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Category: Financials


The 10% Solution

November 15th, 2011 — 4:20pm

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An important factor in buying or selling an apartment is whether the building itself has been approved by one of the three government entities (or quasi-government entities) involved in the home lending industry.

Approval allows a purchaser’s loan to be either sold by the lender to Fannie or Freddie (buyers of home mortgages) or be insured by the Federal Housing Administration (the “FHA,” a loan insurer).  Approval is important even for the “all cash” buyer because their eventual buyer might need a loan and sellers need to know if their building is approved when figuring out how to market the apartment. Continue reading »

Over the years, Fannie Mae, Freddie Mac and the FHA have been implementing more restrictive guidelines to obtain approval.  A recent change requires a lender to review a condominium’s budget to determine that it is adequate and, among other things, provides for an amount equal to 10% of the annual operating budget to be set aside in a reserve fund for capital expenditures and deferred maintenance[1].

This new requirement is applicable to all condominiums, but in the case of a new condominium (gut and non-gut rehab), a reserve study is mandatory requirement for approval.

A reserve study is an in-depth evaluation of a the useful life, remaining useful life, current repair and replacement costs for each reserve component, a review of future funding and an analysis of existing reserve funds.  The reserve study will detail anticipated replacements or repairs to common-area elements and recommend an annual reserve funding to cover future capital expenditures.

If the condominium’s budget does not meet this 10% requirement the condominium might still be approved if a reserve study confirms that the financial condition of the development is stable (FHA Mortgagee Letter 2009-46b , Section V(11)).  If Fannie, Freddie or the FHA is satisfied with the financial condition of the building and that the reserves are adequate despite having less than 10% of the condo’s budget in a reserve account, the requirement can be waived.

In today’s market, many sponsors and developers obtain pre-approval by Fannie, Freddie or the FHA thereby opening their projects to purchasers who will be using Fannie, Freddie or FHA loan products.

Given the current economic climate, it seems prudent for sellers to strive to have their buildings meet the new reserve requirement and for buyers to focus in on this issue.  One can determine if the FHA has approved a condo at HUD.gov although the site is a bit cumbersome to navigate through.

By Jerome J. Strelov and Nahum M. Palefski

[1]              The new guidelines discussed in this post apply mainly to condominium developments.  The guidelines are not mandatory for co-ops, but could be applied on a case by case basis by the various approving entities.

Comment » | Financial Statements, Financials, Get the Co-op in order, The Buyers World, The Sellers World

Financial Statements: The Good, The Bad and The Ugly

March 8th, 2011 — 6:24pm

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Keep Your Eye On The  Ball:   When purchasing a co-op apartment, a purchaser is actually buying shares of a corporation and not just an apartment.  I imagine that most people would not invest a large sum of money in any other business without knowing the financial condition of the business.  Yet, when it comes to buying a co-op, most people never think of asking how the co-op’s business is doing. Continue reading »

After your offer is accepted, your attorney will receive a proposed contract and most likely several documents among them being a few years worth of financial statements.  These statements will show the co-op’s balance sheet and net income or loss. An accountant with knowledge of co-ops should review the financial statements, but you, the buyer, should also take a look to get at least a general idea of what is going on in the business of running the co-op.

As a general rule, you will receive at least three years of past financial statements. For example, if buying an apartment in 2011, you will have the 2010-2009 and the 2009-2008 financials.  By looking into the past, you are attempting to predict how the co-op will operate in the future.

Here are some basic tips of what to look for:

1)    Changes in Maintenance.  The maintenance receipts should be more or less constant.  If maintenance has been increasing each year then you should question why.  It might be that overall costs have simply gone up throughout the City (like fuel and taxes) and that should not be of concern.  But it could also reveal poor management.  Similarly, in the unlikely event that you see a decrease in maintenance, you should find out what happened.  For example: Did several shareholders not pay their maintenance?  If so, did they have a good reason or did they just run out of money?  If the former, make sure the reason no longer exists and if the latter, be prepared for this problem to continue and think about the consequences if the co-op needs to raise more money by way of assessments or further in maintenance.

2)    High Legal Fees: This can be the Ugly.  Find out why.  When legal fees are high it may be an indication that the co-op is involved in litigation that is not covered by insurance, and if so, try to get a handle on the merits of the lawsuit and the possible negative impact.

3)    Decreases in Expenses: This is generally the Good but might be the Bad. A decrease in expenses usually indicates that the co-op is well managed. For example, if heating costs went down, either everyone is freezing or more likely the co-op implemented some energy saving methods or devices.  However, a decrease in wages could mean that the doormen are no longer 24/7.  It is important to find out why the expenses went down.

4)    The Notes:  The devil is in the details.  The financial statements will almost always have references to notes located at the end of the statements after you are dizzy from the read. Yet these notes are important and the good news is they are often the most readable.  Written in prose for the most part, they let you know how many apartments make up the co-op (think how many people will share an assessment if there is a big problem), whether  there were recent major repairs, when the mortgage is due and other information which you might want or need to know about.

