Is My Cooperative in Trouble?

A problem in some cooperatives is the boards do not treat the operations and management of their cooperative like a business. While the cooperative structure is a home and a community, it is also the primary asset of a corporation that needs to be managed. The “asset” needs to be kept in good working order to generate the revenue needed to operate. Allowing that asset to fall into disrepair or to be mismanaged will result in lost revenue, which may, in turn, jeopardize the cooperative’s ability to provide a home and community for its members. In simplest terms, there is a natural reluctance to raise your own “rent” affecting your personal finances, even though it may be necessary to maintain the viability of the cooperative business and result in savings in the long run.

Minor problems can become big problems with big consequences. For instance, leaky pipes may seem like a small problem, but they can have a severe financial impact. They result in higher water bills but also can be the source of significant mold problems. Mold remediation can be very expensive. Low water pressure can be a sign of a need to replace the main water supply lines to your property, also an expensive undertaking. Buckled sidewalks result in tripping hazards. These hazards can result in lawsuits against the cooperative. These are just a few examples of seemingly small problems resulting in larger more expensive issues.

Management and financial tracking are also critical with their own subset of issues that can result in larger problems down the road. An uptick in delinquencies can be a sign of lack of oversight. Worse yet, it could also be a sign of a slowing economy which may impact a greater majority of members’ ability to pay their monthly charges. Cooperatives need to look at macro issues such as this and plan accordingly. Many cooperatives actually have a plan to help members during an economic downturn. These plans may include hardship reserves to help members who need it, contingency reserves and expense reviews to ensure your cooperative is spending money where it needs to and not in areas that can be deferred during the recession.

For U.S. Housing and Urban Development financed cooperatives, it is required that the cooperative deposit 3 percent of annual monthly charges into an operating reserve. This deposit continues until the operating reserve is 15 percent of annual monthly charges. Then the annual deposit is decreased to 2 percent of annual monthly charges. After the operating reserve reaches 25 percent of annual monthly charges, annual deposits are no longer required. This creates an operating reserve that has been found effective in dealing with most potential operational issues outside of the normal cash flow of the property and provides a good rule of thumb for any cooperative to follow in creating an operating reserve.

Another issue that may result in bigger problems is accounts payable. Bills can stack up quickly and not addressing the results in a big problem that will negatively impact operations and may result in late fees, lawsuits, and unneeded legal bills. Not paying a contractor or real estate taxes will result in liens against the property. These liens may be difficult to overcome and will result in increased legal fees.

For all of these issues, the question of whether to raise revenues now, i.e. raise the “rent,” almost always results in lower future expenses and long-term savings.

Boards need to continually monitor their operations and property, identify problem areas and address them. By doing this, they will keep small problems from developing into issues that are difficult to resolve. It will also help you identify whether or not outside help is needed to address them.

Boards need to be asking these basic questions on a continual basis:

  • Does the cooperative have trouble paying its bills?
  • Are accounts payable in excess of 60 days?
  • Have maintenance calls increased?
  • Are there unresolved capital repairs?
  • Has vacancy increased?
  • Has applicant traffic slowed?
  • Have operating expenses increased?
  • Are we increasing monthly charges regularly?

By asking yourself these questions routinely, and being honest about the answers, you can assess whether or not problems exist that you should address. These questions help you identify common problem areas all cooperatives may face from time to time. Common problems include:

  • Underestimating operating expenses;
  • Underestimating the frequency and cost of repairs;
  • Not having sufficient cash reserves;
  • Not tracking occupancy trends or turnover adequately;
  • Not tracking delinquencies and late payments adequately;
  • Not addressing member concerns;
  • Not addressing repair issues and public safety issues on a timely basis; and
  • Not being honest about the need for financing to address physical issues and reposition your property.

An important part of the assessment process includes a physical inspection of the property. This inspection needs to be thorough and examine all areas of the property, including the roof. Inspections should ensure that the property is Americans with Disabilities Act compliant: entry doors are locked; hallways and stairwells are free from obstruction; heating, ventilation and air conditioning systems are in working order; and emergency vehicle lanes are clearly marked. Also, the inspection should address all common areas including laundry rooms, trash enclosures, crawl spaces/basements, mailboxes, playgrounds, and property signage. It is important to also check for pest infestations regularly. As part of the process, the property should maintain a disaster relief plan and coordinate with local emergency services as necessary.

