When it comes to managing co-op and condo finances, boards can’t afford to be complacent — yet, some are. Take the case of one New York co-op, which found itself owing $300,000 in real estate taxes and water and sewage bills due to negligent management. Avi Zanjirian, a partner at the accounting firm Czarnowski & Beer, is here to tell the cautionary tale. Avi Zanjirian is interviewed by Paula Chin of Habitat Magazine.
Thanks for listening. Subscribe to this podcast for more stories on how New York co-ops and condos have solved a myriad of problems. Brought to you by Habitat Magazine, the "bible" that hundreds of board directors turn to every day!
When it comes to managing co-op and condo finances, boards can’t afford to be complacent — yet, some are. Take the case of one New York co-op, which found itself owing $300,000 in real estate taxes and water and sewage bills due to negligent management. Avi Zanjirian, a partner at the accounting firm Czarnowski & Beer, is here to tell the cautionary tale. Avi Zanjirian is interviewed by Paula Chin of Habitat Magazine.
Thanks for listening. Subscribe to this podcast for more stories on how New York co-ops and condos have solved a myriad of problems. Brought to you by Habitat Magazine, the "bible" that hundreds of board directors turn to every day!
Paula Chin: Welcome to Problem Solved, a conversation about problems that have been solved at New York city co-op and condo buildings. I'm Paula Chin and my guest today is Avi Zanjirian, partner at the accounting firm Czarnowski & Beer. Welcome, Avi.
Avi Zanjirian: Thank you, Paula.
Paula Chin: Boards can't afford to be complacent when it comes to monitoring finances. You recently helped a co-op that failed to monitor theirs closely to pretty disastrous results. Can you tell us about it?
Avi Zanjirian: Sure, Paula. I always hate to share these stories because it's obviously not good, not the best of situations, but we always can learn from these situations and hopefully other boards can learn from what happened here. We had a new client that I'm obviously not going to give a lot of information on because I don't want it to come out. Maybe people know who it is. I'm sure they don't want the information public, but it was a co-op that we took over. We were engaged in early 2021 to do '19 and '20 financial statements. Their prior accountant had retired after the 2018 audit. Had told them that she was retiring. Sometimes this happens, they fail to engage in New York CPA. My understanding at the time was that the agent had been there for many years, the board had been there for many years, and the accountant had been there for many years. So this was a change in what was going on entirely.
Avi Zanjirian: Long story short, we finally were able to get started. The first order of business was us taking care of the annual tax deduction letter, which is given out for co-ops at the beginning year to deduct real estate taxes and mortgage interest on a per share basis. We started looking at that. We tried getting in touch with the agent. He wasn't answering phone calls. I was trying to get management reports. I was just trying to get some information. I wasn't able to get that. What we did was I called the town or the city at the town to find out how much their real estate taxes were to go to the source and I could start my work. When I picked up the phone to call the town, they were like, "Oh, we're so happy someone is reaching out to us. The building hasn't paid real estate taxes in a year and a half." And I'm like, "Oh, that's a problem." And that was just scratching the surface. That was the beginning of it.
Avi Zanjirian: The managing agent, because of COVID I guess, was able to get away with certain things of not presenting monthly reports, et cetera. No one knows if the board knew or the board didn't know. There wasn't oversight, the managing agent was let go, the board was subsequently ... There were things that happened, but I'll get into that a little bit later.
Paula Chin: You said that you were just scratching the surface when you found out about the real estate taxes not being paid. What other problems did you find?
Avi Zanjirian: Traditionally on the tax deduction letter, you have the real estate taxes and also mortgage. I asked the attorney who had helped the search to find us as the CPAs, "Hey, can you find out who the vendor is ... I mean the lender is so we could get the mortgage interest so we could put that on the letter?" So that was the next problem. He found out. He finally got in touch with the bank that they had apparently ... They had not provided information to the bank that was required as per the loans, whether that's financial statements, insurance documents, or whatever that might have been. And the loan, they defaulted on the interest rate. They were getting an interest rate of 3.875. It had bumped up to about 8.875. And because no one was really paying attention to what was going on, that 5% increase was getting auto debited from their operating account every month for almost a year and a half, or I should say from January of 2020 until April of '21 when we started working with them, and actually even further. That was why they had no money to pay real estate taxes because the account was being completely bled out by paying this higher interest rate than they had budgeted for.
Paula Chin: Wow.
Avi Zanjirian: Yeah. So that was it. Between just between real estate taxes and the mortgage, it was just there which was usually the two biggest items on a co-op. Those were the two biggest issues we found off the top. When we finally got engaged to do more work, we called the town for water bills. They hadn't paid the water I think also over a year. The employees of the building were being paid and some of the vendors were being paid as well, but they ... Things just weren't being managed appropriately, really, and no one picked up on it up until ... Again, I'm not saying that it was us, but I started asking questions. So everything came to fruition then.
Paula Chin: Well, what happened next? I would presume the board was ousted or there was new management.
Avi Zanjirian: Yeah. The managing agent at the time was let go or was fired, terminated, however you want to call it. The board actually took over to manage for two months. While they were searching for a new managing agent, they managed themselves. Collected maintenance, paid bills, paid the employees. And then two months later, they hired a new management company. That new management company was trying to also piece together the information. We had found out about this stuff, but they have to manage the property. They had nothing. Usually there's a transition between managing agents, between the old and the new and the transfer of documents. They were going on a wild goose chase trying to find things. They told me they found even more. Obviously, there was just a lot that was uncovered during that transition as well. Finally, finally, a couple months later, they held a board meeting, an annual meeting with the shareholders where they finally publicly explained what had happened. Obviously, as you might assume, it did not go over so well.
