Tag Archives: finances

Coop financials still a mystery

In our cooperative survey conducted this fall, 20% of respondents were very or somewhat satisfied with the financial health of the coop, while 58% were very or somewhat dissatisfied. Considering that for many of us this is our largest financial investment, that number could stand to be improved.

What’s the source of that dissatisfaction? We didn’t ask that question, but I suspect it can be summed up in one word: mystery.

  • Our audited annual report is late again — even later than last year. That means that shareholders cannot adequately review the coop’s financials before voting.
  • The budget for the current fiscal year is late again — even later than last year. We’re now five months into the fiscal year that began on July 1, and the board is operating without a budget.
  • Last year’s budget was filled with inflated income meant to hide a looming deficit that board members did not want to have to address before the election. (Board members Lee Berman and Peter Herb wrote last year about that budget was passed by the board with only a cursory review.) Only after the election did the board acknowledge the deficit and raise our monthly maintenance.
  • The coop has no capital budget or reserve fund for large-scale repairs, meaning we could face an unexpected assessment the next time our aging infrastructure cracks.

This mystery would be easily dispelled if the board were to adopt a few new practices like pledging to release audited financials at least 30 days before our annual meeting and budgets at the start of the fiscal year. Using the directors’ occasional newsletter to report more substantive ongoing financial information would also help, as would a mid-year Q&A for shareholders.

Where are coop financials and budget?

I just sent this quick note to our new general manager, Shulie Wollman:

Mr. Wollman,

At last year’s annual meeting, a cooperator asked about the perennially late financial report that’s distributed just hours before our annual meeting, and you suggested that the coop’s auditors were to blame. Any luck this year getting them to move more quickly, or have you hired a new auditing firm, in order to get this information to cooperators in a more timely manner?

Also, we’re now 1/4 into our new fiscal year and I don’t see a budget posted for 2016-2017. Do you know when that will be available?

I’ll let you know what his answer is.

Update 9/30: After a second email, Shulie Wollman replied:

Dear Mr. Sherber:

Sorry for the late response, your email was in my spam folder.

Our goal is to release the financial report as early as possible. This year we updated our computer systems. Because this was done during the fiscal year the auditors need additional time to audit the year-end financial statements of East River Housing contained in the 2 systems. While this may take extra time for this past fiscal year once all our financial programs are running a full fiscal year on the new system reports and audits should be easier to produce, complete and distribute, likewise the budget which can only be prepared and approved after the closeout of the last fiscal year should be made available earlier in the future.

The new computer system will be of great benefit in supplying more timely financial information to the Board and Cooperators.


Happy New Year


Maintenance Security now!

pay coop 1000In announcing the $1000/year maintenance increase last month, the board neglected to expand an important safety net for shareholders with limited means: Maintenance Security for seniors.

The coop can’t survive on a fixed income. Basic costs like taxes, fuel, water, and insurance are always rising. Occasional increases to our monthly maintenance are inevitable.

But some cooperators, including some of our many seniors, do live on a fixed income, and asking them to suddenly come up with an additional $1000 per year could price them out of East River and force them to sell.

That’s unacceptable.

The coop should immediately institute a Maintenance Security enrollment program that would guarantee no senior on a fixed income is priced out of their home by the board’s maintenance increases.

The coop has had a program like this in the past. Before reconstitution in 1997, certain cooperators qualified for New York City’s SCRIE program. This protected seniors and others on a fixed income from rent increases. When the coop reconstituted in 1997, the coop made provisions for a substitute SCRIE program that would continue to protect those cooperators — maintenance increases are deferred until the shares are transferred, at which point the coop collects all past due plus interest.

But the coop has never opened enrollment to anyone new, even though almost 20 years have passed. Seniors today are not protected from the current maintenance increase, or any increase to come.

Just as cooperators’ circumstances change, the coop’s policies need to adapt. In particular, if we are committed to remaining a naturally occurring retirement community (NORC) we need to give seniors more than just free flu shots — we need to tell them they won’t be pushed out of their homes.

The application would be simple — NYC still has guidelines for their public program we could adopt. The cost to the coop would be zero, since all maintenance due is eventually paid back with interest. But most important, we could communicate clearly to everyone who lives here the sort of cooperative community this is.

Flip tax revenue falls further behind inflated budget forecasts

Don't count those chickens before they hatch.
Don’t count those chickens before they hatch.
Flip tax revenue for March and April continued to come in under the inflated forecasts of the board’s pre-election budget, creating a $1 million deficit on the current fiscal year.*

According to assistant general manager Shulie Wollman, flip tax income for March and April was $901,500, falling 15% off the budget’s forecasts. With only two months left in the current budget cycle, the coop is likely to fall 23% short of budgeted income, for a $1.3 million deficit.

