A co-op or condo board’s financial statements provide a unique insight into the building’s health, and even gives a peek into the future. It lets you know if the building is well run or if there any problems that could lead to a special assessment or hike in your monthly maintenance or common charge.
Your lawyer will go through the financials, but it is good for you to have some basic knowledge, too. We provide key areas to probe in order for you to uncover these important clues.
The accountant’s letter
This is an easy place to start. It is right at the front of the financial statements, and you are merely looking for certain language. You are reading to make sure the accountant states he/she presented the financial information fairly. Any qualifying language is a red flag.
The building is not required to have its financial statements undergo an independent audit. Given the expense involved, many small buildings forgo an audit, and you should not misinterpret it. However, larger buildings typically undergo an audit, and a lack of one is a potential warning sign.
Moving on the balance sheet
The balance sheet is typically the first financial statement shown, and there are key items for you check.
Cash is king, and you want to see a sufficient amount. This helps offset the expense when the board needs to order significant repairs, mitigating the need for a special assessment, borrowing the funds, or raising maintenance/common charges. It can also help protect shareholders/unit owners in the event the building hits hard times.
Accounts payable is the amount the building owes for its regular bills, such as suppliers. An unusually large balance could indicate the building is having trouble paying its regular operating expenses.
Before moving on from the balance sheet, you should note the debt balance. While the building may have a mortgage, you want to ensure there is not excessive borrowing to fund other items, such as regular operating expenses. The notes provide additional insight.
The income statement
Unlike a for-profit company, a co-op or condo should not produce a large net income. Ideally, the board seeks to raise revenue to pay its operating expenses, and have some left over for a rainy day. Otherwise, they are charging residents more than necessary to fund the building.
However, it is important to understand the sources of revenue. Unit owners generally provide a stable and reliable amount, but there are other revenue generators that you need to investigate. Commercial tenants that provide an outsized amount should raise your level of concern since a departure could hurt the building’s revenue, and ultimately cash flow, which places a higher burden on the unit owners. It is particularly troubling if one or two larger commercial tenants are responsible for a lot of revenue.
Turning to the building’s expenses, you would like to see it split roughly evenly between mortgage payments, property taxes, payroll, and other operating expenses.
The cash flow statement is divided into three sections. These are the cash flow from operations, cash flow from investing, and cash flow from financing activities. Ideally, you do not want to see an operating cash flow deficiency funded by financing activities, namely borrowing.
The financial statement’s notes are where the details reside. You are looking for unique items, such as litigation. This is the area where you can find out more about the building’s debt. For instance, if the building has more than one mortgage, this is a sign the board is taking on excessive borrowing and not correctly managing the building’s financials.