Determining the financial help of a co-op.

Unless you are involved with the finances of a co-op corporation on a regular basis, analyzing the financial strength of a cooperative can be a very confusing task.

However, it doesn't need to be. The answers to the following three questions will provide the information one needs to a develop a fairly accurate idea of the financial strength of a cooperative, without every having to open a financial statement, or an offering plan.

When analyzing a co-op corporation, the first piece of information you need to know is the percentage of the building which is occupied by shareholders, as opposed to non-owner tenants. A good rule of thumb is that a building should be at least 75 percent owner-occupied to be considered "solid."

A high percentage of owner occupancy is an indication that the building has been well maintained and that there has been an active market for the has been an active market for the apartments. It also means that the cooperative is not dependent upon a single shareholder to maintain its operating budget.

What percentage of the building is owner occupied?

If 10 percent of the outstanding shares are controlled by a single shareholder, that shareholder presents a risk to the cooperative. The degree of risk is dependent upon the financial strength of the shareholder and their "Net Cash Flow Position."

Reliable personal financial information for the holder of non-owner occupied shares is usually un-obtainable. However, by determining their net cash flow position, the risk associated with this shareholder can be measured.

The Net Cash Flow is equal to the rent received, less the maintenance and share-loan payments, if any. Clearly, the greater the net cash flow, the less the risk. If the net cash flow is only slightly positive or negative, one should be concerned, as this could signal future trouble.

If the holder(s) of non-owner-occupied shares were to stop paying their maintenance, the cooperative may be forced to take possession of these units through foreclosure. If the net cash flow generated by these units is negative, in order to balance the budget, the maintenance of all of the shareholders may have to be increased to subsidize the corporation for the difference between the rent collected and maintenance owed.

Does the holder of non-owner-occupied shares have a net positive or a net negative cash flow position?

Whenever there has been a material change in the net cash flow position of the holder of non-owner-occupied shares, they must file an annual amendment to the offering plan with the Attorney General's office and it is distributed to all of the shareholders. The amendment will contain the information needed to determine the net cash flow position of the holder of non-owner-occupied shares.

When financing individual units, or the underlying mortgage, the percentage of owner-occupancy and the net cash flow position of the holder of non-owner-occupied shares are two of the primary indices that a lender will use to base their decision of whether to lend or not. The other is known as the Loan-to-Value ratio (LTV).

The LTV is a measurement of the amount of debt on a property in relationship to the "market value" of the property. If the building has too much debt, attracting lenders may be difficult. The inability to attract a lender will have a negative impact on the market value of the units and inhibit the shareholders ability to sell.

Is the building over-leveraged?

In order to determine whether a property has too much debt on it, you must first determine what the value of the property is.

A property can be valued in many different ways. For a cooperative, the easiest, most accessible method is to calculate it's approximate sell-out value. This can be computed by averaging the last few years of apartment sales on sale-price-per-share basis, and then multiplying this figure by the total number of outstanding shares.

The LTV is equal to the total amount of long term debt, i.e. mortgages, lines of credit, etc., divided by the value of the property.

Even though an LTV as high as 40 percent is considered acceptable, most high quality cooperatives have LTVs under 25 percent.

On a scale of 1 to 10, with 10 being the highest mark, a co-op which is 100 percent owner occupied, with no sublets, and little debt, would be considered a 10. As each one of these components change, so does the financial character of the cooperative.

There are many factors that must be considered when determining the financial strength of a cooperative corporation. These are the first questions that should be asked, and their answers will provide the foundation on which an opinion as to the financial strength of a cooperative can be based.