“We will build a wall … “

No, not that wall … this one:

As promised last year, the Grand Street security fence has started to be erected between buildings 1 and 2 on the south side of the street. East River maintenance workers were outside yesterday and today putting in the first stretch of ironwork, which will, when finished, be painted black with gold spikes, just like the fence in front of the Hillman playground up the street.

As noted by board president Gary Altman in last year’s annual report, the total cost of these fences is expected to be a mere $45,000 because all the fabrication and installation is being done in-house.

Altman emphasized that the fence is not simply to guard against potential trespassers, but to advertise our privileged existence to potential buyers:

“The fence will again be not only a security fence but an enhancement to the value of our apartments as new people look behind the fences and see our beautiful gardens, playgrounds and sitting areas all reserved for those of us lucky enough to call East River our home. Perhaps a key to our private parks will one day carry some of the cache as a key to Gramercy Park has for over a hundred years.”

What do you think about the new fence?

Board president Gary Altman to retire from City Council

Gary Altman (Mark Chiusano/AM New York)
AM New York has the scoop this morning that Gary Altman is retiring from his position as chief legislative counsel to the New York City Council.

Altman has worked for the Council for almost four decades, under many mayors and council presidents. He has been on the East River board of directors almost as long, and now will have even more time to devote to the coop as board president.

Board announces another maintenance increase

The board announced a new maintenance increase today, just two weeks after distributing audited financials showing an even greater deficit for the last fiscal year than previously reported.

This is the second increase in a year.

In addition to monthly maintenance for everyone, rates for parking are going up for the first time in years, as are the fees for storage rooms and bike storage.

The board is also promising to recertify the parking lot — which is a fancy way of saying they will make sure that the cars parked in our lots are the ones that are supposed to be there. They also promise a crackdown on motorcycles and storage units that take up extra space in the parking lots.

The board’s memo today says “It is expected that these increases will raise revenue by around $1.2 million a year.” You can read the whole memo here.

Last year’s deficit clocked in at $2.4 million. That won’t be effected at all by this increase.

This year’s budget expects a deficit of $970,000. The new maintenance increases going into effect May 1 would reduce that deficit by approximately $200,000. That’s a $3.2 million shortfall over two years that the board has no plan to cover.

Just for good measure, the board will impose new penalties on owners with pets who defecate or urinate anywhere on coop property. $250 each time your pooch can’t hold it in from the front door to the curb.

Finance meeting recap

Audited financials for the 2015-16 fiscal year were released last week, and on Thursday members of the board of directors and the management office met with 50-60 cooperators in the community room to discuss the implications of that report.

Importantly, it was a respectful exchange, the sort of back-and-forth that unfortunately is rare at our annual meetings. Maybe it was the chance to have this conversation outside the heat of a campaign, or the opportunity to have it in a more casual environment and with a looser format; whatever the reason, I hope the board is encouraged to hold more of these events in the future.

Several critical issues were raised.

Has the new policy for unlimited subletting been a factor in the sharp decline of sales?

Opponents of the policy, changed by the board in 2015, warned that original owners and even their heirs would be encouraged to hold on to apartments for rental income, taking off the market first-sale units that would otherwise bring in flip tax revenue from 20% of the sale price. Since then, sales at East River have sharply declined and our flip tax revenue has been reduced. Is there a connection?

Board president Gary Altman said it’s too soon to tell, but emphasized that he knows of a couple of apartments that sold because of the increase in sublet fees, and other apartments that had been subletting illegally that are now on the books and bringing in sublet income. He gave no specific numbers.

The audited financials do not break out sublet fees from income, but the board’s budgets do: last year’s budget projects $350,000 in sublet fees while this year’s budget projects $600,000. Meanwhile, flip tax revenue has decreased by millions. There is no evidence of a connection. It is, as Altman said, almost certainly too soon to tell.

Given that our flip tax revenue is so unpredictable, what is the board doing to stabilize our finances?

Finance chair Ellen Gentilviso replied vaguely: “We are going to have a financial meeting now that the financials came out.” She continued, “We’re going to be looking at everything, seeing how much is paid for everything, and analyzing it and determining whether or not we will need a carrying charge increase and if so what percentage it will be. So that’s what we’ll be doing.”

Altman was more introspective about our historical reliance on flip tax revenue for operating costs. He referred to a memo from 2011, explaining, “We shouldn’t really be relying on flip tax. But we are going to rely on it somewhat because we’re trying to keep the maintenance down.” He explained that maintenance increases were particularly difficult for seniors and other families on a fixed income. He repeated, “So it [flip tax revenue] shouldn’t be relied on at all, but we do rely on it.”

The cooperator who asked the question said she agreed entirely, which is why we needed a more concrete plan.

Why are the budget and these audited financials always late — even later this year than usual?

General manager Shulie Wollman explained, as he has before, that upgrading management’s accounting system to a new solution was more complicated than they had expected and led to this year’s delays. He took responsibility: “Yes, we were tardy. Yes, we weren’t able to produce the financial report on a timely basis. We apologize on behalf of management.”

