Reading Co-op Financials
There are five key things to look for during due diligence.
1) Unlike regular companies, co-ops shouldn’t aim for big profits.
They should raise just enough in maintenance and income receipts to pay expenses and contribute to contingencies/reserves. Often a minor deficit/loss is reported after depreciation; this can be normal and not a red flag.
2) Reserve fund balances should be healthy.
Boards need to plan for capital improvements to prolong the life of the building. The reserve serves as a piggy bank for major repairs and can help owners avoid assessments. 10-20% of maintenance receipts is a good minimum amount.
3) The underlying mortgage should be reasonable.
It should mature in more than 2 years, and the current rate on the note should be competitive. If either don’t check out, ensure a refinance is in the board’s plans.
4) Revenues and expenses should make sense.
80%+ of income should come from residential sources. Assessments should be minimal. Flip taxes shouldn’t contribute a major portion of income. Current expenses shouldn’t make a big jump from prior year.
5) Examine commercial lease terms if they exist.
Co-ops often take advantage of favorable locations by leasing to commercial tenants on lower floors. Review years remaining on lease, rent terms and renewals, and tenant solvency. Owners may need to cover for vacancies.