New York's Cooperative and Condominium Community

Habitat Magazine July/August 2020 free digital issue

HABITAT

ARCHIVE ARTICLE

Budget Blues

It was crisis time at Cheltencourt Owners Corporation, the 52-unit cooperative on West 21st Street. "The building's finances were in a turmoil," recalls one board member. Indeed: although the monthly maintenance was 20 percent higher than in comparable apartments elsewhere in the neighborhood, the board was still regularly tapping into the reserve fund to keep the building afloat. In addition, the lobby needed refurbishing, a J-51 tax abatement would soon be expiring, and waterproofing and repointing work was desperately needed.

What's a building to do?

In the case of Cheltencourt, the white knight was named Fiscal Planning, and arrived in the guise of a new treasurer, James McEvoy. McEvoy, who later became president, put the books in order and whipped the building into shape within three years.

"The first thing I had to do was get two year's prior financial information," recalls McEvoy, an accountant. "Before I became treasurer, the budgets were not done with any kind of thought process. For predicting fuel use, they just took what they were doing last year. I said, 'Don't you take consumption into effect? Don't you do multi-year comparisons?' I don't know who was doing budgets before I was there but we were getting whopping maintenance increases. No one had foresight."

To many, budgeting is a mystery. It shouldn't be. Making it an art is the key to keeping a building fiscally healthy. To do that, boards need professional guidance, planning, pluck - and quite a bit of common sense.

The First Steps

Professionals suggest beginning the budget process in September or October. "Typically, you want the budget locked in before December 1," says Mark Shernicoff, an accountant with Zucker & Shernicoff. "If you are planning any maintenance increases, you want to tell the tenants a month before they go into effect, so you should be starting the budget in October at the latest."

Decide what money is required for. What are the short-term needs? What is your board's long-term vision for the community? What does the community actually want? Such planning will be easier if the board is monitoring the finances all year long, typically with monthly reports from the manager. "The budget process is ongoing," notes Steve Greenbaum, director of management at Mark Greenberg Real Estate. "By September, the board should be looking at projects for the next year. Is this the year you want to paint fire escapes? Then get estimates early and plan for it."

To answer these questions and gather information, professionals suggest holding annual "strategic planning sessions" in which the board, management, committee chairs, the accountant, and the attorney discuss the needs of the property.

"The budget cannot be made in a vacuum," notes Arthur Weinstein, a real estate attorney and vice president at the Council of New York Cooperatives & Condominiums. "Everyone with a role must be involved, from the managing agent and attorney to the building president and building treasurer, each of whom have a separate piece of the budget jigsaw puzzle." You can also poll tenants.

The board should develop a model based on historical data. "The important thing is to prepare an analysis of previous budgets to explain deviations," says David Kuperberg, president of Cooper Square Realty. "We prepare a report using charts and graphs comparing the previous budget, the forecast budget, and the actual one to one another. The graphs make it easier for non-financial board members to analyze expenditures."

Once the needs are determined, break down the costs recognizing that most budgets are fairly tightly constrained. In fact, professionals say that four categories make up about 80 percent of the budget every year:

Real estate taxes, based on the government's assessed value of your property. "You can protest it," Shernicoff remarks, "but you can't make a budget based on protest. You have to pay it until you get a reduction."

Mortgage payments. Unless your mortgage is up for refinancing, your payments are fixed for three, five, or even ten years.

Labor. Once you have a staff, you've usually got union contracts, with regular wage increases. There is not much you can do about labor - unless staffing is too high or too low or non-union. You can review things like overtime and get them under control - but once that's done, costs are fairly fixed. You can't pay staff less money, nor can they go without uniforms.

"Many times, in order to not increase maintenance, boards may be overly optimistic in projecting their expenditures," says Kuperberg. "For example, we know wages go up every year pursuant to the union contract. That ought to be projected into the budget. In providing the payroll portion of the budget we've developed a special spreadsheet, which takes into account overtime, sick time, holiday, and wage increases. You're fooling yourself if you ignore that."

Fuel, utilities, water/sewage charges. Assuming you have a reasonably efficient boiler, have replaced windows, and monitor and control heat, fuel then becomes a function of the weather (i.e. how much heat you need) and the market price. A fact of life is that gas and electric rates go up. You should get in touch with utility companies at least twice a year to find out about anticipated rate increases or decreases. Since electric and gas companies have to apply to a commission which approves increases, they will usually be aware of their plans for the coming year.

