JANUARY 2014 /
I once asked a literary agent what kind of writing paid the best and he answered, “Ransom Notes.” In the high tech boom of the late 1990s, ransom notes were replaced by metrics such as “share of mind,” not found in generally accepted accounting principles.
Unfortunately for one of tis promoters, his share of mind stock fizzled, leaving this company CEO open to charges of stock fraud and facing years of government-enforced solitude. My interest in writing new real estate metrics stems from my 20-year investing career, buying and selling many Manhattan cooperatives in that period.
As a former Board President and Board Treasurer of these boards, I have found that an ever-increasing co-op share price is what pleases tenant-shareholders the most. To get to that higher sale price, a co-op board needs to be cognizant of the following and manage the building’ operating cycle to reflect what the Board will report in the co-op’s annual financial statements.
Your co-op is a business and you rely on its balance sheet to indicate how your co-op business stands at one given moment in the business year. A Statement of Operations and Accumulated Deficit sums up the results of operations over a 12-month period ending on that one given moment.
In themselves, these two types of financial documents are a collection of mute figures. But when the assorted financial symbols are interpreted and evaluated, they begin to talk.
For you, the Co-op Board member, a single balance sheet is like opening the chapters of a book—it gives the initial setting. Thus, one balance sheet will show how effective you are at distributing the co-op’s capital, how much is in the various accounts, and how much surplus of assets over liabilities exists.
A lone Statement of Operations indicates revenue generated from maintenance payments, flip taxes, and other sources for a 12-month period, the amount of associated costs incurred to run the plant (your co-op), and the amount remaining after allowing for all costs.
As a Co-op Board member and Manager, you arrange a series of balance sheets to compare related items so as to begin to identify trends. The comparative balance sheets are no longer snapshots, but become MRIs of the skeletal structure of your board’s basic management actions and decisions.
Thus, decisions to relax the co-op’s maintenance collection procedures causing collections to slow up may result in an unwanted increase in receivables. If expansion is undertaken, bank debt may run higher; and if not offset by new assessments, the co-op’s net worth declines.
Similarly, comparative Statements of Operations are used by the Co-op Board to reveal significant charges in what took place. Did the Co-op’s income cover its expenses? It’s only by comparing operating income and expense items from one period to another that revealing answers are found.
If you and your fellow board members are constantly taking the financial pulse of your co-op as outlined above—including making sure the Co-op’s reserve fund reflects the building’s ongoing replacement requirements—then, you are ready for my favorite metric, EBITDA, which is earnings before interest, taxes, depreciation, and amortization. EBITDA is a true measure of building management’s performance as it accurately measures how efficiently revenue is being spent over the various categories of your building’s operating expense categories.
The more positive the EBITDA, the more effective managing job you are doing. If you are asking yourself why bother jumping through these hoops, you should remember that co-ops account for 75% of all the housing stock for sale in Manhattan.
You’re in good company.
United Metro Energy Corporation