Consider a Building's Fiscal Health A Buyer's Guide to Reading Financial Statements

One of the most important issues in deciding if a cooperative or condominium apartment is a wise

investment is the financial status of the building itself. The key document that potential buyers should review is the annual financial statement. This review, commonly known as due diligence, should be performed by either an attorney or an accountant before signing any contracts. However, before incurring the expense of retaining a professional, there are certain key elements of a financial statement that can be reviewed by the buyer himself.

Financial statements are often required by banks before they will approve individual loans to apartment buyers. A good financial statement, if properly prepared, will convey complex facts with simplicity and will be easy to read. It is important to try to review the last two years of financials to track changes in income, expense and reserves.

The financial statement is usually prepared by a certified public accountant. When prepared accurately, the statement will indicate whether the building is in good or poor financial condition. A financial statement should include a balance sheet describing assets and liabilities, a statement of income and expenses (also known as a statement of operations) and a statement of cash flows. Footnotes are used to clarify many of the numbers that appear in the statement and will disclose other pertinent financial information.

Understanding the

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7 Comments

  • Is an increasing deficit in the equity section a (debit balance) caused by the deprecation expense a reason for concern? Newly refinanced mortgage exceeds total assets book value. Fixed rate 9 years left on it. When it ends only 1% of principal will be paid. It was refianced when assets were over valued. Can this cause an issue with obtaining a mortgage in the future? Cash flows seem adequate, reserve has enough for newly contracted repairs and extra 33% of current maintenance fees for future repairs. Revenues exceed expenditures by a slight amount.
  • Two items from the financial statements of the coop I'm considering trouble me. 1) Reserves of $230,000 for 94 apts. 2) Outstanding note for $2 million, on which interest only is being paid, with balloon due 2013. Assets equal $4 million. Operating expenses $1.5 million. I have not signed the contract. Should I walk away?
  • This is a great article. Thank you for the helpful tips. There is so much information on financial statements that it may be difficult to know what to focus on. I also like that you mention what else to look for that is not on a financial statement such as flip taxes and litigation against a building.
  • Clifford M. Bernstein on Thursday, January 19, 2012 5:29 PM
    Very helpful. In computing the deficit at a Coop are capital expenditures included?
  • Most helpful article on coop purchasing I've read so far. Have your written a book and if so, can I buy on Amazon? Applying some of your insight pointed out some obvious issues with a potential purchase finances. You may have saved me from making a huge mistake. Thank you!!
  • I have an accepted offer for a unit in a co-op. I have received the audited financials of the co-op for 2013,2014 and 2015. There are few things which i see in the financial and I am not sure if these should be a red flag a. the co-op has a loan 2.7 mln @6.5% which is maturing in 2019 and whole principal will be due for payment. The net property value (building and land less depreciation) is only 2 mln b. reserve fund is 126k against the annual maintenance of 1.3 mln b. there is a revolving credit line of 90k becoming due in 2019 c. the balance sheet shows accounts payable of 200k (Total Balance sheet size 2.5 mln) Any feedback on the financial health of this co-op, based on the above numbers, will be really helpful
  • JT, your lawyer is most suited to make a determination on any red flags.