"[In 1995], we had such a severe winter that many properties went over fuel costs," says a management executive in Yonkers. "We had two extra months of winter. In addition, the price of fuel went up substantially, probably 20 to 25 percent."

After you've made all these calculations, Shernicoff says, "you have about 20 percent of the budget left to deal with repairs, maintenance, insurance, and professional fees (your accountant, lawyer, engineer, managing agent). There's not too much a board can jiggle with after it gets those things in shape."

Saving Money

A common mistake is not anticipating large capital expenditures. "You want to weed out the aberrations of the past and predict the aberrations of the future," notes Shernicoff. Contingency funds should be established to take into account the building's history.

"Say there was a spike in repairs in the last year because you had a major failure in the riser and floods in 17 apartments. That cost a ton of money. Now, how do you know if it will happen again?" asks Shernicoff. "If the plumbing is in reasonably good condition, it probably won't. But is that a reasonable guess? How many risers are there? Obviously the odds that you do not have to repair something will increase as the risers are replaced, but if the last one you replaced was 80 years old, and none have been replaced before or since, it may not be an aberration, so you should plan for it."

Those with small reserve funds must pay even greater attention to possible capital projects because they have no resources to offset unexpected costs. "If you have a $100,000 reserve fund and a $20,000 surprise plumbing bill, you can easily go to the reserves," says Weinstein. "But if you have an $8,000 reserve fund and a $20,000 bill, you will have to go to an assessment or maintenance increase. A surprise assessment or maintenance increase is evidence of a failure of the budgetary process."

Although the budget is tightly constrained, there are ways to conserve cash, from getting better refinancing to searching out more advantageous deals on service contracts. Boards should examine:

Contracts. Managers say boards should annually review agreements with insurance carriers, service contractors, and laundry companies for the best deals. "By reviewing contracts, you try and get the best dollar value you can," says one management executive.

Refinancing. "If you can get a better rate than you're currently getting, you can come out ahead," says CPA Richard Smolin of Smolin & Yavel. In fact, refinancing saved McEvoy's building over $40,000 a year in costs. To get that money, however, the co-op had to be aggressive. Lenders were reluctant to refinance because 30 percent of the 52-unit property consisted of unsold sponsor apartments.

McEvoy relentlessly pursued financing, finally finding a bank that would loan money. He also got the sponsor, holder of the original mortgage, to forgive more than half that debt. His concession made the new mortgage workable - and helped in planning the budget. "We have $200,000 less in debt now," he says. "So we have been able to bring the maintenance down. We've also been able to increase the reserve fund from savings and renovate the lobby."

Capital projects. Examine capital projects that might save money. McEvoy's property had an engineering report prepared to assess the structure and mechanical work. The co-op then devised a four-year capital plan. It is being financed by a line of credit from the bank.

Another property, a 66-unit, 35-acre homeowners association in Blue Point, L.I., decided to replace its faulty HVAC system. "We had an open loop geothermal heating unit, which was good in the beginning, but then the system started to develop problems," recalls board president Larry Jacobowitz. He estimates the old system cost the complex $65,000 to $80,000 in annual operating expenses and even more in electric costs, without heating/cooling the complex effectively. "The repairs were just a temporary band-aid. We needed more." Eventually, a closed-loop geothermal system for each individual unit was installed. It was more effective and ultimately less costly.

Additional income. Look for ways to maximize income. See if you're getting the most from commercial (garage and storefront) and storage space, and from sublet and late fees. But be realistic. "Do not count on income from reserve fund interest, flip taxes, or anything like that," says manager Gerard J. Picaso, president of Gerard J. Picaso. Observes McEvoy: "I call late charges, flip taxes, and application fees, soft money. I assume we aren't going see any of that. When that money comes in, it's found money."

Taxes. Challenge your taxes. McEvoy's building successfully challenged tax assessments and had its real estate taxes lowered. "Our real estate taxes are less than they were three to four years ago," he says.

Long-Range Planning

Above all else, boards should establish a long-range planning task force to help develop a long-term budget. "A lot of buildings don't want to think about the long-term," says Richard S. Piccola, a CPA. "But it is a good idea to plan for future repairs. Boards should base their maintenance on this and have extra money for it. A lot of boards plan for a break-even point in their budget and have a low reserve fund. But a major emergency can throw that off. And a low reserve makes a building unattractive to buyers."

"You want to be realistic," says Greenbaum. "If you know you're going to have to replace your boiler, you should start assessing for it over the long-term. The best part about long-term planning is that it gets you the money and time to do it right."

