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.
Management has posted the slides they showed at the start of the meeting here.