Wollman revealed that “The board was instructed at the last board meeting that they expect that management produces a budget this coming year in the month of June, with the passing by the board of directors by July” or August. He also said that with the new software now in place for a full fiscal year, he expects audited financials to be ready two weeks before our annual meeting.

Controller Sol Wenig explained that it was the “intricacies” of having one system for two coops (East River and Hillman) that made the migration so difficult.

With last year’s maintenance increase, should we expect to continue to see operating deficits?

The audited financials for last year showed an even larger deficit than we were told to expect. And the budget for this year also projects a shortfall. But Wollman was reluctant to categorize this downward trend as a problem. He emphasized that there were no large expenditures this year that would make the financial picture any worse than expected.

Wenig was more direct by saying expenses “did go up, and will continue to go up. They’re not going down, let’s not kid ourselves. So the board has a very difficult situation and they are going to address it because they are responsible in terms of acting in a responsible fashion in terms of dealing with this. And that’s what they’re going to meet with, discuss in terms of how to deal with the deficiency that exists today.”

To that point, Altman conceded that, based on property valuations, we should expect property taxes to go up an additional $800,000 – $900,000 in 2017-18. Meaning even if the board increases maintenance to cover this year’s deficit, we’re likely looking at another one next year too.

Is the coop’s debt too high?

This question was asked a couple of different ways. Board member Larry Goldman assured cooperators that the coop’s overall debt — a $23.5 million mortgage plus $5 million line of credit (not all of which has been used) — is very low compared to overall valuation of the property (approximately $1.2 billion). Altman pointed out that Penn South — 50% larger than our coop — has an underlying mortgage 6-8 times as large as ours.

Are we making enough on our commercial spaces?

Commercial income was $2.2 million in 2015-16, up from $1.7 million the year before. Wollman said that price per square foot is $45 – $50 on average, which is “fair market to the area.” He described conversations he has had with Starbucks and Dunkin Donuts, which were not interested in our end of Grand Street because of the lack of foot traffic. Seward Park, he said gets $90 per square foot because they are closer to the subway.

“Once there is a ferry,” Wollman added, “maybe the major stores would be interested. At current, they’re not interested.”

Why has there been no analysis of future capital expenses?

Every year, we see this same note in our audited financials: “Management has omitted to present the estimates of future costs of major repairs and replacements that accounting principles generally accepted in the United States of America require to be presented to supplement the basic financial statements.”

Wenig explained, “In order to comply with that regulation, what we would need to do is analyze every capital item that we have within the coop. That would go from the elevators to the roofs, the boiler rooms, the underground piping, the electricity.” He went on to say that an amount equivalent to the cost of replacement divided by the lifespan would need to be set aside each year into a reserve fund. He estimated that would require at least a million dollars a year that cooperators would need to contribute.

Of course, these replacement costs will need to be paid at some point, either slowly over time or all at once when the repairs are needed. Wenig said that the practice so far has been to deal with these costs as they come up. Future replacements would need to be paid for by an assessment, carrying charge increases, taking on more debt, or some combination of those options.

Update 3/27/17
Management has posted the slides they showed at the start of the meeting here.

Short notice: finance Q&A this Thursday evening

Management posted last year’s audited financials on Friday. Tonight, via another short email, they announced that this Thursday at 7pm will be a 1-hour “Finance Meeting” in the community room.

FINANCE MEETING
Thursday, March 23, 2017
7PM – 8PM

Building 4 Community Room
477 F.D.R. Drive

If you wish to obtain a copy of our Audited Financial Statement or the Corporation’s budget, they are both posted on our website, and available in the Management office.

It’s no mystery why the board and management don’t want to make a big deal about the newly released financial report — it shows a deficit of $2.3 million, almost a million dollars larger than the unaudited numbers distributed to shareholders just before our annual meeting in December. With a projected deficit of almost $1 million for the current fiscal year, our coop is in perhaps its worst slump since privatization 20 years ago.

The board will almost certainly have to impose a second large maintenance increase this spring, which still won’t cover the deficit from the last two fiscal years.

Audited financials show larger deficit

Management finally released audited financials late in the day on Friday for the fiscal year ending June 30, 2016. There were significant changes from the numbers distributed to cooperators in December just before our annual meeting — instead of a $1.4 million operating deficit, the coop instead showed a deficit of $2.3 million. This comes after last year’s 11% maintenance increase.

Thin lines show original numbers reported. Thick lines show audited numbers.

Budget projections anticipate another deficit this year of almost $1 million, even with optimistic flip tax expectations. Sales records through the first half of this fiscal year show that flip tax revenue is near a 5-year low.

Silver looking for Get Out of Jail Free card

Former assemblyman Sheldon Silver was convicted of fraud, bribery, and extortion in 2015. But his lawyers argued yesterday before a three-judge panel of the U.S. Court of Appeals for the Second Circuit that a Supreme Court decision in 2016 changed the parameters of his prosecution and that his conviction should be overturned.

Prosecutors in 2015 argued that a variety of actions by Silver were “official acts” influenced by personal dealings, intermingling state grant disbursements and rent control legislation with things like finding a job for the son of a doctor who pushed business to Silver’s law firm. And jury instructions in that trial similarly did not make any distinction between those activities.

