Why Building Financials Matter
When you buy a co-op, you're not just buying an apartment—you're becoming a shareholder in a corporation that owns an entire building. That corporation's financial health directly affects your monthly costs, your ability to sell, and your exposure to future assessments.
A building with strong finances can maintain the property, build reserves, and keep maintenance stable. A building with weak finances may require special assessments, struggle to get loans for improvements, and ultimately see property values decline.
Learning to read financial statements helps you evaluate buildings before buying and understand your ongoing investment as an owner.
The Key Financial Documents
When evaluating a co-op, request and review:
- Audited financial statements: Annual statements prepared by an independent CPA firm (usually 2-3 years of history)
- Current budget: The approved budget for the current fiscal year
- Recent board meeting minutes: Discussions about finances, capital projects, and building issues
- Offering plan and amendments: The original building documents, updated over time
Understanding the Balance Sheet
The balance sheet shows the cooperative's financial position at a specific point in time—what it owns, what it owes, and the shareholders' collective equity.
Assets: What the Building Owns
Current Assets
- Cash and cash equivalents: Money in checking and savings accounts
- Reserve fund: Money set aside for future capital needs
- Accounts receivable: Maintenance and assessments owed by shareholders (watch for large amounts—indicates collection problems)
- Prepaid expenses: Insurance or other costs paid in advance
Fixed Assets
- Land: The land the building sits on (carried at original cost)
- Building: The structure itself (original cost less depreciation)
- Equipment: Elevators, boilers, HVAC systems
Note: These values are historical costs, not current market values. A building bought in 1970 may show land worth $500,000 even if it's now worth $50 million.
Liabilities: What the Building Owes
Current Liabilities
- Accounts payable: Bills owed to vendors and contractors
- Accrued expenses: Costs incurred but not yet paid
- Security deposits: Deposits held for shareholders
- Current portion of long-term debt: Mortgage principal due within 12 months
Long-Term Liabilities
- Underlying mortgage: The building's primary loan (this is the big one)
- Other long-term debt: Loans for capital improvements
Shareholders' Equity
The difference between assets and liabilities represents shareholders' collective equity in the corporation. This includes:
- Paid-in capital: Original purchase prices of shares
- Retained earnings: Accumulated profits (or losses) over time
The Underlying Mortgage: Critical Analysis
The underlying mortgage deserves special attention because it significantly impacts building operations and your costs.
Key Questions to Answer
- What's the current balance? Compare to the building's value and number of units
- What's the interest rate? Fixed or variable? If variable, what's the cap?
- When does it mature? Refinancing in a high-rate environment can trigger maintenance increases
- Is it self-amortizing? Does the principal decrease over time, or is there a balloon payment due?
Underlying Mortgage Red Flags
- High balance relative to building value: Limits flexibility and refinancing options
- Upcoming maturity: Within 2-3 years means refinancing decisions soon
- Variable rate without cap: Exposes building to interest rate risk
- Balloon payment due: Building must refinance or pay off a large sum
- Recent increases: Building took on new debt—understand why
Reading the Income Statement
The income statement (also called the statement of operations) shows revenue and expenses over a period, typically one fiscal year.
Revenue Sources
| Revenue Type | What It Represents |
|---|---|
| Maintenance charges | Monthly fees from shareholders—typically 80-90% of revenue |
| Flip tax income | Transfer fees from apartment sales |
| Sublet fees | Charges to shareholders who sublet their units |
| Commercial rent | Income from ground-floor retail or office space |
| Laundry income | Revenue from laundry room equipment |
| Interest income | Interest earned on reserve funds |
Major Expense Categories
| Expense Category | Typical % | What to Watch |
|---|---|---|
| Real estate taxes | 25-40% | Increasing faster than inflation? |
| Payroll & related | 15-25% | Staff size appropriate for building? |
| Mortgage interest | 10-20% | Rate resets coming? |
| Utilities | 8-15% | Energy efficiency improvements planned? |
| Repairs & maintenance | 8-12% | Adequate spending on upkeep? |
| Insurance | 3-8% | Coverage adequate? Claims history? |
| Management fees | 3-5% | Competitive rate for building size? |
Operating Surplus or Deficit
The bottom line shows whether the building operated at a surplus (revenue exceeded expenses) or deficit (expenses exceeded revenue).
- Consistent surpluses: Building is well-managed, may be building reserves
- Breakeven: Acceptable if reserves are adequate
- Deficits: Concerning—maintenance may increase or reserves depleted
Reserve Fund Analysis
The reserve fund is money set aside for future capital needs—roof replacement, elevator modernization, façade repairs, boiler replacement. A healthy reserve prevents emergency assessments.
Evaluating Reserve Adequacy
There's no universal standard for "enough" reserves, but consider:
- Per-unit reserves: Calculate total reserves divided by number of units. $10,000-20,000+ per unit is generally healthy for Manhattan
- Upcoming capital needs: What major projects are anticipated? Does the reserve cover them?
- Building age and condition: Older buildings need larger reserves for aging systems
- Recent capital work: Buildings that just completed major projects may have lower reserves temporarily
Reserve Calculation Example
Red Flags to Watch For
Financial Warning Signs
- Declining cash reserves over multiple years
- Large accounts receivable (delinquent shareholders)
- Operating deficits without clear plan to address
- Minimal or no reserve fund
- Significant increase in underlying mortgage
- Qualified auditor's opinion (anything other than "unqualified")
Operational Concerns
- Maintenance increases exceeding inflation multiple years
- Recent assessments without clear capital purpose
- High turnover in management company
- Deferred maintenance visible in building
- Pending litigation mentioned in notes
- Sponsor still owns significant units
Positive Indicators
- Consistent operating surpluses: Well-managed finances
- Growing reserves: Building is preparing for future needs
- Low delinquency rate: Shareholders are financially healthy
- Reasonable underlying mortgage: Low balance, favorable terms
- Recent capital improvements: Building is maintained and upgraded
- Unqualified audit opinion: Clean bill of financial health
- Stable maintenance increases: Predictable, tied to inflation
Questions to Ask
When reviewing financials, seek answers to:
- What major capital projects are planned in the next 5 years?
- How will those projects be funded—reserves or assessment?
- When was the last maintenance increase and by how much?
- What's the delinquency rate among shareholders?
- Are there any pending lawsuits involving the building?
- What's the status of Local Law 11 façade inspections?
- When does the underlying mortgage mature and at what rate?
- What's included in the building's insurance coverage?
Working with Professionals
While you can learn to read basic financials, complex situations benefit from professional review:
- Your real estate attorney: Should review financials as part of due diligence
- A CPA experienced with co-ops: Can provide detailed financial analysis for a fee
- Your broker: Should flag obvious concerns and compare to similar buildings
The Bottom Line
Co-op financial statements tell the story of how a building is managed and its financial health. Strong financials—adequate reserves, manageable debt, balanced budgets, low delinquency—indicate a well-run building where your investment is protected.
Weak financials—depleted reserves, growing debt, repeated deficits, high delinquency—warn of potential problems: assessments, maintenance increases, or declining property values.
Take time to understand the numbers before buying. Ask questions about anything unclear. A building's financial health matters as much as the apartment itself.
Francine Crocker ensures her clients understand building financials before making offers. She reviews financial statements, identifies potential concerns, and coordinates with attorneys for detailed analysis when needed. No surprises about building health after you buy.
Questions about a building's finances? Contact Francine for a thorough evaluation.