December 1, 2022

Problem solved: cleaning up a co-op’s financial mess

November 8, 2022

As part of our ongoing Issues Resolved series, Habitat speak with Avi Zanjirianaccounting firm partner Czarnowski & Beer.

Changing of the guard. We can always learn from our mistakes, and hopefully other councils can learn from what happened here. We were hired by a co-op board in early 2021 to do their 2019 and 2020 financial statements. Their accountant had retired after the 2018 audit, and it was my understanding that the accountant, the managing agent and the board of directors had been there for many years.

To dig. The first thing to do was to take care of the annual tax deduction letter, which is given to co-ops at the beginning of the year to deduct property taxes and mortgage interest on a per share basis. We tried to contact the managing agent, but he was not answering phone calls. So I called the town halls to find out the amount of their property taxes. The person on the phone said, “Oh, we’re so glad someone is contacting us. The building hasn’t paid property taxes for a year and a half.” The managing agent, because of COVID I guess, was able to get away with not submitting monthly financial reports.

Bleed the budget. The solicitor eventually contacted the bank and we learned that the counsel failed to provide the information required under the loan agreement, so they failed to honor the interest rate. Their interest rate went from 3.8% to 8.8%, and since no one was paying attention, they didn’t realize that the 5% increase was automatically debited from their operating account every months for nearly a year and a half. That’s why they had no money to pay the property taxes – because the account was completely emptied by paying this higher interest rate.

When we learned that the water bill had not been paid for more than a year, the trustee was dismissed and the management took over the management of the building. Usually there is a transition between the managers, a transfer of documents, but when the new management company arrived, they had nothing. The new managers went on a wild goose chase trying to find things. Finally, a few months later, the board held an annual meeting with shareholders where they explained what had happened. As you can imagine, it didn’t go well.

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It’s time to clean the house. Shareholders were able to elect a new board, and the new board is working to right the ship. Interest has been reset to original rate, property taxes have been paid and they have a payment plan with water and sewer.

The saddest thing about it was that people couldn’t sell their apartments because any sale requires financial statements or a tax return. And the banks were saying, “The last balance sheet is from 2018. We need something to get these deals done. These people had already bought their new apartment, so they were paying two mortgages. Once the financial statements were put together, the new managing agent and the new board of directors were able to establish a new budget. They had to do a big maintenance raise, about 10%, and a $350,000 appraisal to pay all the old bills. They succeeded in bringing the mortgage interest rate back to the original term and apartment sales began to close.

The importance of monitoring. The real takeaway here is that there is a fiduciary responsibility when you serve on a board. If you’re not getting those financial reports, then raise your hand as a board member and say, “Hey, what’s going on? » Go to the managing agent’s office. Take the initiative to monitor — that’s the key word. When you don’t, ask questions, and look at financial reports, it’s a very scary example of what can happen. The council that is currently in place is trying to ensure that this does not happen again.