Successful cooperative boards are pro-active about reviewing their property’s performance. These are the things you should do regularly to ensure you catch problems before they become significant issues:

  • Ask yourself the “are we in trouble” questions above;
  • Review performance of the property with the management company monthly;
  • Be mindful of the common problem areas and mistakes;
  • Review property management performance regularly;
  • Visually inspect the property thoroughly and regularly (at least every 6 months);
  • Be proactive in dealing with issues; and
  • Seek outside help as needed.

By establishing this framework to regularly assess your performance, you will help keep your cooperative ahead of potential problems and set yourself up for future success.

Hugh Jeffers is vice president of origination at Centennial Mortgage in South Bend, Ind.

How to Streamline the Process of Collecting Carrying Charges

This may be the most obvious observation in the world: Members staying current on their carrying charges are essential to the lifeblood of the cooperative corporation.  Without them, you are in big trouble.  It seems so fundamental, but our office still sees frequent issues, popping up on a daily basis and we thought this was a good opportunity to go over some tips on how to streamline the process.

  1. Partial payments: Have a consistent policy on whether you will take partial payments after a Notice has been issued.  We don’t need confusion amongst members as to whether the partial payment has taken them out of the legal process.  We also don’t need a manager making an expectation for one member and not another, as there could be legal consequences for showing disparate treatment of members.  We want to work with members where can, but we need to be consistent.
  2. Certified funds: Mandate that once a Notice goes out, only certified funds will be an acceptable manner of payment. Time is money and the cooperative should not have to wait to see if the funds are actually there.  This is at minimum a showing of good faith by the delinquent member that the funds are available and keeps the follow up by management to a minimum. The money is good when it is presented and deposited, without any fear of getting an NSF notice.
  3. Make sure delinquent members come into the office and pay in person. How many times have we heard the old phrase “the check is in the mail”?   For Cooperative purposes, the “mail” is usually the dropbox, but you get my point.  I don’t like going to court and having a member tell me, “well I dropped it off in the box.”  That is not always verifiable or credible.  Having the delinquent member go into the office with certified funds and getting a receipt confirming payment will eliminate that issue, since that payment has been verified likely would have resulted in them not even being in court that day because the case would likely have already been dismissed.
  4. Accepting Carrying Charges After the Time Provided in the Judgment for Possession: Laws will differ state by state, but in Michigan like many other states, a Cooperative has no obligation to accept payments after the time to pay set forth in the judgment has elapsed.  Every month it seems, we will have Defendant/members trying to pay after the timeframe has expired, and sometimes after we have ordered the bailiff out to execute and dumpsters for their belongings.  Legally, you have no obligation to accept this money because the ship has sailed.  Of course, the Cooperative has every right to make accommodations for payment if they choose to do so, but the court has no authority to require you to accept these payments.  If they do, it is an appealable issue.
  5. Be clear and unambiguous when the Court Officer/Bailiff comes to execute: It is customary for the executing officer to contact the management company or the lawyer who ordered the execution to ascertain if the execution is still necessary, or if the delinquent Defendant /member has paid. Saying anything other than the “Defendant has not satisfied the judgment and the writ needs to be executed” can cause issues.  We just had to handle a similar issue where the court officer at the time of execution believed there was some type of a payment plan because he heard some payment had been made.  The manager didn’t tell him to hold off on execution, but because the directive was not clear, the court officer took it upon himself to discontinue the execution process which required additional attorney fees to get the process back on track.
  6. Creating habitual non-payment policies. If you are in a state like Michigan which allows a member to ”pay and stay,” meaning if they can come up with the money within 10 days after the judgment is signed, they have cured the balance by satisfying the judgment and can stay.  It costs time and resources for members who are habitually late, or “frequent flyers” as we call them.  Work with your cooperative attorney to adopt a policy that requires any member who is late 3 consecutive times or 4 times in a calendar year to be terminated.  Costs, resources mount when members do not take their obligation seriously.  This policy gives you more leverage on problem members and provides an independent cause of action that they cannot satisfy by paying every time they are taken to court.  It may sound harsh, but in the event the cooperative is not able to recoup all of their fees every time they go to court, those losses add up.  It is not fair the rest of the membership should pay the price for those who don’t live up to their obligations.

Creighton D. Gallup in an experienced Partner with Pentiuk, Couvreur & Kobiljak, P.C. He has drafted proposed legislation exempting housing cooperatives from the Michigan Truth in Renting Act and the Michigan Consumer Protection Act. You may recognize him as Creighton is a frequent instructor at NAHC and MAHC where attendees benefit from his many years’ experience working with management companies and housing cooperative boards.


Please note this content is provided to our readers for educational purposes but it is not intended and should not be regarded as legal advice. Readers are encouraged to consult with competent legal counsel for personalized guidance.

