fees and maintenance, or result in an assessment.