The shortfall is not because real estate is tanking. Our expected flip tax revenue of $4.4 million would be comparable to income from two years ago, and better than any year prior to 2013. The problem is that the board budgeted for way more income than could be reasonably expected, inflating revenue forecasts in order to mask a looming budget deficit.

This isn’t just obvious in hindsight. We pointed out these inflated forecasts in November when the budget was released, and predicted the current deficit. Board members Lee Berman and Peter Herb voted against the budget specifically because it failed to reflect the coop’s fiscal situation honestly.

pay coop 1000Now that the election is over, Gary Altman and other board members have changed their tune, admitting that their pre-election forecasts were way off base, and raising maintenance to compensate. This year’s maintenance increase, however, can’t pay for last year’s deficit, and the board has yet to explain away the red ink in our 2015-16 ledgers.

* The flip tax numbers I’m citing come from Mr. Wollman in the management office, compared with the board’s published budget from the fall. However, Gary Altman’s recent memo announcing maintenance increases says that the coop’s flip tax shortfall is already $1.5 million. I can’t explain the discrepancy in our figures.

The bill comes due: You owe $1000

pay coop 1000

The board of directors today announced an average maintenance hike of $1000 per year for each apartment in the coop to raise $1.7 million in revenue.

The coop’s budget for 2015-2016 inflated flip tax forecasts to cover the predictable deficit; now that flip tax revenue has indeed fallen short, the need to increase revenue is impossible to ignore.

Regular expenses like property taxes, labor, and insurance continue to increase year after year; it’s natural that our income would need to increase to match. Over the last five years, the board has relied on flip tax revenue and bank loans to cover the difference. With flip tax revenue not cooperating this year, the board decided it was finally time to increase maintenance.

Here is the memo from today announcing the increase:
Continue reading The bill comes due: You owe $1000

Board of directors’ newsletter hints at financial situation

Click for full PDF.
Click for full PDF.
The board of directors distributed their second newsletter of the year today. Among the highlights:

  • Community room renovation cost was $8,500 more than original quote of $73,000 — the additional money was used for new chairs, tables, and window treatments.
  • The coop has refinanced its underlying mortgage of $23.5 million with an interest rate reduction from 4% to 3.5%. The new financing allows for a $5 million line of credit that the newsletter says “serves as a reserve fund.”
  • Looks like that reserve fund will come in handy, as laundry room / sewer reconstruction costs are adding up. Building 4 cost a total of $283,700. Building 2 was higher, at $469,500. (Building 3 is set to start Monday, and building 1 will be next.)

Is East River starting to show its age?

old pipes

When sewer pipes enter their seventh decade of use, this is what they look like.

A view of the inside of building 4's laundry room.
A view of the inside of building 4’s laundry room.

The question is now, can preventative maintenance in the other three buildings save money in the long run? Or is sitting back and waiting for another sink hole to open up our only real option?

Because if the sewer pipes look like this under building 4, they probably don’t look much different under buildings 1, 2, and 3.

Who’s next?

The strategy at East River for years has been to keep maintenance as low as possible. That’s an admirable goal, keeping this corner of Manhattan livable and affordable for families old and new. The cost of major upgrades and repairs — like the boiler room and local law 11 facade work — has been added to our underlying mortgage through interest-only loans in order to protect current cooperators from higher monthly fees and assessments. (This is a not uncommon strategy.)

Recently it was revealed that the coop is seeking a $5 million line of credit for anticipated repairs and maintenance, so there’s no indication that the current board has any interest in changing course.

The coop also maintains no reserve fund for unanticipated repairs, and has not conducted any study of the costs of future repairs and maintenance. Which means it should not actually be a surprise when the 60-year-old laundry room turns into a money pit.

Earlier this week, management emailed an update to cooperators in building 4 with apologies for the inconvenience, closing with: “This job has been very difficult and very hard to estimate because we did not know what we would find when we started digging.”

You can say that again. And again and again.

How much debt should the coop carry?

In response to the news that East River is seeking to refinance its mortgage with an additional $5 million line of credit, one cooperator has passed along two articles that discuss underlying mortgages and how a coop can appropriately manage its debt burden.

The first is an article written in 2012 — when East River last refinanced and increased its debt from $15 million to $25 million with an interest-only mortgage. Real estate lawyer Pierre Debbas explained why, with low interest rates available, 10-year interest-only refinancing were very popular with coops:

The main reason is that your average shareholder owns their unit for approximately seven years and chances are there will be significant turnaround in units prior to the mortgage maturing.

If the board were to make principal and interest payments, it would result in an increase in maintenance, which would devalue the property and hurt most current shareholders in the building. Only future ones and those current ones who plan on staying in the building for far longer than seven years would benefit from a reduction in principal. Once the underlying mortgage is paid off, maintenance generally decreases significantly.

