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Evaluating a Building's Financials: What You Need to Know

Initial Facts

  • Most buildings operate with a loss

    • Depreciation and a large underlying mortgage contribute to this
  • Ensure positive cash flow

    • Enough cash flow to cover any current liabilities
  • Determine any future risk of abnormal increases in maintenance or common charges 

critical documents

  • Accountant's opinion letter

  • Balance sheet

  • income statement and statement of cash flows

  • notes to the financial statement 

Accountant's opinion letter

  • always addressed to the board of the co-op or condo

  • look out for phrases beginning with "subject to" and "except for"

Audited

  • INDEPENDENTLY prepared by a CPA to verify all information is accurate

    • Sometimes co-op or condo simply provides information to the CPA
      • Typical for buildings with under 20 units

engineers report

  • Rarely used; includes a paragraph regarding building's omissions 

balance sheet

  • owned assets and owed liabilities 

  • shows the building's worth

                                                                    cash, cash equivalents and reserves

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  • must have enough reserve cash to handle potential contingencies 

  • healthy buildings will have reserves that equate to roughly 3-6 month's operating expenses including anticipated capital improvements in the next 12 months 

  • some buildings keep these reserves in investment accounts such as low risk cd's or money market accounts 

accounts receivable

  • generally only accounts due by current shareholders or commercial tenants 

Accounts Payable

  • excessive balance is a definite sign that the building is having financial issue

  • Any balance greater than 10% of the yearly maintenance should be a concern

  • Current Liabilities 

    • Short Term obligations to be paid within 12 months
  • Long term liabilities 

    •                                                                                                        Paid out in more than 12 months time

Mortgages

  •  

    Balance generally split by short and long term balances

  • short term maturity generally portrays refinancing issue

Income statement & Cash Flow

  • shows the cash inflow and outflow during the previous 12 months

  • shows what has been earned, or lost, and what has been spent should there be excess cash

  • In a coop it is common for the net income to be negative

    • Coops try to take in through maintenance what it pays out through exppenses

    • usually depreciation brings a positive net income back to zero and below

  • the benefit is to avoid taxation, while trying to cover its costs and build reserves

notes to the financial statement

  • found at the end of the financial statement; includes detailed information

  • legal and mortgage information generally requires special attention

Land Lease

  • important to review and understand the maturity date as well as any extentions

  • cannot be tied exclusively to land value

reserve fund

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  • is the building borrowing money from its reserve fund? what are they being used for

  • large balance allow for more stability although large sums may be used for potential building improvements that require excess funds

contingent liabilities and legal matters

  • pending lawsuits

    • most costs are covered by insurance policies

    • f building initiates the lawsuit it can be expensive and may reflect upon the financial stability of the building