What Are Financial Best Practices?

Annette Murray, Shareholder
WilkinGuttenplan

The Lay of the Land

Boards need to understand financial best practices. It doesn’t matter if the building is a condo or a co-op. The issues are the same.

One of the most important best practices in financial matters is for a board, along with the management company, to prepare a five-year capital plan. We find that many buildings in New York City do not have adequate reserves or they don’t have a plan to fund the reserves. We usually suggest that the board – along with management, the super, contractors, and an engineer – put together a list of items that have to be replaced over a five- to seven-year period. It’s an estimate. It’s not going to get disclosed anywhere. It’s just a draft working document, or what I consider a strategic plan, for the board.

Now What?

The building has to decide its spending needs for those capital projects and how it’s going to get the money. Is it coming from maintenance or common charges? Or is it from a capital assessment? And is that assessment going to be over one year or several? Or is it coming from financing, refinancing, or a line of credit?

If a board doesn’t know what’s coming up in the next few years, it’s flying blind. It’s a best practice to give unit-owners or shareholders a heads-up – an advance warning that there is going to be a capital assessment. Nobody wants something sprung on them. That’s one of the best financial practices for a building.

Another one is to look at the operating side of the budget, the day-to-day activities. There should be anywhere from two to four months of common charges or maintenance kept aside in an operating cash account. This will give the board enough working capital so that if any large, unexpected operating expenses come up, the board has the cash to fund them and doesn’t have to immediately go out and either draw from the reserve account, which is not a best practice, or impose an operating assessment.

A third item that often gets neglected: if a building has had several deficits and its working capital has gotten low, the board should try to beef up the working capital and put a line item in the operating budget for “deficit reduction” or “working capital reserve.”

These three best practices should help ensure that the building is financially stable, which is the goal of all board members and management.