When a conversion sponsor fails to meet his financial obligations, the result can be a default on the underlying mortgage, one of the most destructive catastrophes to strike a co-op. Even a default on the sponsor's maintenance obligations can put a co-op in dire straits. Although there is no ironclad method to protect a building from a sponsor default, a vigilant board of directors can look for early warning signs of a coming onslaught and take precautions accordingly.
The odds against an unanticipated default can be substantially reduced if the board of directors works closely with its attorney, accountant and managing agent to implement a system of routine financial check-ups on the sponsor. Just as the managing agent conducts regularly scheduled inspections of the building structure and systems, the board should implement a program that will reveal any early signs of financial difficulty on the part of the sponsor. Such a checklist, if reviewed at least once a year, will alert the board to any potential problems looming on the horizon.
What to Look At
The most important source of information is the financial disclosure amendment, a document that must be filed annually with the Attorney General's office by a sponsor or holder of unsold shares owning more than ten percent of the shares of a housing corporation. This amendment is to be presented, via first class mail, to everyone residing in the building including board members, share-holders and occupants of unsold apartments. According to the Attorney General's office, the following information is required to be included in the amendment:
- (a)the number of unsold shares remaining;
- (b)aggregate monthly mainte-nance payments for the unsold apartments;
- (c)aggregate monthly rental received from the occupants of the unsold apartments;
- (d)a list of all unsold shares which have been pledged as collateral for loan(s) or otherwise represent security for financial arrangements;
- (e)in the event that unsold shares have been pledged as collateral, the identity and address of the lender(s); the maturity date of the loan(s) and payment obligations under the loan(s); and
- (f)schedule of all other cooperatives and condominiums in which the sponsor or holder of unsold shares is a principal owning more than ten percent of the shares or units.
Examine Sponsor's Cash Flow