As part of our Problem Solved series, Habitat spoke with Avi Zanjirian, a partner at the accounting firm Czarnowski & Beer.
The reserve fund is an important part of a co-op or condo's financial health. But for many boards, the pandemic wreaked havoc on their best-laid plans to keep their reserves healthy. What’s happened as a result of COVID-19?
It's actually been interesting in different buildings. At some we’ve actually seen cost savings, but at others there have been additional expenses for supplies, cleaning services and extra staffing. We've seen payroll costs going up. We've also seen certain buildings increasing equipment like fans and UV sterilization lights that go into elevators. All of these weren't budgeted for, and obviously the biggest thing with a lot of buildings that have commercial space is decreased revenues. We can talk about the increase in expenses, but the decrease in revenues has really hurt them. They’re looking around, saying, “Where are we going to do, and where is the money going to come from?” That has put some buildings in the position where they've tapped into their reserve accounts, and money that was set aside for something else is now being used for operations.
Why is that a problem?
In certain situations, it might not be a problem. Some buildings might have a reserve account that is a rainy-day fund, so when they need to borrow $50,000 or $100,000 for something, that's fine. Unfortunately, not every building is like that. A lot of buildings work really, really hard to build up a reserve account. They may not have a transfer fee or a flip tax that gets collected at the sale of a unit, or the demographic in the building may not be able to cover an assessment by cutting a check for $20,000. To see that suddenly get wiped out in a year — and not for what it was intended for, but something else — demoralizes the board after all the work they did. So that's one side of it.
And what’s the other?
The accounting side. You set aside this money telling shareholders and unit-owners it’s going to cover the roof project or boiler replacement or lobby renovation. And now you're taking that money and using it to pay for day-to-day operations. If that money was collected from assessments, potentially these owners contributed capital to the building. So that could pose a tax problem.
Let’s say you have $100,000 coming in from an assessment, which in certain situations is considered a “contribution,” and not revenue that would be part of your income bottom line. But if it goes toward operations, it is revenue. Now the question is, do you have to be taxed on that? The other problem is that you told shareholders or unit-owners that it's going to be a contribution. If someone sold their apartment that year and they use that contribution to offset their capital gains, they have to potentially amend their tax return. Those are the biggest tax implications.
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What can boards do to remedy the situation?
There are three avenues you could take. The first is a payment plan. You decide over how many months you want to pay back the $100,000, and you put that money back into the reserve account. The other alternative is an assessment, which no one likes, but it’s another way to recoup money and replenish your reserves. The third option is that if you have a line of credit, you could borrow on it and make a goal to pay back the principal over a certain amount of time. So these are all manageable little bites to get you back to where you want to go.
Is there something the board should communicate to residents about what happened, and why it took the actions it did?
You send out a letter to your shareholders or unit-owners and say, "We told you that this assessment was going to be for capital projects, but we had to change course. So it’s not a contribution anymore; it’s an operating assessment." People might not be happy about it, but you need to communicate very matter-of-factly and directly. Otherwise light bulbs start going off that something is really wrong. Transparency is always the best policy.
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