Budgeting is never easy, not for a family of four and certainly not for a co-op or condo community of hundreds. That fact is made all the more difficult by the lingering effects of the recession, which continues to wreak havoc with our confidence as well as the bottom line. For many boards, trying to balance a budget these days requires making difficult choices. If the budget is falling short, what is the solution? Raise more revenue by raising fees? Or reduce costs by cutting back on services and amenities? For residents, neither option is likely to win a popularity contest.
So how does a board determine the best ways to keep their bottom lines in the black? And if unpopular choices must be made, what is the best way to break the news to residents?
What’s Flexible, What’s Not
For co-op and condo communities of all sizes, a budget is not necessarily a highly flexible entity.
“Workman’s compensation, elevator contracts, government fees, inspections fees are not at all flexible,” says Larry Silverman, president of Atlantic Management based in Union City, New Jersey. “Or if you do a mortgage for five years, 10 years, you have no room to play with that during that time frame.” For the most part, those prices are fixed from year to year with very little room for maneuvering unless it’s a new contract year for staff. Otherwise, the prices that are locked in at the beginning of the year will still be the same at the end and likely for several years after that.
Jeff Stillman, CPA and vice president of Stillman Management Inc., based in Mamaroneck agrees, defining the major pieces of most budgets as “inflexible.”
And the pieces that are moveable usually offer very little in the area of control either. Fuel costs are a prime example, says Floyd Brigman, an account executive at Stillman Management. He recalled that the year before they were working on a fuel budget of a little over a dollar a gallon and this year, it’s more than three dollars. “That’s a $250,000 shortfall,” he says. “You can’t make that up in the blink of an eye.”
The list of items that a board and management can cut may be relatively small but it still exists. Utilities, for example. Perhaps it is possible to get an energy audit or figure out ways to cut use and cut costs. Sometimes with careful review of the bill, errors are found as well. Perhaps even looking into grants available from the utility companies for energy conversation and other pilot programs might save dollars down the road.
“On insurance, you can raise the deductibles,” Stillman suggests. “Or enter into a master umbrella program,” which is something to which Stillman clients have access. He also suggests doing a risk review of the building and seeing if there are any areas that could be repaired or improved to help lower rates and reduce claims.
With supplies, it is possible to cut costs by doing bulk purchases. Management firms can order the winter’s supply of calcium chloride for all of their buildings at one time, earning a volume discount and reducing costs for everyone.
There may be long-term solutions, too. Doing preventative maintenance on major ticket items such as elevators and boilers will reduce repairs during the year and improve efficiency. Training staff to do small contracting jobs could pay off in the long run for a building, saving on outside vendor costs.
Raising Versus Reducing
At times, the search for budgetary salvation may lead boards and management to consider reducing certain amenities or services offered within the building. The experts agree that not a lot can be gained from cutting amenities because they simply do not account for that large a chunk of the budget. “If there’s a doorman that’s on duty for 16 hours a day, you can cut it back to eight hours or twelve hours,” says Silverman, “But it won’t save you that much money. Small things like that will probably have little impact.”
There may be legal questions involved with the removal of an amenity or reduction of a service as well. “Before cutting back on amenities, the board needs to review its declaration, offering plan and any amendments, bylaws and house rules to determine whether such a resolution would be permissible,” says attorney Adam Leitman Bailey, a lawyer who practices commercial real estate law in New York and New Jersey. “In many cases, completely closing an amenity mentioned as a common element and offered in the offering plan would not fly. A building cannot take away land which they purchased as part of the building without compensation, if at all. However, reducing the hours for using the amenity would most likely be permissible depending on the building’s corporate documents.”
So, while it may not be possible to close the pool, for example, it may be possible to reduce the hours it is open. Given the small amount of money that action likely would garner, though, it might not be worth it to anger unit owners and shareholders who look forward to using that pool every weekend.
Time to Raise Those Fees
No matter how much is done to shave dollars off the debit side of the balance sheet, there are times when the issue of raising fees is unavoidable. In these instances, an open and honest dialogue with residents is an absolute must.
“When faced with having to raise maintenance or levy an assessment, education, understanding and sympathy should be the modus operandi,” says Bailey. “Owners deserve to know why the increase or assessment is necessary. The residents should receive a memo detailing what caused the increases—for example, an increase in oil costs (or) an increase in taxes and insurance. The memo should start with a statement that the board understands that these are tough times, and that the board has done everything it could to avoid this situation. It should also demonstrate the board’s efforts to avoid the increase.”
The sooner these communications can begin, the better. “The best case scenario would be several updates from the board even before the increase, showing that they are trying to avoid the problem and other ways it has tried to garner revenue or reduce expenses,” Bailey adds.
Silverman agrees. “It’s a good idea to give them as much advance notice as possible.” It helps, too, to have accountants on hand to explain budgetary issues at annual meetings, so residents have a solid understanding of where things stand and where financial vulnerabilities may rest.
Fee increases or assessments should be kept as small and reasonable as possible. In a rare case, Silverman saw a building announce a 15 percent fee increase for their residents. “There was a case where an owner owned multiple units and they had stopped paying so it forced the rest of the owners to make up for that. “No one likes large increases but sometimes they are unavoidable,” Silverman says. “Another example for a large increase if there was a big, unplanned for expense, like a major problem with the elevator, it could be running fine and then all of a sudden you had to change the controller. That would cost a lot of money.”
In some cases, small yearly increases are advisable, providing a budgetary cushion to insulate the community from unexpected and unavoidable shortfalls. “In the long run it’s always better. If you do a small increase every year people will expect it,” says Silverman “or they can plan for it.”
Small annual fee increases can do more than simply serve as an umbrella for rainy days. They can help build the long-term health of the co-op or condo. “I am a big believer in a strong reserve, especially in these days of natural (hurricanes, floods) and unnatural disasters (Wall Street collapse),” says Bailey. “So small automatic increases are a good idea to build the reserve fund and to show potential buyers that problems do not exist, these increases are automatic and do not mean that the building is not doing well.”
Being able to count on small increases of one or two percent each year can be especially helpful as buildings age and repairs become more of an issue. Many of today’s co-op and condo buildings were constructed in the 1950s and ‘60s before being converted in the ‘80s and ‘90s. Now those buildings are more than half a century old “and a lot of the things that were done at the time of conversion, like windows, are past their useful life,” says Stillman.
On the downside, Bailey says, “money is tight and if these increases are not immediately needed, you will not only be financially harming the owners, but also potential buyers who may be priced out of buying in the building.”
In short, there are no easy solutions when it comes to balancing a budget in an uncertain economy and at a time when, for almost everybody, every dollar counts. “The problem with doing budgets is you have to be a bit of a fortune teller,” says Stillman. Despite the best efforts of boards and management, sometimes the budgetary prophecies can fall short and that red ink starts appearing. When that happens, difficult choices must be made. By being open and honest with residents, however, those choices can become a group effort and solutions can become consensus.
Liz Lent is a freelance writer and a frequent contributor to The New Jersey Cooperator. Editorial Assistant Christy Smith-Sloman contributed to this article.