Co-Operative Boards and the Approval Process

Co-Operative Boards and the Approval Process
Every co-op Board of Directors requires a complete statement of assets and liabilities with documentation of ALL entries. And remember, not all Board members are financially sophisticated. Preparing the financial statement in a clear and comprehensive manner can save both time and frustration for buyer and Board as the review process proceeds. Naturally, each financial statement is unique and requires its own notes and support documents in order to appear to its best advantage. Your Warburg Realty agent can provide you with insight into both the particular requirements of the building in which you are interested and the most effective way to present your financial information so as to create a smooth, trouble-free transaction. In the meantime, here are some helpful tips to prepare you for what will be expected of you:
  • Use the financial statement form that is distributed as part of the application package provided by the building or its managing agents.
  • Obtain a copy of your credit report, so you can review it before the Board does. Also, some buildings may ask for more specialized or detailed reports like Fidelifacts, Bishop or Proudfoot, which go into detail about credit and personal history.
  • Be prepared to provide complete tax returns for the last two to three years.
  • All listed assets must be documented with bank statements; all securities, bonds, IRAs and other retirement accounts documented with brokerage statements; all real estate values verified with appraisals or market opinion letters.
  • In the case of partnerships, a letter from the general partner or accountant in charge will be needed explaining how the listed value was determined.
  • Life insurance cash values should have a statement confirming them (applicants frequently list face value of life insurance as an asset; it isn't.)
In addition, there are many specific financial situations which require special explanations. A few of the most frequently seen are:

PRIVATELY HELD BUSINESSES: You must explain how the listed value has been determined. For example, if an earnings multiple is used, evidence must be cited to indicate that such a multiple is typical for your particular industry. If a valuation of equipment is included, both the cost and depreciation schedules should be listed. In general, a corporate accountant is the best person to explain the value of a privately held business. Frequently, when the business represents a large part of the purchaser's assets, a Board will require that a corporate financial statement and/or tax return be provided.

REAL ESTATE INVESTMENT PARTNERSHIPS: K-1 forms included in Federal income tax returns will confirm profit or loss in real estate partnerships. Boards will ordinarily require substantial documentation on real estate partnerships; individuals whose net worth is largely in such partnerships must be prepared to demonstrate the value of each one by producing appraisals, confirmations of income, or contracts of purchase. Documentation is especially important if depreciation renders a buyer's taxable income small or nonexistent. Without a reasonable explanation, all Boards are suspicious of tax returns bearing low numbers submitted by buyers claiming high incomes.

STOCK OPTIONS: A letter confirming the number of options granted, the date or dates on which they become exercisable, and the price, must be issued by the institution which has made the award. The value of the options (the difference between the option price and the market price minus any applicable taxes) must be clearly shown.

A MARRIED COUPLE PURCHASING IN ONE NAME ONLY: As far as Boards are concerned, a married couple is a legal entity. If there is ANY question about the sufficiency and clarity of the assets and income being shown by the purchasing spouse, the financials of the other spouse will be asked for. This happens frequently and can cause both embarrassment and delay to the purchasing process. To avoid problems, both parties should present full financial information from the outset.

GUARANTORS: There are co-op buildings in Manhattan which will not accept any third party guarantees. Those buildings which accept them (the majority do) will not be satisfied with a letter vaguely promising to take care of any problem the prospective purchaser might encounter with maintenance or assessment charges. Guarantors must expect to execute a binding document in a form dictated by the Board and to provide full financial disclosure. Often, a Board's concerns can be addressed without a guarantee if a buyer is willing to place maintenance (typically six months to a year) in an escrow account as security against a default in the maintenance.
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