A case in point is Cedarhurst Park, a 68-unit property in Cedarhurst, L.I. The roof needed to be replaced but the board did not want to exhaust the reserve fund. According to board president Michael Herzog, the co-op is currently imposing a special five-percent assessment over two years. That covers about half the cost of the roof, and the other half will come from reserve fund.

Long-term planning is also crucial in dealing with tax abatement programs offered through local governments. In New York City, for instance, the J-51 and 421a programs grant tax abatements, usually for 10 years, for certain capital improvements. For many with J-51 and 421a, the decade is - or will soon be - running out. "It is critical to plan for expiration," says Weinstein. "J-51 and 421a are time bombs. They offered wonderful benefits but when they expire, the building can be hit with a sudden maintenance increase to cover new taxes. The budget process should take those into account."

Long-range planning can help save money on contracts, too. "What we try and do is get boards to look at a two-year budget even though we're adopting a one-year budget," notes Murray. "With that, you can lock in two-year contract prices for services and stabilize the maintenance fees. In order to do that, there has to be quite a bit of planning."

One good example is board president Hal Golio's Peekskill,condo. Every year, the board of the 160-unit, 10-building complex examines its budget and capital improvement options. "We decide on what capital project we want to do and budget around that," says Golio. The property's three-member buildings committee recommends capital items to look at during the year. It also does researches and get bids.

One year, the condo decided to install building intercoms. In preparation, the board executed a pilot program on one 16-unit building to determine how much time and money it would take. Such care is typical: in a non-capital project, the board debated the issue of wages for its workers - and after much discussion and analysis decided to unionize them. "We did a cost analysis," explains Golio. "We found that it was cheaper to do that. We had been carrying health insurance for private individuals, which was an extraordinary cost. Unionizing them helped us streamline."

Rather than assess, the board usually examines financing and loan options and then aggressively pursues them. To repaint all the property's common areas, for example, the board convinced its mortgage-holder to make an $88,000 loan over five years. "We really had to sell the bank on it," says Golio. "But we found a condo in California that had a loan of this type. We showed the lender what they had done. Then we showed that our receivables were coming in on time, and that our payables were steady and not exorbitant. We also gave them vendor references. They gave us the loan."

Communication

Once the board has created a budget, it should try to get the tenants to understand and support it. After explaining in a property-wide memorandum what the numbers mean, a board should hold a special meeting at which questions are answered and concerns addressed. (But remember: the residents come to meetings for information only - not to vote. "A board's responsibility is to manage the finances," notes Shernicoff. "If they hold meetings and give tenants an incorrect sense that they'll be approving a budget that can create problems. You can't logistically bring every major decision to the tenants.")

"In presenting a budget it is important that you footnote it, explaining how you arrived at all items," observes Kuperberg. "If you have repairs of $65,000 this year and are providing $75,000 for next year, how did you get that number? All the shareholders ought to have a reasonable explanation and at least be comfortable that the board knows all the elements that have gone into budgets."

At 522 Shore Road, a 247-unit cooperative in Long Beach, L.I., the lack of such communication was a key reason that tenants became disgruntled. The board did not know how to communicate, so the tenants didn't know why a special assessment had turned into a maintenance increase. They also didn't know why promised repairs took longer than predicted. They didn't know anything. And they got mad.

After the board was replaced and Lucille Punzi took over as president, all that changed. Newsletters came out regularly, as did minutes of meetings, all of which explained the complicated budget. "There were major projects," Punzi notes. "We were meeting every week for a while. The meetings were very intense, very difficult. The renovation [we undertook] cost so much."

In the end, the biggest mistakes boards can make are to be unrealistic and optimistic. "Many boards try to zero out a budget so they can have no maintenance increase," says Greenbaum. "They try putting off a maintenance increase until they need one. So instead of having a three percent increase one year and another one the next year, they wait until the third year and have a ten percent increase, and are operating with difficulty for two years because they did not have the increase. Boards have to be realistic."

A healthy does of pessimism can help, as well. For when budgeting, everyone agrees that it is important to predict by being practical, by consulting with professionals, and, above all else, by following Murphy's Law. As Shernicoff notes, "The most common mistake people make in budgeting is being overly optimistic. They think bad things are not going to happen to them. I find that it is the overly pessimistic buildings that tend to be in very good financial condition. It is better to follow Mr. Murphy when you are preparing your budget. Assume that if anything can go wrong, it will. You'll be better off."

 

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