Do You Know What To Ask When Purchasing A Cooperative?

Feb 10, 2005 4:15 PM

What will affect the amount of the monthly maintenance?

• Number of shares allocated to the subject unit
• Any major repairs
• Repairs deemed necessary by building inspector
• Outstanding balances and maturity dates of underlying mortgages
• When tax abatement expires
• When land/ground lease expires
• Last maintenance increase and percentage of last increase
• Arrears in maintenance payments of any units within Co-op
• Litigation and any other legal suits against the Co-op
• Presence of any health hazards (Examples: lead, asbestos)
• Increase in operating costs: fuel, labor, insurance, real estate

Once you have decided on a Co-op and unit, request for:

• Co-op financial statements - Ask for two(2) years’ most recent and audited statements which will detail the financial history of the Co-op. Make sure that the statements indicate that the Co-op receives maintenance in excess of the operating expenses, which results in a cash surplus to the Co-op. If the opposite occurs, the result is a deficit and the maintenance for all shareholders is usually increased to cover the shortfall. The financials generally consists of a breakdown of the Co-op’s Income, Assets, Liabilities and Notes or Summation.

• Income: Maintenance income, interest income from investments, other income (laundry, parking, etc.)
• Assets: Make sure that there is sufficient cash reserves set aside. The benchmark to determine sufficient cash reserves is $1000 for every unit within the Co-op. Will include the total number of shares for the Co-op. Check for assets which have readily liquidable funds and types of accounts which have minimum fluctuations in value/balance.
• Liabilities: Underlying mortgages, litigation, mechanics’ liens, other debts.
• Notes/Summation: Underlying mortgages detailing outstanding balance, terms, maturity; details of any thing new which have occurred during that year.

• Offering Plan/Prospectus/Black Book - Will entail the rules and regulations of the Co-op. The management company will have a copy at their office. Due to the document’s bulk in content, obtaining a copy may require a fee which will be fully refunded when the document is returned. Once you become a shareholder, you will be entitled to have a copy to keep for your records.

• Amendments/Attorney General Disclosure Statement (AG) (if applicable)

  If the presale is 90% or more, amendments are not necessary. For every year where the presale is below 90%, sponsors will have to file amendments to the offering plan for the unsold shares which they are managing. When reviewing the amendments, be sure to check that the sponsors have a positive(+) cash flow and compare that cash flow with the number of units the sponsors are managing. Make sure that the sponsors are not pledging unsold shares as collateral for loans. The sponsors are not shareholders of the Co-op. If sponsors have pledged unsold shares as collateral for loans and decided to skip town, the Co-op and its shareholders will have to incur the costs of the loans. You would also want to make sure that the sponsors do not control the Co-op board or committee because you do not want the control of final decisions to rest upon non-shareholders.

After you have reviewed the Co-op’s information on its surface, find yourself an attorney to review the data in detail. While legal representation for yourself is optional, it is highly recommended that you hire an attorney to make sure that you will be investing in a financially sound Cooperative Corporation.

 

 

Co-op Board interview
After you and the sellers have completed drawing out the sales contract and you have a mortgage loan commitment, you must get the Co-op’s board approval to purchase the unit within the Co-op. An appointment will be scheduled for a meeting between the buyers and the Co-op board. If the Co-op board has approved the buyers’ application, then the transaction will proceed. If the Co-op board has declined the buyers’ application, the purchase transaction is terminated. Co-op boards have very broad discretion and can reject applicants for almost any reason.

Mortgage Loan Closing
The parties involved at the mortgage loan closing will be the buyers, sellers, lender’s attorney, buyers’ attorney, sellers’ attorney and a representative of the Cooperative Corporation.

Last Important Note
Protect your investment by having a say in the final decisions of the Cooperative Corporation. Once you have purchased a unit, try your best to become or be involved as a member of the Co-op board/committee.