Too often, building boards are blindsided by big improvement projects. In these moments, an assessment is typically given to the owners. This isn’t always the best way forward. In order to prevent being hit with major costs out of the blue, it’s important to understand what’s going on in your building on a regular basis. We worked with Marsha Grant from Grant Management Services to provide you with the best tips on budgeting. In this blog post, we’ll give you insight into how to work with your management company to come up with an accurate building budget. We’ll also cover the line items that are often missing from building budgets that could save you money down the road.
Operating Expenses Are Key
One of the most important aspects of creating an accurate building budget is taking operating expenses into consideration well in advance. Rather than wait for unexpected issues to arise, it’s crucial to forecast costs and set realistic expectations for the year ahead. This means starting the process at least five months before the budget is due.
When it comes to projecting expenses, insurance costs can be difficult to estimate. To get an accurate picture, consider reaching out to an insurance broker to learn about next year’s costs. By factoring this information into your budget, you can ensure that your expenses are more realistic. When it comes to vendors, contracts should be reviewed for yearly increases. Some contracts can be re-bid for cost savings. We recommend getting at least three bids.
Many building owners believe that a condo / coop should operate at no surplus whatsoever. We disagree. Typically, accountants use a straight line depreciation method. This method involves taking the cost of equipment, dividing it by the number of years, and allocating the same amount for each year. While this is a great accounting tool, it doesn’t help the building properly save for future maintenance, which tends to increase. This is where a surplus comes into play. A surplus can be utilized to cover any maintenance fees that crop up. Therefore, it’s essential that the board, management, and accounting team are on the same page when considering the depreciation of the building equipment and infrastructure.
Building boards often think of assessments as a saving grace. However, as inflation rises and interest rates go up, assessments are only the best option if your ownership can afford it. If that’s not the case, you should consider working with consultants who can provide insight that will help you build a better budget.
Hiring the Right Help
During my tenure as treasurer for my building, I learned the hard way that it’s essential to plan for the maintenance and replacement of building equipment and infrastructure. In hindsight, I should’ve checked the Fannie Mae & IRS websites to understand the shelf life of the issues my building was having. These websites would have shown me that the end of life was approaching for our building equipment. I would have then known to hire a consultant and engineer to provide assessments on the equipment and facade depreciation, an evaluation of our roof and structural integrity, and information about the incentives available to our building at the City, State, and Federal level.
Highly rated, skilled consultants can provide you with a deeper analysis on the time span left on various systems. This will help you accurately budget and save for future maintenance. It’s important to note that once you have a written report from a consultant that states a deficiency that may be urgent, you need to act on it to prevent gross negligence. Once a board or property manager receives information on an issue, they have a responsibility to show ownership that they are moving forward with a solution. Green Potential can help you find the right vendors to get the job done quickly and for free.
Revenue: Not Just For Operating Costs
Revenue is a critical part of building budgeting. By accurately accounting for expected revenue, you can allocate resources effectively and prevent the need for assessments to owners. This means taking a comprehensive approach to budgeting that includes not only operating expenses, but also revenue streams and long-term planning.
After working with a consultant to understand the longevity of your systems, you can account for the resources that need to be set aside for maintenance and system replacements. As systems get older, they cost more to maintain. When you allocate for increasing HOA / maintenance costs, you not only prevent assessments to ownership, you also positively impact the long-term financial standing of your building. If your building cannot afford to increase HOA / maintenance costs, it’s important to hire consultants to analyze the various factors that may affect your building’s budget in the next 3-5 years.
To better understand these factors, talk with your management company about bringing on additional support. If your management company or board needs additional vendor bids, we’re here to help at no cost to you. Green Potential is a matchmaker between vendors and buildings. We understand the types of projects consultants want to work on and provide proposals from among the best in the field. With each vendor recommendation, we include a cost analysis and reviews from previous clients on the quality of their work.
With the right approach, you can create an accurate building budget that sets your building up for long-term success. In a future post, we’ll explain how to work with banks to help your buildings’ reserves grow more efficiently.