But a 2016 decision by the Supreme Court acquitted Virginia Gov. Bob McDonnell by narrowing the definition of “official acts” to include only acts performed as an official, like passing legislation, not things like setting up meetings between individuals.

Silver did both. But because the instructions to the jury were broader than the subsequent Supreme Court decision allow, there’s no way to know how the jury reached its decision.

As I understand it, the Second Circuit could let the conviction stand, overturn it, or allow for a new trial under the more stringent definition of “official acts”.

Silver was sentenced last year to 12 years in prison, but he has remained at home in Hillman pending appeal.

Read reporting from yesterday’s hearing in the New York Times and Daily News.

Silver’s appeal set for this week

Disgraced former assemblyman Sheldon Silver has been home on Grand Street even after his 2015 federal conviction on corruption charges, pending appeal. Well, that appeal is finally set for this Thursday in front of the U.S. Court of Appeals for the Second Circuit.

At issue is whether Silver’s help getting state funding for cancer specialist Dr. Robert N. Taub in exchange for litigation cases for Silver’s law firm (and referral fees for Silver) constituted “official acts” according to a narrow definition of that term adopted by the Supreme Court last year (McDonnell v. United States).

By the way, the Lo-Down helpfully pointed out that Assistant U.S. Attorney Andrew Goldstein, who took the lead in prosecuting Silver in 2015, is still in charge of the case even after Preet Bharara’s dismissal last week as U.S. Attorney.

Red flag raised in delay of audited financials

On January 11, general manager Shulie Wollman answered a cooperator’s question about the late distribution of audited financials by saying the report was imminent:

We are hopping to have the audited reporters completed and distributed to all shareholders by the end of January and a financial meeting scheduled for the 2 weeks into February.

A month later, Mr. Wollman had a different expectation:

Although the auditors expected to complete the audit by the end of January, they now have indicated that solely based on their work schedule it will take them longer to complete as tax season has intervened. We have strongly expressed our disappointment that other company obligations and business are keeping them from the completion of our financials on the schedule they previously announced. Because only the auditors can at this point control the completion date, I can only say that hopefully all will be finished this month as they are now claiming is their target time schedule.

We followed up with Marks Paneth, the accounting firm engaged to review East River financials. Here’s what partner Michael Saul had to say:

Please be assured that “tax season commitments” have NOTHING to do with the finalization of the financial statements as we treat EVERY SINGLE CLIENT as the most important client we have.

Rest assured that it is our competence and diligence and desire to get the shareholders fair financials that is holding up the process. The only thing that would diminish the reputation of this firm would be to perform shoddy work. Our firm represents some of the most notable cooperatives in NYC so we are well aware the timing and obligations involved.

He went on to quote Marks Paneth’s engagement letter with the coop:

We will issue a written report upon completion of our audit of the Corporation’s financial statements. Our report will be addressed to the management and board of directors of the Corporation. We cannot provide assurance that an unmodified opinion will be expressed. Circumstances may arise in which it is necessary for us to modify our opinion or add an emphasis-of-matter or other-matter paragraph. If our opinion is other than unmodified, we will discuss the reasons with you in advance. If, for any reason, we are unable to complete the audit or are unable to form or have not formed an opinion, we may decline to express an opinion or withdraw from this engagement.

That last bit sounds like a warning — that the auditors might not offer a good opinion of our financials, or might not be getting sufficient information from management to form an opinion at all. Either one could be have disastrous effect on potential buyers’ ability to get mortgages which in turn would push us further into debt.

Mr. Wollman and the board should offer a better explanation for why the financials are so late, and finally take responsibility for the problem themselves.

Coop looking at another deficit this year

The management office released the budget yesterday for the fiscal year ending 6/30/17, showing an expected deficit of $970,000, a little better than last year’s (unaudited) $1.4 million shortfall.

A few notable items from the full budget:

  • As the accompanying memo from management points out, increase in expenses this year of $900,000 is entirely due to our real estate taxes going up by that amount.
  • You can thank last year’s 11% maintenance increase for the $1.3 million increase in revenues expected this year.
  • Aside from carrying charges, other revenue is expected to go down.

Despite starting off the first 7 months of the fiscal year lower than last year, the budget expects flip tax revenue to remain just about even from last year. But without a big spring bump, flip tax revenue will be $400,000 – $500,000 less than projected. The board is again using inflated flip tax projections to mask what is likely an even larger deficit.

On another note, while memos from board president Gary Altman and management often find ways to praise our local councilmembers, state reps, or governor, the memo announcing the budget’s release made a pointed dig at the mayor: “The city’s budget has risen $12 billion dollars since the Mayor took office 3 years ago and East River’s real estate taxes have risen by millions of dollars.” In an election year, no less!

More specifically, East River’s RE taxes were down slightly during Di Blasio’s first two years, but have risen sharply ($1.8 million or 30%) since. That’s a tough increase to cover without even more maintenance increases. Borrowing more money would help for one year or two, but taxes won’t be going down. This is a recurring and growing expense that will need to be met by recurring income.