Avi Zanjirian: They were able to elect a new board. The new board is working to fixing, correcting the ship. It's still not fully there. The interest rate has been reset back to the original rate. Real estate taxes have been paid, but all of their reserves were depleted because they had to pay all that back real estate taxes and they have payment plans with water and sewer, with the union. Everyone is working with them to kind of get them back to float.
Paula Chin: And I presume there will be or has been a maintenance increase and an assessment.
Avi Zanjirian: Sure. The first order of business was to get financials done, which is what we helped them with. Obviously it was hard to do an audit with not really having much records. So we were able to do a review, a review engagement for 2019 and 2020. We got financial statements. The saddest part about all this was we were sitting at the meeting and these people were literally handcuffed. They wanted to sell their apartments and they couldn't because any sale requires financial statements or a tax return. And the banks were saying, "The last financial statement is '18. We need something in order to close these deals." People were stuck in apartments. My heart was going out to just these owners. Some were telling me they had already bought their new apartments, they're paying two mortgages. Obviously not a great situation, but once we got the financial statements together, they were able to ... with the new managing agent and the new board, able to put together a new budget. And obviously the building was running at a deficit before this anyway. So they had to do a big increase, about 10%, to catch up and an assessment to pay off all the old bills. I don't know. Between two and a quarter million to 350 of an assessment just to catch things up. They have to do a catch up in terms of that from a revenue perspective.
Paula Chin: Real nightmare. So they're on their way back. Where do things stand now in terms of their finances?
Avi Zanjirian: The biggest thing they needed to do was the increase that kind of stabilized their budget because they were able to get the mortgage interest rate back to the original term. I think it gives them a little breathing room so they're not paying this exorbitant monthly interest. They had some other issues that came up. Obviously it's like when the storm just hit from other ways, some insurance claims, et cetera, but they're doing okay. They have some cash. Obviously they don't have them out of reserves they had before, but they're working to ... Separately they're trying to recover from the old agent with lawyer, with lawsuits, et cetera. I don't know the information there. Even if I did, I wouldn't talk about it publicly, but they're working to recover some of that money. But the board that's currently in place is making sure that this doesn't happen again.
Paula Chin: Shareholders who are looking to sell, is their situation better?
Avi Zanjirian: Yes. So thank God we got the financial statements out. They were able to refinance their mortgages. Sell, whatever they need to do. The banks took it and the business moved on. So they're current from there. Their tax filings are current, their financial statements are current. We're currently working on their '21 financial statements. We're hoping that by next year's, by the '22 audit, we'll be able to audit them and there'll be some consistency with the board, and with the new managing agent, et cetera. So it's looking promising.
Paula Chin: So if they stay the course, they'll do well. Avi, what's the takeaway here? What do boards need to know? Obviously no board wants to find themselves in this kind of situation.
Avi Zanjirian: Sure. The real takeaway here is that the board members ... Obviously it's a volunteer position. We understand that. There's a fiduciary responsibility when you're on a board that you are overseeing and also I would say managing, for lack of a better term, what's going on if you have an independent management company. We work with a lot of managing agents. There are a lot of managing agents that are fully staffed. They have different departments and sufficient internal controls. That's the thing that we look for when we're doing our audits. Our audit standards require that each property has its own internal control structure. That means simply that the person who's cutting checks, and signing checks, and depositing checks, and approving bills, et cetera, are not the same person.
Avi Zanjirian: There's a segregation of duties there. And the many agents in New York and around the country have a structure that way. They have an accounts receivable department, accounts payable department. There is someone, a separate department that looks at the bank reconciliations. The managers approve the bills, whether they're using an outside AP service like AvidXchange or RapidPay to prove invoices. All that goes into that and allows there to be sufficient controls and to make sure that there's no fraud. The issue is when you have smaller agents that they're not ... There's one or two people in the office. When that happens, it's really important that the boards are involved. Making sure that they're getting the monthly reports every month. That should have been the red flag here. COVID, understandably, a lot of agents who were not paperless had to shift being paperless and sending out the reports monthly that way. Okay. March and April of 2020 was crazy for everybody, but getting to May, June, if you're not getting these reports, which is my understanding is that they weren't being produced, then raise your hand as a board member and say, "Hey, what's going on? Are we still there?" Go to their office. I understand during COVID, that was something that in-person wasn't happening, but you still have to manage. We still had most of our practice. We audited about close to 200 co-ops and condos. Most of our practice was ... they all were able to make it work. They were still managing properties even under the situations they were in.
Avi Zanjirian: It's important that they're looking at the reports. Not only getting them, looking at them to make sure that expenses are in line with the budget, making sure cash balances make sense according to what they know is going on in the building. There's that oversight. There's obviously a lot more that we could talk about to get into that detail, but making sure that the board is really taking the initiative to monitor. That's the keyword. Monitor what's going on. It's their responsibility to do so. When you don't do that and let things just go kind of the way they always do and trust the agents, which I'm not saying we shouldn't trust the agents, but just to kind of not ask questions and not look at the reports, here's obviously a very, very scary example of what can happen, but it could happen.
Paula Chin: I guess the bottom line is that boards absolutely have to be proactive. Avi, this has been really great, really interesting. Thank you so much for joining us today.
Avi Zanjirian: My pleasure. Thank you for having me. Have a great day.