There are countless war stories told by real estate brokers of deals that fell apart because the buyer felt that the building's financial statement contained negative information. There is no question that it is essential to review the financial information on a co-op corporation or condo association prior to buying. However, it is equally important to create reasonable criteria for making a good evaluation. All too frequently buyers analyze financial reports on co-ops and condos in the same manner they would any other financial investment, and this is fundamentally wrong. In any other economic investment the analyzer searches for economic opportunity to create greater profit; however, in purchasing a co-op or condo apartment, economic opportunity is not an element. Rather, the analysis is oriented to ascertaining ongoing stability.
Under New York State law, every co-op corporation and condo association must issue to the board of directors, and to shareholders or unit owners, a financial report prepared by an independent, certified public accountant within four months of the end of its fiscal year. The buyer and his financial adviser have the right to review this document at any stage of the buying process. In every financial report there must be a letter signed by the accountant passing an opinion on the financial condition of the building. There are three types of opinions normally rendered.
In the "clean" opinion, the most common type of report, you will find the words: "Presents fairly in all material respects"¦" A clean opinion means that the accountant found no objections. In the "subject to" opinion, the accountant has identified some reason for concern over possible future economic exposure leading to a maintenance increase. An "except for" qualified opinion means that the accountant believes there was some element of the review where the material examined was inadequate or not satisfactory to pass a clean opinion. An "except for" scenario can include any vague item on the balance sheet - such as $20,000 for building repairs or a large sum owing from a tenant/shareholder - that can't be verifed.
In the event that a building's financial statement presents either of the two "qualifying" statements, there is reason for further investigation and review by the buyer. In many instances the reason for this qualification may turn out to be immaterial; but in some cases, if the amount of the unverifiable item is significant, it could affect the future stability of the monthly fees.
The balance sheet is a snapshot of the financial condition of the building at a specific point in time. It consists of three primary parts: assets, which is what the building owns; liabilities, which is what the building owes; and stockholder's capital, which represents the building's wealth. Assets and liabilities are segregated into current and long-term. The defining point for current is whether or not the item will be converted to cash received or paid, in the ordinary course of business, within a period of one year.