It happens infrequently, but when it does, it can be an enormous challenge: a co-op corporation or condo development has a long-running squabble with the building sponsor/developer, falls victim to long-term mishandling of funds — or outright fraud—by the board, or has to undertake a major unexpected or ill-prepared-for repair project. All of a sudden, they’ve got no money in the reserve fund, they can’t borrow against the property to make vital repairs, and residents are beginning to think they may have made a poor investment. Suddenly the whole building is on the precipice of insolvency. It’s a scary situation —but there are ways to edge back from the brink of financial wreck and ruin and get back on track. Here are some stories of communities who did just that.
Running the Numbers
At the end of the day, keeping a building solvent is about math. The money coming in has to be greater than or equal to the money going out. Extreme variation in either of the two sides of the equation can push a building towards financial difficulty. There are any number of ways, sudden or gradual, that this can come about.
The first reason is simple mismanagement. “Where communities fall into problems is when they don’t pay attention to what their building needs,” explains Enid Hamelin, longtime property manager and current board member at the Butterfield, a co-op in New York City. “They have no concept of the preservation of the structure of the building. They have not planned for it.” For example, there are a number of prewar buildings in New York, built during the Roaring Twenties. These are often coveted addresses, with their oversized apartments, high ceilings, interesting features, and so forth. But they are old. And with age comes the need for renovation. So it’s especially important in that type of building to be vigilant and plan carefully.
“There’s some instances when you see it,” says Jeffrey Reich, a partner with New York City-based law firm Schwartz Sladkus Reich Greenberg Atlas LLP. “Boards aren’t watching the store. They hold common charges and maintenance down and don’t let them grow with expenses, or maybe cover it with a flip tax or some other income they get. They’re not keeping up, and they’re in a hole. There can be some slow burns.”
Another way co-ops and condos get into trouble: unforeseen expenses. Out of nowhere, a building that has been in the black suddenly finds itself in urgent need of funds. Maybe the roof has deteriorated years before anyone thought it would. Maybe the elevators stop working. Maybe a lawsuit wasn’t decided in the community’s favor, or the damage caused by a major weather event wasn’t covered by the condo or association’s insurance. When comparing associations that have been successful to those that haven’t, Tim Haviland, senior vice president of commercial lending and community association loan program at Oak Brook-based Inland Bank and Trust, says he looks closely at those that have—to see the financial path that they took. “One of the most important things is the personality of the association and the makeup of the homeowners,” he says. “They have the responsibility to elect good leaders. A lot of times, those that don’t, don’t understand the rules of living in an association. Once they select good leaders and board members, they need a board that sets a good budget that makes sense — with ongoing upkeep of the building and putting away reserves for repairs they know will be needed. Finally, the homeowners need to pay on time so the cash flow stream remains the lifeblood of the association.”