These financial statements are not easy to decipher and sometimes will not make any sense at all.  But they can be indicators of how the co-op has been and will be run in the future.  I think it’s a good idea to see what they reveal so you can have a knowledgeable conversation with your accountant and attorney before you sign on the dotted line.  After all, after you close the apartment these will be the numbers of YOUR BUSINESS.

Although this post focuses on co-op apartments, a purchaser would have many of the same concerns with the purchase of a condominium apartment even though you are technically not buying shares of a corporation because condo owners still have to deal with, among other things, common charges, assessments and repairs to the building.

2 comments » | Do Your Diligence, Financial Statements, Financials, News

Local Law 84/09 and Benchmarking

February 6th, 2011 — 4:15pm

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It’s Not Easy Being Green.

Just when you thought you were starting to get a handle on this market, there is now something new to ponder.   New York City Local Law 84/09 requires that by May 1, 2011 buildings that are 50,000 square feet or larger will have to report to the City their usage for electricity, gas, fuel oil, steam and if equipped with an automatic meter reading equipment, water. Continue reading »

The Department of Buildings has generated a list of all buildings that must make such reports

This information will be available to the public for residential buildings starting September 1, 2013.  It will be interesting to see what influence, if any, this will have on prices of individual apartment units.  I suspect it will have an affect in buildings having an energy usage that varies widely with other similar buildings. It will be one more factor for buyers to consider in this age of increasing energy costs and so sellers should be thinking about this data in determining the selling price.  It could be a positive or negative depending upon the situation.  I can just imagine a broker advising a client about the benefits of being in an energy efficient building so that maintenance or common charges wouldn’t be as likely to increase. I can also hear a lawyer warning a client about the possibility of maintenance or common charge increases due to the energy inefficiency of a building. This seems like a good time for co-ops and condos to consider the costs and benefits of becoming more energy efficient so as not to hamper sales in the future when this information goes viral.

3 comments » | Do Your Diligence, Financials, Going Green, News, The Sellers World

Not All Assessments Are Bad Assessments

January 24th, 2011 — 9:23am

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While conducting due diligence on behalf of clients in connection with co-op purchases, we have encountered situations where co-op corporations have instituted assessments on all of the tenants’ shares.  While the existence of most assessments can be telling concerning the overall financial health of a building, a yearly assessment to offset the building’s real estate tax abatement is a typical practice in New York City and not an assessment that should concern a potential purchaser. Continue reading »

New York City provides a tax abatement for all residential co-op units, with the exception of units owned by sponsors, or owned by person who own more than 3 units in the development, and those used for non-residential purposes.

By law, these tax abatement savings must be credited to each eligible unit.  In condos, the savings go to the condo owners and are reflected on the unit owner’s individual tax bill.  However, in co-ops, the tax abatement savings go to the corporation which credits them to each eligible unit.  Co-op boards typically elect to recapture the tax abatement for the general expenses of the building or to increase the reserve fund.  To do this, co-op boards typically impose an assessment for roughly the same amount as the abatement, thereby effectively canceling the abatement.

For further information on NYC’s  property tax abatement program, click here

Nahum Palefski

Nahum is an associate attorney at the Law Offices of Jerome J. Strelov and concentrates on real estate matters.

Comments Off on Not All Assessments Are Bad Assessments | Can you Afford it?, Financials, News

Buying With Eyes Wide Shut

January 19th, 2011 — 1:18pm

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It’s not just four walls!
The client calls and says that they have finally found the apartment they have been searching for. The broker is sending the deal memo today and by the way, since there is another buyer lurking, can the contract be signed by the end of the week?

The answer is simple. Yes we can BUT. Do you really want to buy an apartment in a building you know nothing about?
Would you like to know if there has been a bedbug problem? Continue reading »

Leaks in your apartment line? If the co-op or condo is embroiled in litigation? Are there major capital improvements required or underway? Can the building afford them? Are there thefts in the building? Crazy loud neighbors? Does that seemingly quiet restaurant on the ground floor turn into a raging club on Friday and Saturday nights? Does the smell of hamburgers and fries from the restaurant on the ground floor vent onto your rooftop terrace? Will your maintenance or common charges skyrocket? Will there be unexpected assessments? Can the co-op’s maintenance cover its operating expenses or does it depend on the flip tax and assessments to meet its current obligations.
If you will be buying regardless of these and other issues, then, by all means, sign the contract as delivered by the seller, show up at the closing with your checkbook, and pay and pray.
Oddly enough, most buyers don’t realize that when they are buying a co-op or a condo they are effectively buying into a business. In a co-op it’s a bit more obvious because they are buying shares in the co-operative corporation but it is essentially the same thing for a condo.
So, its not just the four walls of the apartment you are buying. It is the financial and structural integrity of the co-op or condo. It is how the place you are going to live in operates. Does it allow pets? Big ones? How does it handle sublets? Are there a lot of non-owners living there and how will that affect your quality of life?
So, if you are concerned about knowing these things find a lawyer who will take the care, attention and time it takes to discover problems or hopefully, the absence of anything too serious.
Every building has issues. No place is perfect. But it’s nice to know just where the imperfections are so you can make an informed decision and not one simply based on the four walls that will be surrounding you.

Comment » | Do Your Diligence, Financials, Find a Lawyer, Fly-By, News, The Buyers World

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