Co-op / Condo Boards & Residents: Do YOU Know These Critical Budget Items?

 
1. Make sure boards obtain signed contracts with vendors.
 
The more fixed-price common expenses the co-op / condo board can include in the budget, the fewer variances there will be between actual and budgeted expenses at the end of the year. The best way to accomplish this is through signed contracts with as many of the association vendors as possible — especially for any large expense.
 
All too often, co-op / condo boards rely strictly on history and are surprised when they receive the bill for the goods or services.  Several years ago, insurance costs escalated and many boards did not work with their insurance carriers on premium amounts in advance of the budget process. As a result, boards did not budget for the large increases — leading them to shortfall on the budgeted insurance line. The best way to avoid these surprises is to get as many signed contracts as possible. Signed contracts are simply a good business practice as they establish a fixed price and provide good communication on the expectations of both parties.

2. Have boards do professional reserve studies with periodic updates.
 
A separate portion of the condominium association or cooperative apartment corporation's budget should be used to fund future major repairs and replacements of common elements where the replacement cost will exceed $10,000 (e.g. roof, windows, etc.). These common elements are typically referred to as the reserve components.
 
Professional reserve studies are a valuable tool for the association to use to identify the reserve components and estimate their lives and replacement costs. Boards have a fiduciary duty to provide the best estimate of the future reserve expenses and to allow the owners to fund those expenses over a period of time — thus preventing the need for a special assessment at the time of replacement. At a minimum, owners should be aware if the association is not setting aside monies for these repairs so they will not be surprised when a special assessment for the repair or replacement becomes necessary.
 
3. Have boards be aware of "non-cash" and "non-expense" cash needs
 
The economy over the past few years has demonstrated the importance to condominium associations and homeowner associations of budgeting for non-cash items such as bad-debt expense. Unfortunately, when owners do not pay their assessments in a timely manner (or at all), the paying owners have to make up the difference.
 
This situation is a very difficult item to budget for adequately, as each delinquent owner's balance and situation needs to be evaluated independently; however, it is a crucial budget item. Co-op and condo boards need to understand the importance of spending the time to estimate this line item as thoroughly as possible and on the conservative side, since there are often other related expenses such as attorney fees, that are also incurred during the collection of delinquent accounts.
 
Another non-expense item boards should include in the budget process is the repayment of a loan. Including the future cash payments for a loan is critical because if the association does not budget for all required cash payments, the association will find it unable to meet its obligations.
 
In summary:

•  signed contracts with vendors
•  professional reserve studies, and
•  budgeting for non-cash and non-expense items 

These three items help co-op / condo boards minimize surprises to their cash flow more often than any other expenses I have seen in my 14 years of condominium and homeowner-association accounting. You need good budgets in order to avoid a cash crisis and to plan for additional projects that enhance owners' standard of living.

 
CPA Candy G. Cunard, a graduate of the University of West Florida, is a manager with accounting firm Carr, Riggs & Ingram, LLC, (CRI) the nation's 34th largest. She is a member of the Community Association Institute (CAI) and the American Institute of Certified Public Accountants (AICPA).  This is adapted from an article on her firm's website.
 
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