Green Rewards Could Save Your Cooperative Money

Many stories have been written about the value of employing energy savings devices throughout cooperatives. These stories explore the virtue of cost savings and the benefits of living green. But, did you know that going green can also reduce the cost of mortgage interest for your community’s loan?

What are Green Rewards?

The Department of House and Urban Development (HUD), Fannie Mae and Freddie Mac, collectively the government sponsored entities (GSEs), previously rolled out incentives including lower interest rates or reduced mortgage insurance cost for cooperative community loans that have adopted green or intend to adopt green energy programs. These green incentives have been extremely successful with borrowers.

What are the benefits?

The GSEs offer two avenues of achieving Green Rewards: a) those properties that were previously designed or renovated to be Green Certified under one of the several Green Energy Certifications or b) those properties that will do Green Energy retrofits as part of a refinancing of the property. Each of the GSEs has differences in their respective programs. It is important to consider each program individually and not confuse their attributes. As a loan underwriter recently said to me; “On the surface each program looks similar; however, in actual practice, the Fannie and Freddie programs are quite simple while the HUD program is cumbersome.”

How does my cooperative tell whether this program is a benefit?

Before considering the program differences, a broader approach is in order. Each of these programs have cost associated with them. These costs must be balanced against the potential savings. The savings come in two varieties: a) the actual utility cost savings and b) the interest rate or in the case of HUD, the reduction of mortgage insurance premium (MIP) that can be saved as a result of refinancing. Professional contractors will evaluate the property to determine potential utility savings and cost; however, paybacks from utility savings alone can be quite lengthy. On the other hand, the “loan savings” being either a lower interest rate or a reduction of the MIP are generally +/- .25 percent reduction in rate. Obviously saving a .25 percent point of interest is far more meaningful to a larger mortgage versus a smaller mortgage. To further illustrate, a $2.5 million mortgage at a rate of 4.50 percent versus a rate of 4.25 percent creates a savings of approximately $4,400 annually. Some Green HUD reports can have an up-front cost of as much as $10,000 to $15,000. Therefore, it would take nearly three years to repay the cost of the HUD report alone. On the other hand, a .25 percent point reduction in rate on a $20 million loan can create savings of over $35,000 annually. Therefore, it is essential to understand upfront what the potential loan and utility savings are versus the cost of reporting.

To have an existing property be Green Certified means something very different to each of the GSEs. Under the HUD programs, the MIP can be reduced to ¼ of 1 percent if the property is Green Certified. However, if the property is already deemed “affordable” by HUD (90 percent subsidized), then the property already qualifies for a reduction in MIP. The cooperative cannot stack the Green MIP reduction upon the affordable MIP reduction. As well, HUD requires more initial due diligence and ongoing monitoring than Fannie Mae or Freddie Mac under the certification program.

How do the programs compare?

Both Fannie Mae and Freddie Mac offer a Green Certification program. We recently had a client develop a new building (opened in 2016) that included significant energy conservation design and construction elements. There was little doubt that the client could obtain the Green Certification Program for either Fannie Mae or Freddie Mac. The cost of the certification of approximately $20,000 was significantly larger than the annual Green interest rate savings the $7.5 million loan would have generated. This is not to say Green Certification reward programs don’t work, but rather that they should be evaluated closely at the onset to insure cost and rewards are properly aligned.

The Green Certification programs continue to evolve and grow. A board should work closely with its lender at the outset to insure that the Green Certification rewards exceed the cost and commitment. The second broad class of Green loans comes from properties that would benefit from retrofitting to achieve Green energy savings. In each of the programs the onset is similar. An independent third-party company inspects the property and its records. A detailed report is prepared wherein building components are evaluated and charted such that retrofits and anticipated savings are readily identifiable. In a Green retrofit, your HUD lender should work with you through the report to identify what aspects of the property can be modified to reduce energy consumption.

HUD requires a significantly high level of savings with annual monitoring. If initial repairs do not meet the required goals, then additional retrofitting may be required. Your Freddie Mac or Fannie Mae lender will work with the board to understand the reports and focus to find energy savings in either energy (gas and electric usage) or water savings.

The required benchmark is currently 25 percent of utility savings for either water OR energy (gas/electric) cost. You cannot combine water savings and energy savings to meet the benchmark. In the Midwest, properties that have gone through the experience find energy savings are too cost prohibitive to meet the required benchmarks. Generally, the best savings come from water conservation directly related to efficient toilets and low-flow outlets. Freddie Mac and Fannie Mae do not require a minimum cost outlay to achieve the savings benchmarks.

