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.