Lisa Prevost in Board Operations on January 10, 2020
Co-op and condo boards have set their budgets for the coming year. The smart ones avoided wishful thinking and stuck to the cold hard facts of running a business. First, the operating budget required boards to look ahead to the coming year’s income and expenses, then calculate any necessary increase in maintenance or common charges to keep the two in balance. Next came the longer-term capital budget, which requires boards to consider how much it’s probably going to cost to keep the building in compliance with increasingly complex city regulations governing everything from facade repairs to energy efficiency.
But what sounds like a fairly straightforward, by-the-numbers process often winds up veering into the realm of fantasy as boards try to convince themselves that the expenses on paper won’t actually materialize. For many frustrated managing agents, the recent budget season resembled a weekend with Ricardo Montalbán on the long-ago TV series Fantasy Island.
“A lot of times boards have preconceived ideas, and then they make irrational decisions,” says Paul T. Brensilber, president of the management company Jordan Cooper & Associates. “Like ‘We can only raise maintenance 3 percent.’ That’s plucked from thin air. They say, ‘We can’t raise it too high, or we won’t be competitive with other buildings.’ That may be true, but it’s got nothing to do with running the building properly.”
Boards understandably want to cut out unnecessary expenses. But the truth is, very little of the operating budget is under their control. Typically, managers say, up to 90 percent of a budget consists of fixed costs. In a co-op, real estate taxes and mortgage payments often account for more than half of expenses. Calculating the next year’s tax increase can be done with reasonable certainty because of the city’s five-year phase-in of any change in value in a given year. (Tax assessmentss can also be contested by a tax certiorari lawyer.)
“If, for some reason, the assessed value of your property increases significantly during the new year, your budget will be off,” says Daniel Wollman, chief executive officer of the management company Gumley Haft. “But it’s only going to affect a fifth of the number for taxes because of that five-year phase-in.”
Payroll, another major expense, is also fairly predictable from year to year, as are the costs of insurance, service contracts, heating fuel and utilities. Annual increases in these categories are budgeted for based on past history.
“Buildings have to be realistic about their budget,” Wollman advises. “I meet with boards who feel enormous pressure to keep maintenance down, so they’ll nickel-and-dime the budget to get them the maintenance level they desire.”
But failing to raise maintenance levels to keep up with rises in real estate taxes and other fixed costs will ultimately come back to bite boards as their accounts-payable balance grows. “The budget just becomes phony,” Brensilber says. “People come to the annual meeting, and they’re shocked. Did the board do them a favor by keeping the charges artificially low? I would say, no, they did not.”
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