An Insider’s Guide to Reviewing Co-op Building Finances
Nov 16, 2023
Once the offer is accepted and the deal sheet is sent out, there’s still work to be done if you’re buying a co-op. And you probably have plenty of questions: Who exactly is looking at all this data, what are they looking for, and who is responsible for the due diligence at this step? Let’s take a closer look at what happens next (as well as give you a peek at a sample co-op financial statement so you can get a better idea of the process).
At this point, your attorney will usually ask for the cooperative financial statements, board minutes, offering plan, house rules, proprietary lease, sublet policy, and purchase application on your behalf. If your buyer agent conveys that you are a serious, pre-approved, or all-cash buyer who has been searching for a while, it might be possible to obtain the financial statements before submitting an offer.
Once your attorney receives all those documents, fortunately, it’s them who will be performing legal and financial due diligence on your behalf. It’s important to note that financial due diligence is not the responsibility of buyer agents in NYC. Therefore, your attorney will review the cooperative financial statements instead of your buyer agent. While you are free to review them yourself, it’s a relief knowing that a competent attorney will thoroughly examine them.
Take a look at the short sample cooperative financial statements below but know that these statements can be (and often are) longer and more detailed. Not all cooperative financial statements are audited like this one. Also, you’ll typically only receive annual financial statements, meaning there’s a delay built in and you won’t have access to the current financial status of the building. No worries — this is all to be expected.
To address that gap, buyer’s attorneys usually request a co-op questionnaire that inquires about the building’s current status. In rare cases, you may be able to obtain the building’s current year budget or the latest monthly financial statement, although this request is rarely granted. It’s important to consider that making such an unusual request may be seen as difficult and could potentially lead to board rejection so tread lightly.
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Sample co-op financial statements for a building in Park Slope
FINANCIAL STATEMENTS December 31, 2016
[ADDRESS] OWNERS CORPORATION | [ACCOUNTING FIRM] Certified Public
Accountants
TABLE OF CONTENTS
Report Letter – page 3
Statement of Assets, Liabilities and Stockholders’ Equity – Income Tax Basis –
page 5
Statement of Revenues and Expenses – Income Tax Basis – page 6
Notes to Financial Statements – page 7
To the Stockholders of [ADDRESS] OWNERS CORPORATION
Independent Auditor’s Report
We have audited the accompanying financial statements of [ADDRESS] OWNERS
CORPORATION which comprise the statements of Assets, Liabilities and
Stockholders’ Equity – Income Tax Basis as of December 31, 2016, and the
related statements of Revenues and Expenses – Income Tax Basis for the years
then ended, and the related notes to the financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these
financial statements in accordance with the basis of accounting the Company
uses for income tax basis purposes. This includes determining that the income
tax basis of accounting is an acceptable basis for the preparation of the financial
statements in the circumstances. Management is also responsible for the design,
implementation, and maintenance of internal control relevant to the preparation
and fair presentation of financial statements that are free from material
misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures in the financial statements. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant
to the entity’s preparation and fair presentation of the financial statements in
order to design audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the
reasonableness of significant accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of [ADDRESS] CORPORATION as of
December 31, 2016, and the results of its operations for the year then ended, in
accordance with the basis of accounting the Company uses for income tax
purposes described in Note 2.
Other Matters
The Company has not presented the supplementary information about the
estimates of future costs of major repairs and replacements that accounting
principles generally accepted in the United States of America require to be
presented to supplement the basic financial statements. Such information,
although not a part of the basic financial statements, is required by the Financial
Accounting Standards Board, who considers it to be an essential part of financial
reporting for placing the basic financial statements in an appropriate operational,
economic, or historical context. Our opinion on the basic financial statements is
not affected by the missing information.
Even though these financials are only current as of the end of the last fiscal
year, you can still learn quite a bit about how the building is run. From these
sample co-op financial statements you can tell that the building is quite
frugally run, has more revenue than expenses and has kept costs for services
relatively low. This is a great building to be in!
NOTES TO FINANCIAL STATEMENTS December 31, 2016
Note 1. The Corporation
[ADDRESS] CORPORATION (“The Corporation”) was incorporated in New York in
May, 1984. Operations commenced in July, 1985, when the property was
converted to cooperative ownership. The Corporation qualifies as a cooperative
housing corporation under Section 216 of the Internal Revenue Code. The
Corporation’s shares have been issued representing 8 tenant shareholders’ units
represented by 624 shares.
Note 2. Basis of Reporting
The accompanying financial statements have been prepared on the cash method
of accounting used for federal income tax purposes. Consequently, certain
revenues and expenses are recognized in the determination of income in
different reporting periods than they would be if the financial statements were
prepared in conformity with generally accepted accounting principles.
Note 3. Land, Building and Improvements
The building is being depreciated on the straight-line method over 27.5 years.
Expenditures for major improvements and betterments to fixed assets are
capitalized, and expenditures for repairs and maintenance are expensed as
incurred.
The property was acquired in a tax free exchange in accordance with Section 351
of the Internal Revenue Code. Consequently, the Corporation’s tax basis in the
property for income tax depreciation purposes is the sponsor’s basis, increased
by the amount of gain recognized by the sponsor in the exchange.
Note 4. Mortgage Payable
The mortgage was refinanced in 2003. The prior mortgage with the New York
Community Bank ($68,785 principal balance) was replaced by a new mortgage
with the same bank in the amount of $80,000 on April 31, 2003. The new
mortgage payable, secured by the land, buildings and improvements, is payable
in equal monthly installments of $836.42, consisting of interest at the rate of 5.75
percent per annum, with the balance of the payment applied to the unpaid
principal balance.
This amount does not include any monthly escrow due. The mortgage is for a
term of fifteen years. Assuming that the Corporation has made all of the
payments, the mortgage will be fully paid off on April 4, 2019.
Note 5. Maintenance Charges
Maintenance charges assessed to the tenant-shareholders are intended to cover
operating expenses of the building, as well as amortization of the mortgage
debt. Accordingly, the portion of maintenance used for amortization of the
mortgage is added to the stockholders’ equity as additional paid-in-capital.
Note 6. Future Major Repairs and Replacements
The Corporation has not conducted a study to determine the remaining useful
lives of the components of the common property and current estimates of the
costs of major repairs and replacements that may be required in the future. When
replacement funds are needed to meet future needs for major repairs and
replacements, the Corporation may have the right to borrow, utilize available
cash, increase maintenance charges, pass special assessments, or delay repairs
and replacements until funds are available. The effect on future assessments has
not been determined at this time.
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