Wednesday September 21, 2016
As a New York City condo or co-op board member, one of your principal responsibilities is stewardship of your property’s finances. A lot of that boils down to one thing: your annual budget.
Though many board members may regard the “annual budget” as another term for “big headache,” it doesn’t have to be that way! By staying aware of common budgeting pitfalls, you can make the creation of your annual budget a smooth process and ensure an entire year of minimal money woes while you’re at it.
To help you get there, we’ll identify five things that tend to blow association budgets. If you’re partnered with a knowledgeable and experienced property management company, they’ll help you manage these budget busters so your property can avoid paying the price – literally and figuratively – later.
1. Double-digit maintenance/common charge increases.
Some condos and coops delay increasing the budget for operating expenses fewer than every three to five years. This results in a consistent maintenance/common charge for a while, followed by a sudden, surprising increase that’s larger than expected. As an alternative, try increasing the maintenance/common charges by a small percentage each year, rather than keeping them consistent over a few years and surprising your owners with a hefty increase. This will help accommodate the inevitable rise in maintenance costs in a gradual manner for all residents.
2. The “not-so-special” special assessment.
Special assessments can be an alternative tool for good fiscal stewardship – but only when they are appropriately implemented. Avoid levying special assessments as a means to keep pace with rising maintenance/common charges. Instead, reserve special assessments for funding specific projects, raising working capital or enhancing reserve funds. A normal contingency line item in the budget will often allow your condo or co-op to address unforeseen issues and will also provide relief from any normal items that might cause deficiencies in your budget.
3. Underfunded reserves.
Reserve funding is a disciplined task needed to maintain the useful life of important capital items like roofing, paving, facades and large equipment. Your property should have adequate reserves that are funded on an annual basis. These reserve balances and your funding plan should align with your building’s capital forecast to make sure funds are available when needed. A percentage of your property’s reserves must also be included in your budget each year and must follow a specific statutory requirement. Maintaining these reserves isn’t just good for operations – many lending institutions require it.
4. Deficits.
The “d word” is, unfortunately, sometimes just part of the business of running a multifamily property. A strong indicator of a deficit is your are more than 60 days old. If that’s the case, it’s a good idea to fund this amount as a line item in your budget or with a special assessment. Additionally, if your forecast for the coming year is markedly different from what the audited financial statements are reporting, that’s another indicator of a deficit. Also remember that maintaining good relations with your vendors through timely payments is an important strategy that will help prevent deficits.
5. Evaluate your fixed expenses.
When you’re creating your annual budget, nothing is a given, not even fixed expenses. By making it a habit to re-evaluate vendor contracts, find more competitive service providers and reduce overtime for your staff, you’ll be able to reduce these fixed expenses. Energy is another large component – have your building systems evaluated for energy efficiency, and talk to your property manager about locking in electricity, gas and fuel rates. An effective management company with the right resources can leverage their relationships with vendors to provide more competitive pricing for you. They may even have in-house experts who can educate and guide you on various options related to energy expenditures.
The best property management company will help you avoid these five budget busters, and collaborate with you to develop your community’s annual budget. They’ll also be there to make sure you’re adhering to the strategies implemented to maintain the integrity of your budget. That includes everything from expense tracking, controlling cash flow, planning capital improvements and making market projections to minimize (or eliminate) surprises.
Most of all, remember that your annual budget forms part of the longer term strategic plan for your community to maintain financial health and stability for many years to come. Mind these potential pitfalls and you will find that it’s a way to create a blueprint for success throughout the entire year and beyond.
For more insight on how a well-planned budget process can add up to savings for your community, contact FirstService Residential today.
Are you a condo or co-op board member in New York City? Register today to be invited to our Board Member Roundtable Discussion Series, an original forum that promotes the exchange of ideas and best practices among NYC condo and co-op leaders.
Are you a condo or co-op board member in New York City? Register today to be invited to our Board Member Roundtable Discussion Series, an original forum that promotes the exchange of ideas and best practices among NYC condo and co-op leaders.