Fannie Mae will pay for the report if the Green program is used. Freddie Mac will pay for the report regardless of the outcome. Both agencies require some annual reporting; however, there are not further retrofitting requirements if the savings are not achieved as anticipated. HUD as well doesn’t require a minimum retrofitting expense, but its benchmark guidelines are challenging. HUD also requires an assurance that if the energy goals are not met after one year that additional retrofitting requirements will be added until the goal is met. Therefore, cooperatives should consider having “comfortable room” in their initial estimates and costs to achieve the savings within the first year. Energy conservation has been and will continue to be a hot topic for the managers and owners of properties. The GSEs have all created programs to address and incentivize properties to get certified or retrofitted. As with any incentives, these programs have changed and likely will continue to evolve. It is important to compare and contrast each of the GSEs programs before selecting a single course of action. Go green and save green but be wise.  

Seven Common Budgeting Mistakes and How to Avoid Them

Each year, a cooperative’s board of directors must decide on a budget for the coming year in order to pay the bills in a timely manner, fund reserves and maintain the asset. This is a principal responsibility of the board of directors as outlined in the corporate bylaws.

Budgeting is challenging for all boards, regardless of the cooperative’s age, location, and needs. Here are a few considerations for your cooperative “budgeteers.”

1. The Annual Optimist

No one likes to increase monthly carrying charges for the membership. Often there is a tendency to make optimistic assumptions concerning what the coming year holds. You may want to assume that things will run smoothly without change and without special problems or needs. It never works out that way. A tree dies. A galvanized pipe breaks. A key employer in the area closes and lays off workers. The city increases property taxes. There is a fire, and you have a $10,000 deductible. Truly, you cannot predict the future. It is okay to base your budget on prior experience, but beware of assuming everything will run without incident. When you demand that a proposed increase be skimped to save a dollar, you may be skimping the cooperative and not the budget.

2. Investing to Manage Expenses

What are you currently earning in interest on your reserve accounts? Unless you have an investment secret that you need to share with all of us, most likely your interest income has been a fraction of what it used to be. Perhaps the best way to increase the return on your reserve funds would be to use reserves to update a specific facet of your operations to reduce an expense. A terrific example is replacing those old toilets with low-consumption toilets that reduce the water bills. It costs nothing to have an analysis done to see what the return on investment may be. Many cooperatives still have old HVAC systems that use the obsolete R-22 refrigerant. The cost of R-22 has sky rocketed. Your reserve funds may net you better operations by planning replacement of old equipment. Any savings can be invested back into your reserve accounts.

3. The Annual Pessimist

The only thing worse than trying to enter the fiscal year too optimistically is the damage done by that board member (or members) who are never satisfied with anyone or anything. “How dare you suggest that the rates be increased when nothing is done right in the first place? We pay too much for this or that. Staff is incompetent. No one monitors what is paid.” You know this person. He wants to complain about everything, regardless of reality, aging of the asset, the challenges involved in the daily operations of the cooperative, especially in a constant, negative environment. Should you manage the property efficiently? Of course. Should you expect champagne conditions on a beer budget? Perhaps not. Work to control costs but do it with a positive attitude that does not create friction. future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/ maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

4. No Long-Range Plan

Do you have a 10-year plan for your cooperative? A 5-year plan? Have you forecast operations, income needs and reserve usage? NAHC holds seminars on long-range planning. As a member of the board of directors, you are a fiduciary, responsible not only for the moment but for the COOPERATIVE HOUSING QUARTERLY | WINTER 2018 future. If you do this year’s budget without measuring it against long-term needs, you are passing on a problem to future board members. They may be faced with a 10 percent increase due to the failure this year to increase rates by 3 percent. Your cooperative should never just be a place where people live solely for the “low rents.” Your cooperative should facilitate community living, too. Budget carrying charges/maintenance fees properly; do not budget just for a “low rent” philosophy. You may end up with only “low rent” residents who do not understand cooperative living.

5. Current Events

On a national, state and local basis, things change and things happen that affect the economy of individuals, businesses and governments. Does your board of directors pay attention to these events and trends? You will find you are not immune to these changes. For example, after September 11, 2001, insurance rates sky-rocketed. Today, unemployment is at record low levels nationally and in many states. You are competing for professional staff and services. So how will you adjust your budget to anticipate higher personnel costs, higher health and employee benefit expenses? New HUD mandates on property upkeep? New demands for security and security systems in a social time where crime is down, violence is up and everyone is suing property owners if the victim suffers injury. As a board member and trustee, you need to keep up with current events and not assume immunity from the impact of these events.

