Budget Forecasts: It’s Going Up

With the skyrocketing price of fuel – higher and higher after Hurricane Katrina shut down some oil production and delivery from the gulf coast – co-ops and condos are facing a looming crisis of their own: the out-of-whack budget.

“We didn’t put in another maintenance raise for this year’s budget,” says Ruth Shoenthal, the treasurer at a 145-unit West 96th Street building in Manhattan. “But we will probably have to raise it next year.” In her 2005 budget, prepared last year, she estimated that fuel costs would double. “I slated $80,000 and we’ve spent $120,000. And it’s going to be higher than that now with Katrina.”

As cooperatives and condominiums prepare their budgets for 2006 (traditionally, first drafts roll out in November), many CPAs and treasurers are finding the crystal ball a little murky – and also a little scary. Fuel prices were already going up before the hurricane struck, thanks in part to the war in Iraq, and now it’s anyone’s guess what costs will be like next year. “Fuel prices are out of whack,” observes Gary Ziprin, chief financial officer and a principal at Midboro Management. “Prices went up well beyond anyone’s expectations.”

“Basically, we’re doing our 2006 budgets right now, and we’re looking at the news on the heating and fuel costs – we’re tagging certain buildings [as] 46 percent higher [than last year],” says Paul Attinello, chief financial officer at Kaled Management.

Typically, the budget is prepared and monitored throughout the year. Projected budgets began skewing away from actual budgets in the early summer when the price of gas began rising. That led most buildings to take corrective action. “Some of our buildings have already voted in surcharges that we’re looking to possibly start now and run them through March,” notes Attinello, who says his firm began the budget process a little earlier than usual this year, “so we could have the budget completed for October, and hopefully have answers by November.”

Then Katrina struck, causing not only fuel increases but also threats of rising insurance premiums. No one knows what the effect of the potentially high volume of claims will be, but some predict that with the insurers taking a huge hit – a few professionals say it could be as high as $100 billion – they will try to recoup by raising premiums nationwide. “Insurance going up is a good possibility,” says Zitrin. Attinello warns that increases could top 40 percent.

There is also the regular increase in property taxes. “Taxes are continuing to go up,” reports Attinello, who says that regular tax certiorari challenges may not always bring down the assessed value – and, in any event, take time.

Vendors, too, are facing higher costs and are passing them on to client buildings, notes Michael Eisenstein, controller at Wentworth Property Management. “What I’ve been looking at is a range of probably about 30 to 45 percent as an increase from previous years.”

The uncertain situation with fuel and insurance has led some managers to advise co-ops to try and lock in rates now. “A fairly novel approach that’s being looked into is whether the [insurance] carrier will permit buildings, whose package policies don’t expire generally until sometime in the range of January to June ’06, to look at a full one-year renewal immediately at the expiration date at today’s premiums,” says Donald H. Levy, a vice president and account executive at Brown Harris Stevens. “We’re looking into that, and we have not received answers yet.

“There’s another issue being discussed with a lot of buildings,” he continues. “The oil companies, for years, have been presenting an option to buildings individually to lock in fuel prices on a one-year contract. There are very few buildings in our experience that have been willing to do that, because in the mind of most boards, it constitutes, and in fact it is, commodity speculation.”

Some are choosing to cover rising costs by refinancing, since the rates are still relatively low. “For the buildings that can do it – the ones that don’t have a large prepayment penalty – the rates are still so low that there’s enough room for them to increase the amount of the mortgage [and obtain extra cash] and still pay the same amount on a monthly basis,” reports Tom Flanagan, chief financial officer at Wentworth.

Others are considering a fuel surcharge – assessment – to stay in place for as long as prices are high. “Without knowing how high is up, the likelihood is that come the end of the heating season for 2005, and certainly for the 2006 budget, there will be a need to put in a substantial increase on projected fuel costs, which then raises questions that are already being discussed [about instituting] a fuel assessment rather than putting in a permanent increase in maintenance,” says Levy. “But there’s a lot of skepticism among the few people we’ve spoken to so far about whether those prices are ever going to come down again to any meaningful level below where they were pre-hurricane, and whether, in fact, whatever needs to be projected should just be included in the maintenance.”

Most boards are being advised to monitor and prepare their budgets even more carefully than usual. “The one thing we try to do, and hopefully everyone does, is not simply manage a building month-to-month financially, but actually come up with some financial models going forward,” observes Jonathan Klein, president of Wentworth. “We’ve had to get a lot more aggressive in the budgetary conditions of the buildings.”

Experts note that, when preparing budgets, boards should try to be flexible – and have a “Plan B” at the ready. Says Levy: “You should at least project some downside variations, even if they don’t end up becoming a reality in terms of a maintenance increase or an assessment. Look at the downside risk, and be prepared, on short notice, to put in some kind of a special assessment or increase in place, if it becomes necessary. Have an alternative plan available, even if you don’t put something in immediately until more effects are known.”

But most professionals admit they have not seen a situation like this in recent memory. “It’s just incredible,” says Attinello about the rising cost of fuel. “When I go to board meetings, the main issue that we’re usually up against is this increase in fuel, and people can relate to it because they’ve seen it at the pumps themselves. Taxes, insurance, and real estate taxes. That’s really our triple-whammy.”

So, fasten those seat belts, it’s going to be a bumpy year.