What should I be asking about the building's financials and history?
An attractive and well dressed man wearing a dark suit and sitting in an austere, modern, condo with views of the city visible trough the floor-to-cieling windows looks bewildered. He is starring down at a stack of papers containing financial information and graphs. The image has a tinge of icy blue as the chilling realization of how ambiguous some of these numbers are.
More Than an Apartment:
How to Investigate a Building's Financial Health Before You Buy in NYC
As a real estate agent in New York City, I've guided countless clients through the thrilling, and sometimes daunting, journey of buying a home. We spend hours looking at floor plans, mentally placing furniture, and debating the merits of a walk-in closet vs a larger bathroom. But what many buyers overlook is one of the most critical parts of the purchase: the building itself.
In a city of towering co-ops and sprawling condo buildings, you're not just buying a single unit; you're buying into a collective (sometimes a literal corporation). The financial and physical health of that building will directly impact your quality of life, your wallet, and your long-term investment.
Beyond the beautiful finishes and a great view, what should you be asking about a building's financials and history? Here’s a guide to help you dig deeper and make a truly informed decision.
1. The Documents: Your Financial Rosetta Stone
When you find a property you love, your first step is to request a series of key documents. This is where the real due diligence begins. In New York City, your attorney typically makes this request as a standard of practice. Your attorney should also know exactly what to look for and can walk you through their findings after they have completed their due-diligence. If for some reason you opt not to use an attorney (highly inadvisably), or you want to know all you can; please read on.
The Building's Offering Plan: This is the foundational document for any co-op or condo, created when the building was first converted or officially placed on the market for sale. It provides a comprehensive look at the building's history, its bylaws, and the rights and responsibilities of shareholders or unit owners. This is where you may find the original layout of the unit you wish to purchase or sell. This is also where you may learn about quirky by-laws that limit how you rent, remodel, or use your space.
The Last Two Years of Financial Statements: A deep dive into the building’s balance sheet and income statement is non-negotiable. This will give you a clear picture of its financial health, including its assets, liabilities, and how it manages its income and expenses. It is important to remember that there are not a lot of standards here. A building may have different sets of numbers than its neighbors because of age, recent repairs, number of units, tax assessment, staffing costs, debt, specific savings goals, etc. To get an idea of what is “ok”, you should consult either your attorney or a lender or both. Lenders have the benefit of typically already having the financials and a history of the institution’s willingness or history of lending within the building. If you are concerned about a specific building; speaking to your lender could provide a lot of clarity on what is acceptable financially and why.
The Last 12-24 Months of Co-op/Condo Board Meeting Minutes: These minutes are a goldmine of information. They chronicle the board's discussions on everything from roof repairs and noisy neighbors to upcoming special assessments and capital projects. Reading them can give you a feel for the board's priorities and any potential headaches down the line.
For instance: Two buildings roughly the same age and with the same number of units may each have $2.4mm in their reserve funds. If you see that one of the boards has been talking about replacing the marble floors in the lobby and is struggling to find estimates to complete the work for less than $1.5mm … The minutes may shade the financials in a light that is more or less favorable.
2. What to Scrutinize in the Financials
Once you have these documents, it’s time to put on your detective hat. Here's what my attorneys and I look for:
A Healthy Reserve Fund: Think of the reserve fund as the building’s savings account. A well-managed building should have a substantial reserve to cover unexpected major repairs, like a new boiler or roof replacement, without having to levy a special assessment on owners. A low or nonexistent reserve fund is a major red flag (depending on the building).
A Low Percentage of Owner Defaults: Look at the building's delinquency report. A high number of owners consistently falling behind on their maintenance or common charges can indicate a building with financial instability or a lack of enforcement by the board. This could also lead to a strain on the building’s cash flow.
No History of Major Special Assessments: While occasional special assessments are normal for a well-maintained building, a history of frequent or large assessments can signal poor financial planning. It could mean the board is constantly playing catch-up on deferred maintenance, which will ultimately be paid for by the owners. It could also mean that the board chooses to run lean, relying on the knowledge that the thoroughly voted unit owners each hold substantial reserves independently. They simply would rather individuals manage their funds instead of the corporation. (These issues are rarely binary.)
Building Status: Landmarks and Local Law 11: The beautiful facade of a historic pre-war building might be a landmark—a coveted feature that comes with specific regulations. Landmark status can add significant costs to any exterior renovation. Similarly, pay attention to any mention of "Local Law 11" work. This is a New York City law requiring the inspection and repair of a building's exterior walls. If a building is due for this work, it could mean a substantial upcoming cost that will be passed on to you.
Lawsuits: You won’t specifically see this in the financials but you may find it in the Board Minutes. Your attorney will search for and inquire about lawsuits issued by or against the building or it’s developer. This is always important as a slip and fall could result in monetary damages. However, lawsuits are especially important for new developments. It doesn’t take but a quick Google search to find numerous buildings that have opened suit against the developer/builder for faulty equipment, poor workmanship, or improper materials. It is very important to know if your building will be livable and if you will be buying into a years-long suite that hurts both your quality of life as well as your finances. It can be very difficult to sell a home that cannot be lived in and has a years long legal battle hovering over it like a storm-cloud.
3. The Land Lease: A Uniquely NYC Consideration
Finally, a very specific and crucial factor in New York City is the concept of a land lease. Not all buildings own the land they sit on. Some are on a long-term lease with a separate landowner. Often, that landowner is the City of New York.
What it is: A land lease is a legal agreement where the co-op or condo corporation leases the land for a set period, often 50 to 99 years. The lease will have a fixed rent for a period, followed by scheduled rent increases.
What it means for you: When a land lease is approaching its renewal date, the rent can increase dramatically, which will be reflected in your monthly maintenance or common charges. This can significantly impact the value of your unit and its long-term affordability. It's essential to understand the terms of the lease, when it expires, and the mechanism for calculating future rent increases. My job is to help you navigate these terms and their potential impact on your investment. Practically, I’ve seen luxurious, large, terrace wrapped spaces sitting on market for years at a price of $650,000 (when they compete in price, size, location, and finishes with $3.5mm spaces). They sit because they are in buildings with land leases that are either paying off the recent purchase of the land or are in the increase phase of their lease term and the monthly charges to service these are upwards of $6000.00
Monthly mortgage cost is not the only important factor in a New York City home purchase. For more on hidden costs see our post, What Are The Hidden Costs Of Buying In NYC?.
Buying a home in New York City is a major financial and emotional commitment. By looking beyond the four walls of your potential apartment and carefully investigating the health of the entire building, you can avoid costly surprises and ensure your investment is a sound one for years to come.