Financial Statements for Manhattan Co-ops and Condos
Many New York City buildings, especially co-ops, have their financial statements audited annually by an independent CPA. This audit adds legitimacy to the financials reported to shareholders. Typically, the report is 17 to 25 pages long and includes these key sections:
Key Areas in the Audit Report
Cash Balances
The reserve fund covers utilities, taxes, and capital projects. Buildings must maintain a sufficient cash balance and compare it with typical spending. For example, electrical invoices can reach $600,000, and real estate tax bills may exceed a million dollars. Therefore, maintaining a proper balance is crucial for budgeting and avoiding maintenance increases.
Investment Performance
Buildings often invest funds to earn interest. Finding safe investments is challenging with current interest rates. Thus, many buildings use brokerage accounts to manage investments. Gains or losses from these investments affect financial statements and tax returns.
Due To/Due From Balances
Buildings with both co-op and condo portions may have due to/from balances between entities. For instance, if the co-op pays utilities for the entire building, it creates a “due from” balance for the condo portion. Tracking these balances is essential to avoid cash flow issues.
Performance vs. Budget
Budgets are created annually to plan expenditures. Financial reports compare building performance against the budget. This comparison helps guide expense allocation and assess the building’s financial health.
Assessments for Repairs and Projects
Buildings may need assessments for repairs or capital projects, such as roof replacements or converting from oil to gas heating. Special assessments can also fund renovations, like upgrading a retail lease.
Conversion from Oil to Gas Heating
Rising fuel prices prompted many Manhattan buildings to switch from oil to gas heating, believing it would be a lower-cost option. Initially, this seemed cost-effective due to savings and tax incentives. However, a sharp drop in fuel prices in 2014 made the cost savings obsolete. Some buildings faced large expenses from the gas conversion project, though other types of conversions might still be favorable.
Legal Cases
Buildings involved in lawsuits must disclose potential outcomes in the financial statements’ footnotes. This includes issues like noise from nearby construction, damage from explosions, or disputes with the city. Accounting standards require reporting potential losses, though likely settlement wins are not included.
Mortgage and Credit Information
Details about mortgage maturity, refinancing, line of credit, and loan amortization appear in the financial notes. This information offers insight into future financial obligations.
Auditor’s Opinion
The audit report includes the auditor’s opinion on whether the financials accurately represent the building’s position according to Generally Accepted Accounting Principles (GAAP). A clean opinion is desirable, indicating no material misrepresentations.
Utility Expenses and Trends
Financial statements discuss utility costs and trends. They may include strategies to manage these expenses effectively.
Building Condition and Capital Expenditures
The financials note the building’s condition and potential capital expenditures. Large projects should be planned for using strategies like escrow accounts.
Commercial Leases
Important leases, such as retail spaces, affect the building’s finances. Expiration of significant leases can impact cash flow. Buildings should prepare for potential vacancies or new tenants.
Real Estate Tax Assessments
Real estate taxes can be substantial. Buildings should plan for tax payments and consider setting up escrow accounts to manage these obligations.
Super’s Unit Issues
The super’s unit may be rented out, generating income for the building. Issues related to this unit, including rental arrangements and renovations, are relevant to financial statements.
Tax Abatements for Shareholders
Programs like STAR exemptions and veterans’ abatements reduce real estate tax obligations. Buildings should budget for these abatements and monitor any phase-outs.
Large Delinquent Balances
Large accounts receivable can signal financial issues. Proper management of receivables is crucial to avoid financial strain.
Escrow Accounts
Escrow accounts are essential for managing large expenses, such as capital projects and real estate taxes. They help plan for future financial needs.
Non-Tenant Income
Buildings may receive income from various sources, such as movie rentals or vending machine contracts. These additional revenues can impact the building’s overall financial picture.
For more information or to consult on these topics, contact George Dimov, CPA, at george@nyc-account.com or fill out the contact form. George has extensive experience with luxury Manhattan co-ops and condos.
