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Habitat Magazine October 2020 free digital issue

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ARCHIVE ARTICLE

Building Your Budget: A Management Overview

The budget process, when done properly, is fairly complicated and takes a considerable amount of time. Anyone can take last year’s expenses or expenses year-to-date, add an inflation factor and say, “Here’s my budget.” But that’s not the proper way to do it. The purpose of a budget is simple. It’s a way for a board to set the income and expenses for the coming year and to predict any increases in maintenance or common charges. Because he or she has the figures for income and expenses readily available, the managing agent usually prepares this. The manager also has access to the financial software to print reports and examine past budgets. (In a self-managed building, the treasurer would follow a similar process.) We start preparing the budget in the first or second week of October, and we submit that to the treasurer by the end of October. That draft would then be reviewed by the treasurer and/or board and be approved sometime in November. The four key elements to consider are: the operating budget, the capital budget, the reserve fund, and the city’s tax abatement. 

The Operating Budget 

An operating budget is composed of two parts: income and expenses. The income side includes common charges/maintenance and also such guaranteed revenue as money from garages, storage bins, and gyms. You would not include transfer taxes, alteration fees, or items that are uncertain or should go into the reserves. On the expense side, there are such major factors as staff payroll, real estate taxes, oil, gas, and (in a cooperative) mortgage interest. Eighty percent of those factors are fixed. 

You should take into account the year-to-date expenses. You should look at every single check that was issued and ask, “Is this a recurring expense? Is this something out of the ordinary? Was this a one-time catastrophe?” On the other side, you must ask, “What’s coming up next year?” You have to examine the past three years of expenses to try to get a running average and forecast the coming year’s taxes. To do that, we consult with tax certified attorneys who make tax challenges for the building.

Next, you take your income and your expenses, and you arrive at a bottom line, which will indicate if you need to raise maintenance or common charges. The way real estate taxes have been going, it’s pretty certain that most buildings will need an increase. 

The Capital Budget

A capital budget consists of money allotted for local laws, elevator upgrade regulations, and any “wish list items” that the board may want to undertake, such as upgrading the lobby, gym, or pool. Typically, a capital budget covers anywhere from 5 to 10 years. Forecasting any longer than that becomes an uneducated guesstimate. 

There are two ways to create a capital budget. You can make your best estimate, listing your major components, their useful life, and the costs associated with them. Some boards hire an engineering firm to look at every component of a building and come up with a long-term plan. There is a danger in having a capital budget prepared by an engineering firm, however, because it produces a document based on the so-called “useful life” of the equipment. What happens if you’ve got a great super who has been maintaining your equipment and keeping it operating longer than expected? You have to look at all the factors that affect your equipment, such as the care by the super.

The Reserve Fund

Accountants typically state that a co-op or condo should have three months of operating income as the reserve fund. But every building is different, and funding the reserves can be done in a number of different ways. Boards can refinance an underlying mortgage; charge transfer taxes and alteration fees; sell hallway, roof, or other commonarea space; or sell air rights. Many buildings are trying to change their governing documents to permit a transfer tax. The average is two percent, and it’s a great source of revenue. Having a large reserve fund doesn’t eliminate assessments, but it can certainly decrease their size and frequency. 

Tax Abatement

When preparing the budget, we also have to consider the co-op tax abatement. Almost all cooperatives recoup that abatement for use by the building in the form of a matching assessment on their shareholders. The problem is that if the abatement is not renewed, the co-op would have to make up the difference, and, in most cases, it would require a substantial increase in  maintenance. However, the general feeling is that the abatement will continue.

Balanced Budget

The key to maintaining a balanced budget is to monitor your monthly income and expenses. We look at the budget every month, searching for any major variances between projected and actual costs. We feel that a board should increase maintenance to balance its budget. Boards that do not increase maintenance or common charges, or do not levy assessments, are hiding behind a smokescreen that a sophisticated buyer will see through. (For more on that, see “Monthly Fees: To Rise or Not to Rise” on p. 26.) Remember: banks want to see a balanced budget. They want to see that a cooperative or condominium is on solid footing. They certainly don’t want to risk their loan to a building that may be in financial distress.

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This article was adapted from the Habitatu online course Budgeting Basics for Co-ops & Condos, Taught by Michael J. Wolfe, president of Midboro Management, and CPA Annette Murray, shareholder at WilkinGuttenplan, this course provides a comprehensive overview of the budgeting process. It covers the budgeting timetable, the different budget sections, how they are created, which ones are problematic, and specific concerns of condo budgets. 

Visit http://bit.ly/HabUBudgeting to take the full course.

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