WHAT WENT UP (OR DOWN)?
Financial statements typically present results for the past two years, in columns so you can compare the numbers. “I look for changes from one year to the next,” said Paul Wolsk, a real estate lawyer with Hartman & Craven. “If all of a sudden there’s a much higher accounts payable to vendors, that might mean the co-op is in a cash crunch.” It’s not that a big increase is necessarily a bad sign — the co-op might have had a big expense like replacing the roof. You want to understand why there was a significant change.
WAS THERE A PROFIT LAST YEAR, OR A LOSS?
Obviously, a profit is better than a loss — meaning the building’s income from monthly maintenance fees, commercial rent and other sources covers its expenses. But if a building relies on an unpredictable source of income to pay for operating expenses, like the flip tax some co-ops charge sellers when an apartment changes hands, that can be a red flag. “If they’re making up a deficit with a flip tax,” Mr. Wolsk said, “it’s likely that their maintenance is not high enough.” Most buildings aim for a balanced budget, so if yours shows a loss year after year, that should be a concern.
HAVE THERE BEEN ANY ASSESSMENTS?
Co-ops typically need assessments to pay for capital improvements or unanticipated expenses, like replacing a boiler, doing major work on an elevator or fixing the facade to comply with local regulations. “Try to find out what the assessment is being used for, and how long it continues,” Mr. Wolsk said, noting that longer-term assessments, payable in monthly installments, have become more common than single lump-sum payments.
WHAT’S LURKING IN THE FOOTNOTES?
Real estate lawyers say one of the most important sections of a financial statement is the footnotes, which detail, for instance, any litigation involving the building. “Are they paying a lot of money to lawyers, and if so why?” said Eva Talel, a partner in the real estate group of the law firm Stroock & Stroock & Lavan. “The footnotes would be helpful in giving some explanation about that.”
The footnotes might also reveal whether the building had a tax abatement on the verge of expiring, which would mean the monthly maintenance fee was likely to increase, or whether the co-op leases rather than owns the land on which the building sits. This is also where you’ll find details about the mortgage and any approved assessments, as well as comments about major repairs that have been undertaken or might become necessary.
HAVE THE FINANCIAL STATEMENTS BEEN AUDITED?
Financial statements are typically prepared by independent accountants, who should note whether their audit meets “generally accepted accounting principles,” an industry standard known by the acronym GAAP. “If it’s not in accord with GAAP,” Ms. Talel said, “then it’s not an audited financial. It just means that different criteria have been applied by the auditors.”
She says that smaller co-ops in New York Cityoften use unaudited financial statements because they cost less to prepare, but that doing so would be unusual for a larger building. One difference is that GAAP standards require cost estimates for anticipated major repairs. “That’s where audited financials give you more information, because they’re required by internal rules to do that,” Ms. Talel said.
The co-op’s treasurer or the accountants usually attend the annual meeting, giving shareholders a chance to ask questions about what they’ve found in the financial statements.
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