6. Reserves

Reserves, reserves, reserves! Board members, do you know what your reserve balances are? Do you know how much is set aside monthly for your reserve accounts? Do you know where they are invested? Are they fully FDIC insured? Do you know the trend in reserve funding over the past years and the forecast for the coming 5-10 years? Reserves and proper funding of the reserve accounts, both for capital replacements (RR) and for the general operating reserve (GOR) are the difference-maker for your cooperative. They provide you with operational and budgeting strength if well-funded and planned for the future.

7. The Big Picture A board of directors, as stewards of the corporation, acting in the best interests of the cooperative as a whole, should view the budget process in the overall, big picture and less as a microscopic examination of each and every individual expense. Whatever one tries to pin down to an exact value will mean absolutely nothing as soon as the new budget year begins. Have a long-range plan. Commit to that plan and do not allow the skimpers to take over the budget process. Each year, NAHC has training in budgeting. Do you attend that class? Do you need to go back and not only attend it but pay attention to what is presented? In conclusion, as a steward of the cooperative corporation, avoid the common mistakes and attitudes mentioned earlier. Be a positive participant in your cooperative’s operation. See if one or two of the “budget mistakes” noted in this article are familiar to your board of directors. Focus on those to strengthen your budget and in the end, your cooperative.

Bill Henley serves as the vice president of The Columbia Property Group, Inc. He provides over 40 years of experience in multifamily housing with extensive knowledge in cooperatives and real estate management. Henley oversees the Georgia portfolio which contains over $51 million of multifamily assets.

Project Costs: What’s the Bottom Line?

“How much will this cost?” is one of the first and foremost questions addressed when a capital project is presented for board review and approval. Whether the project in question is mandatory (like a code required fix) or discretionary (like new landscaping or interior finishes), the cost should and will inevitably be a key factor in the decision making.

If one has ever bought a car, one knows that there is always a difference between the initial price and what one pays at the end of the transaction. Though hardly alone in doing so, the automobile industry is notorious for touting the sticker cost or minimum monthly payment in large writing while effectively burying the fine print (taxes, licensing fees, optional items). By the time they are added, along with financing, the cost is unsurprisingly much higher. Such, too, are the costs of capital projects; it can be difficult to assess a total project cost based on the estimate or proposal.

A roof replacement is a good example. First, there are the hard costs: roofing materials themselves and labor associated with their installation. Lumped in with these hard costs are optional extras, like smaller roofs nearby (bulkheads, awnings, etc.) that should be replaced at the same time, or maybe additional insulation or possibly even extras on top like solar panels. Squaring away all the potential add-ons, should leave the cooperative with the base hard costs of the project. It is also necessary to include soft costs in these calculations. Depending on the location and circumstance, there will be further costs for permitting, taxes and insurance.

For the roof replacement, there may be a permit required from the local town or city, taxes on the roofing materials (if not included in the contractor’s price or exempted) and supplemental insurance if the cooperative’s carrier requires it. Oversight can be another tricky soft cost to estimate. Depending on the scale of the project, personnel on behalf of the cooperative will need to be available for coordination and periodic observation to confirm that the project is completed correctly. This person can be a volunteer board member or a member of the cooperative management team; just remember that the cost of involvement in a larger scale project may not be included in the management team services.

Additionally, depending on the project, neither the board member nor management team may be technically proficient enough to observe the project properly, in which case an outside professional (like an architect/engineer) may be needed. Last, but not least, once all the soft costs have been added, there must be contingency allowances. A certain percentage of between 5 and 15 percent varying by project should be added and set aside in case of unforeseen problems that may arise. If one has ever seen one of the popular home improvement shows on cable where people renovate or flip houses, one knows something always goes wrong: unexpected damage that was previously concealed; unexpected delays due to weather; a surprise potentially hazardous material (like mold or asbestos) that needs to be tested and abated. As with the roof example, one could come across all three: structural beams that were damaged and now need to be repaired, a delay due to rain or snow, older roofing materials that contained asbestos at some point in time and may need to be tested and/ or abated.

At the end of the day, the project’s soft cost combined can add up to the cost of the base project itself. This scenario may sound crazy, but it is true. The consumer company, SoFi Lending Corp.*, had an advertisement placed in the Black Friday shopping circulars of several newspapers; it was designed to look like a normal advertisement for holiday shopping from a department store, but it featured a teddy bear for $87.56, a waffle iron for $182.67 and blender for $1,458.71. Its point was that with bad financing from high interest credit cards, one pays much more than one realizes for consumer goods. The same holds true for capital projects: a base proposal from a contractor may come at one price, but the true cost will undoubtedly be higher.