Condo Board Takes Action to Rectify Commercial Owner's Underpayment

It’s not uncommon for buildings with mixed residential and retail space to find the commercial owner isn’t contributing adequately to the shared expenses of the building. The board then finds itself doing assessments for residential owners while the commercial owner’s monthly payments stay flat. This recently became a problem at a 15-unit condop on West 3rd St. Avi Zanjirian, CPA and partner at accountancy firm Czarnowski & Beer played a crucial role in correcting the imbalance.

Allocations and Adjustments

Condops are buildings divided into a residential co-op space and a commercial condo space and the two entities share expenses. “The co-op operates as its own separate co-op and has its own expenses, but it shares expenses with the commercial owner,” Zanjirian says. Often in these situations, the offering plan will outline for the building what expenses are shared and in order to keep a steady cash flow, the commercial unit owner will pay a flat amount every month.  At the end of the year, actual expenses are compared to the percentages in the offering plan generating what are called true-ups. “Either the commercial owners get a credit if they overpaid or they owe money if they underpaid,” Zanjirian says.

Feeling the Squeeze

At the condop on West 3rd St., the commercial owner had a set amount to pay each month of around $5,000 and at the end of the year paid a small true-up of around $1,000. Expenses were pretty flat for many years but recently started to grow. “We are in an inflationary environment, expenses are going up, insurance costs are a big driver of expenses, as are shared maintenance projects around the building,” Zanjirian says. The board wasn’t keen to ask the commercial owner to pay a higher monthly amount in spite of Zanjirian’s advice to do so. However, it quickly became clear the condop lacked operating funds. “Money the condop had set aside for capital projects was being used for operations,” he says.

Ushering in Change

When a new board was voted in and the managing agents changed, Zanjirian took the opportunity to address the allocation of expenses. “At one point there were $15,000 to $16,000 in true-ups at the end of the year — and remember, they're only getting this amount when we do the financial statements,” Zanjirian says. The board needed to approve the true-up and bill the commercial owner, who wanted verification and then take a month or two to pay. “It's nine months of delay in cash flow on a small building and if you perpetuate this year after year after year, it becomes a cash flow problem for the building,” Zanjirian says. 

A Shift in Approach

Solving this problem involved figuring out monthly payments for the commercial owner based on the current expenses and the current budget. “A monthly increase of $1,500 was calculated for the commercial owner or order to close the gap,” Zanjirian says. Of course, the costs weren't just going up for commercial owner, they were going up for everybody. A special meeting was called to explain the reasoning for the increases. Meetings were called over an eight month period to bring about the change. “A budget was set to allow the building to operate at breakeven which is the goal, as opposed to doing band-aid assessments,” Zanjirian says. The cost for the building amounted to around $2,500, separate from Czarnowski & Beer’s  agreed-upon auditing fees.“Nobody likes to increase maintenance and common charges,” he adds. “But boards have to take a realistic look at their expenses.”