With the 2014 campaign now fully underway, even Mr. Jacob wants a piece of the action with today’s response to our provocative questions distributed prior to the Meet the Candidates forum on Monday.
Coop financial statements for fiscal years 2009, 2010, 2011, 2012, and 2013 are available online, so you can see what he’s talking about yourself. In both 2011 and 2012, the coop shows an operational deficit, meaning that expenses were greater than income. That’s actual expenses, not counting depreciation or amortization.
I know one prospective buyer last year whose mortgage application was turned down because the lending bank had misgivings about those deficits. Even if the coop looks better a year later with flip taxes from a resurgent housing market bailing us out, the underlying concern about our financial stability has not been resolved.
But, please, let’s look at this another way, because I’m not interested in having a shouting match with Mr. Jacob or anyone else. Cooperatively Yours decided this past spring to encourage communication with the board and management. That means asking questions in a more public way to hold our directors accountable, and pressing them to distribute quarterly reports of board actions and hold mid-year financial Q&A’s so that these kinds of issues can be discussed more constructively. To that end, I’m very grateful to Mr. Jacob for his memo, because it opens a conversation about what kind of a deficit may be beneficial and what kind is unsustainable.
One of the questions our flyer asked on Monday was: “The coop’s deficit grows every year — now almost $11 million. Are you OK with that?” Mr. Jacob says that because that figure represents what’s called accumulated deficit it’s actually not an unhealthy number and therefore, yes, he’s OK with it. That’s a perfectly good answer. I would rather it had come without bold-faced all-caps name-calling, but I think this is progress, and this Thanksgiving, I’m grateful for it — let’s get answers first and we’ll work on our manners another time.
Good work. Lets keep their feet to the fire.
If Heshy wanted to be completely transparent, he would have mentioned that the operating deficits from 2011 and 2012 have also contributed to our accumulated debt not just depreciation and amort. But, I’ll concede his points.
What I wish he would have addressed is the fact the the cash in the bank in all honesty is mostly ($2.4 of the $3M quoted) leftover cash that was borrowed to complete the boiler room, high pressure to low pressure conversion, and local law 11 projects. Only the boiler room and local law 11 projects were completed. Both of these projects from the audited financials shows ER costs of $6M for both projects. ER did pay down $1.5M during FY2013.
10.0M (new ER Loan)
-3.5M (Boiler Room)
-2.6M (Local Law 11)
-1.5M (loan paydown)
2.4M not spent
As a reminder ER increased the underlying mortgage in 2012 from $15M to $25M to pay for these additional projects and local law 11 work. To consider the $3M in the bank a true positive is deceitful.
What people need to understand that our cash position is also artificially boosted because we are not required to make monthly payments against our mortgage principal. ER refinanced into an interest only mortgage in order to increase short-term cash flow. If the board wanted to show financial restraint, they would model a conventional mortgage and set aside the equivalent cash and apply it to the mortgage paydown that we are allowed to make on an annual basis.
Neel — thanks for the clear breakdown and context.
Very good, thanks. I’m not completely ready to concede Heshy’s points, as my understanding is that accumulated deficit and accumulated depreciation are two different things. However, at this point I’d love to have third-party audit and explanation of our finances. Too many questions.
Not only did our underlying mortgage increase dramatically, in order to pay for things like Local Law 11 (which I thought were normally covered by assessments – is that correct?), but this article points out some other inconvenient truths:
http://www.habitatmag.com/archive/article/3526/interested-in-interest-only-loans/
“…interest-only loans saddle future shareholders with the entire burden of an ever-increasing amount of debt. Some board members argue that this growth in debt is irrelevant since most underlying mortgages are never paid off but, rather, are just rolled over indefinitely. While most co-op underlying loans are rolled over, increasing debt loads eventually will force every board to increase maintenance and/or cut services by more than would have been necessary had amortization been included in each monthly payment…
There also is a philosophical “fairness” argument in favor of amortization. Interest-only loans afford current shareholders all of the benefits of the new funds, as well as the lowest possible monthly payment. They get to ride in the new elevators, sleep under the new roof, and look out the new windows without having to pay their pro rata share of those improvements through monthly amortization.
Moreover, if they sell their unit before the new loan matures, they receive an added bonus because their sales price will reflect the perceived value of all of the improvements even though they didn’t pay for any of them. That “privilege” goes to future shareholders.
A more equitable arrangement would be to include amortization as part of every new loan so that every shareholder pays back some of the cost of each improvement. To carry this point even further, I could make a theoretical case for matching the amortization of every new loan to the average useful life of the improvements being funded by that loan. To reach that academic standard, however, would require perfect data regarding useful lives and some fairly complex calculations. The “plain vanilla” amortization offered by most lenders is a sufficient approximation.”
One cooperator (who would rather not post under his own name) emailed this explanation:
“Recently there was a flyer circulated that suggested that East River has an $11 million deficit. This flyer elicited a strong response from management stating that we do not have an $11 million deficit, that this item relates to the IRS allowing a corporation to depreciate investment, and that it does not reduce East River’s cash. I’m here to say that both the flyer and management are incorrect, each for different reasons.
“East River definitely did not have an $11 million deficit in 2013 – look at the financial statements. East River had approximately a $300,000 loss in 2013, but this figure represents an accounting loss, not necessarily a cash loss. However, management was also inaccurate and conflated numerous things when discussing this $11 million. The $11 million has nothing to do with the IRS or depreciation.
“So what is this mystery $11 million? I’m going to try to explain without being too technical. This $11 million (see the bottom of page 3 of East River’s 2013 financial statements) is “Accumulated Deficit.” This term can also be referred to as “Retained Earnings (Deficit)” in accounting language. Retained Earnings represents the cumulative amount of earnings the corporation has earned since inception (I’m oversimplifying). If the Retained Earnings are negative, meaning the corporation has cumulatively lost money since inception, Retained Earnings might be referred to as Accumulated Deficit, as in East River’s case.
“Therefore, this $11 million represents that East River has lost $11 million cumulatively since its inception (or since they started producing financial statements). However, there are many caveats to this comment that East River has lost $11 million cumulatively since its inception:
“a) Having lost $11 million does NOT mean East River owes anyone $11 million, nor does it mean that East River lost $11 million cumulatively in cash. $11 million is an accounting figure. Over time though, accounting income and cash will eventually become close.
“b) Having an $11 million Accumulated deficit doesn’t mean the sky is falling or we’re in grave danger. However, if East River was continuously profitable, we would expect the Accumulated Deficit to shrink.
“My opinion is that what’s more important than the specific amount of Accumulated Deficit is the trend in which it is going. As of June 30, 2009, the Accumulated Deficit was approximately $6.3 million. As of June 30, 2013, it was $11 million. This suggests we’re losing money and this is not the direction in which we want to go. Why are we losing money? It could be many reasons including costs are too high, revenues too low, mismanagement, etc.
“East River can function and thrive with an $11 million Accumulated Deficit. However, if the figure keeps growing, at some point the banks or potential buyers could be scared off.
“And that’s the truth.”