A person steps off the top of the Empire State Building. Someone at a window on the 50th floor sees him go by and yells, “How are you doing?” The person on the way down responds, “So far so good!”
Alvin Wasserman, director of asset management at Fairfield Properties, often tells this joke to his boards. When a board ignores deficits for several years, he says, it is, in effect, jumping off a building. “Usually,” Wasserman says, “the crisis comes to a head with the election of new board members. The new board is forced to correct the problem or face serious consequences. There is a need for a large common-charge increase. The members of the community, who were complicit the whole time when the common charge held steady, often act surprised. They shouldn’t.”
Running deficits is no way to run a business. Shuffling money around – paying off one contract late or shifting payments among contractors – can backfire.“If you’re not paying people on time, then you’re not getting prime vendors and prime rates,” says Stuart Halper, co-owner and vice president of Impact Real Estate Management. “They’re going to charge you more in the marketplace because they know you’re more trouble than otherwise. Your management company is also going to suffer because when they call the plumber who wasn’t paid in one building, the plumber’s going to say, ‘Why should I go to this other building for you?’ Word gets around, and some management companies won’t want to work with your building.”
Under-budgeting can also backfire. “If you have expenses that you know are going to be a certain dollar amount and then you under-budget intentionally just so you don’t have to have a maintenance increase, then you’re not doing the right thing,” says Wasserman. Boards have to know which expenses they cannot ignore – such as utilities, staff salaries, and mortgage and debt payments.
The best solution for chronic shortfalls, says CPA Carl Cesarano, a partner at Cesarano & Kahn, is to raise your maintenance or common charges. Halper recommends they go up on track with the GDP, or gross domestic product, a readily available economic indicator issued by the U.S. Department of Commerce’s Bureau of Economic Analysis. Experts also say it’s advisable to have an equity line of credit with a lender. “It’s a good cash management tool, provided you’re very responsible over how you use it,” says Cesarano. “It’s like having a credit card – if you go nutty, you get in trouble.”
But let’s say you didn’t plan ahead to obtain a line of credit, and your budgetary squeeze is too urgent to wait for an assessment or for an increase in maintenance or common charges. What can you do?
“They can refinance their debt, or they might have other fees and sources of income available, such as storage rooms or parking,” says Peter Lehr, director of management at Kaled. Or they can try a payment plan. “A lot of vendors will work with you because they’re hungry for the business,” says Halper. “Certain vendors are amenable and certain are not. The oil companies, for the most part, keep everybody on a short leash. When you don’t pay your oil bill and you need a delivery in the middle of winter, the vendor says, ‘You’re 60 days late, you have to find somebody else to deliver the oil – or you have to pay the balance.’”
There’s a pecking order among vendors. “You don’t want to get into that mode, but there are peaks and valleys in your expenses,” Cesarano says. “Things level out during a 12-month [budgetary] period, but during the winter, say, you spend more money than during the summer [because of heating expenses.] There are certain vendors you can pay after the peak – the repair and maintenance vendors and accountants and lawyers. If you tell the plumber that you’ve used hundreds of times, ‘Hey, I need a little help,’ they’ll work with you. If push comes to shove, those are the vendors who will wait.”
But boards should maintain a line of credit and raise the monthly charges responsibly so as not to wind up in this situation. “You incur a liability, you pay it,” Cesarano says. In the end, says Wasserman, it all comes back to the joke about the man jumping off the Empire State Building. “You can’t forego the law of gravity,” notes the manager. “The same thing goes for the law of economics.”