However, most boards do not desire to ever pay off their underlying mortgage in its entirety and view the mortgage as a way to fund capital improvement projects or replenish the reserve fund.

This seems to be East River’s current philosophy, as the 2012 refinancing funded the boiler conversion and facade refurbishment required by local law 11, and the current increase in debt is for expected repairs and maintenance. It would be interesting, however, to know whether that seven-year average is true for East River or if new cooperators are staying even longer, in which case there could be an argument made for amortization.

The second article specifically addresses whether interest-only mortgages are appropriate for coops. The author repeats some of the pros as the article cited above, that since coops tend to keep rolling over their mortgage, and since property values do, over time, increase, paying down the mortgage is not financially necessary. On the other hand, he also lists some reasons not to use these types of loans:

  • Modest amortization “assures that the debt on your building will not grow over time solely because of refinancing costs.”
  • “Interest-only loans saddle future shareholders with the entire burden of an ever-increasing amount of debt.”
  • “The size of your underlying mortgage as a percentage of your building’s overall value will affect the pricing of any new debt.”
  • Is it fair? “Interest-only loans afford current shareholders all of the benefits of the new funds, as well as the lowest possible monthly payment.”

I should note that this article was written all the way back in 2007, just before the real estate bubble burst. Opinions on the subject may have changed since then. If anyone has other more contemporary sources to cite that may shed some light on East River’s philosophy of increasing debt in order to avoid raising maintenance, please add a link in the comments below or email hello@cooperativelyyours.org.

Coop seeks $5 million line of credit for repairs and maintenance

A public notice that East River Housing is seeking to refinance its debt — first brought to our attention in the board’s newsletter last month — indicates that the coop will seek an additional $5 million line of credit for “anticipated repairs and maintenance.”

The coop’s annual financial report routinely includes a note by the auditors that East River has not conducted any study of the costs of future repairs and replacements. At last year’s annual meeting, General Manager Harold Jacob was asked about upcoming expenses and answered that he anticipated nothing beyond normal upkeep. So either something has come up in the meantime to warrant $5 million, or the money is expected to be needed for our operating budget.

The coop’s last refinancing was in 2012. At the time, the coop consolidated $15 million in existing debt and added $10 million for three major projects: the boiler upgrade, conversion from high pressure to low pressure, and local law 11 facade repairs. The boiler upgrade cost $3.5 million, local law 11 cost $2.6 million, and the low pressure conversion never happened. Of the remaining $3.9 million, $1.5 million was used to pay down our debt, and $2.4 million was held (accounting for most of the $3 million cash on hand as of June 30, 2014).

The 2012 mortgage was interest-only, meaning that the $1.5 million pay-down was the only money put towards the mortgage’s principal.

The coop’s strategy seems to be to keep maintenance costs down and avoid assessments by taking advantage of low interest rates and increasing our debt by more than 20%. That’s good news for those of us who don’t want to see our monthly expenses go up, but bad news for those of us planning to still be here a decade from now when rates won’t be so favorable and the cycle of borrowing breaks.

The board needs to shed some light on their strategy — and allow for a debate on its pros and cons — with a mid-year Q&A on the coop’s finances.

Must read: Can maintenance approach $0?

The New York Times real estate section yesterday had a provocative article about coops that take advantage of prime ground floor retail space to dramatically reduce shareholders’ maintenance costs. Their prime example is a coop at Bank Street and Hudson where a studio apartment that used to pay over $800 monthly now pays around $20.

Sounds like a New York homeowner’s fantasy, doesn’t it?

Some spots in Manhattan (like the West Village) can draw ridiculous retail rents, but the article also mentions a coop at East 7th Street and Ave. B where retail income has had a big effect on maintenance fees — a 1-bedroom there carries a monthly charge of only $252.

This sort of thing used to be unheard of, because U.S. tax law insisted that, in order to reap the tax breaks associated with cooperative housing, a coop’s income from non-owners (like retail) could be no more than 20%. At my old coop on West 10th Street in the 1990s, we kept our retail rental rates artificially low in order to keep income under 20%. But that law changed a few years ago, giving coop’s much more flexibility.

Could a scenario like this be possible at East River? Probably not. For one thing, the far east end of Grand Street is obviously not a prime retail location. For another, the proportion of retail to residential space is much lower here than, say, at a 6-story building with a full ground floor of retail.

Nevertheless, one look at our low-end retail tenants, not to mention our inefficiently allocated ground floor spaces, says that there’s room to grow our retail income if the board were to push management to be more creative and aggressive.

Here’s the link again to that NYT article: http://nyti.ms/1E4oH4a