Income Stream: A Primer

An income stream is the flow of money from tenant-owners for maintenance or common charges, assessments and storage fees and such, as well as rents from commercial spaces and income laundry rooms and community rooms and the like. Like the flow of water in a stream, it can be measured by how much is flowing and its constancy. Boards frequently get into trouble because they don't understand the nature of the building's income and how to ensure an income flow to maintain the building and provide proper services.

The largest portion of the stream is the maintenance or common charges. In a property without commercial space, this frequently amounts to more than 95 percent of the income. To ensure this volume, you need to set the maintenance at a level that will cover the building's needs for the year.

To do this, you must prepare a budget that estimates income and expenses — including reserve contributions and contingencies — for the coming year. Failure to prepare an accurate budget and set the monthly charges appropriately will usually result in operating deficits. That will deplete reserves and/or increase the number of unpaid bills.

Watching the Wheels

Having set the monthly charges at a level sufficient to meet the building's needs, you now have to protect it. Doing this requires the regular and accurate billing of the monthly charges, commercial rent and other income. Increases have to be billed on time and for the right amounts, as do rent escalations for commercial leases, transfer fees, late charges, sublet fees, storage fees and other tenant charges. You should follow up promptly on late payments to prevent arrears from accumulating.

Review billing and collection reports periodically to ensure that all charges are being billed and billed accurately. When a new budget is approved, check to see that the new maintenance is being billed correctly to everyone. Leases should be reviewed to determine if the following are being billed and, especially where calculations are necessary, are being billed properly:

• rent increases, including fixed and percentage increases,
• consumer-price-index increases, and
• escalations based on increases in expenses, most often real estate tax but frequently including insurance, heating, water and other operating costs.

Arrears will have a negative effect on the constancy of the income stream and may have a negative effect on the amount of income if the arrears are ultimately uncollectible. The loss of income from the inability to collect arrears is much more likely in condominiums because a condo's lien against the unit for unpaid common charges is inferior to the lien held by the unit-owner's mortgagee. This is the opposite of the situation in cooperatives where the cooperative's lien for unpaid amounts due under the proprietary lease is superior to the lien held by the lender who made the initial share loan to the tenant-shareholder.

Because of the significant effect that failure to collect monthly charges can have on the financial health of a building, arrears should be closely monitored and late charges imposed for failure to pay by a certain date. There should also be a procedure in place to ensure that arrears are not allowed to get out of hand. A timetable should be established for dunning notices from management and for referring arrears information to counsel for collection.

For example, if maintenance has not been paid on time, a late notice should go out informing the owner that they are late and a late charge has been imposed and will appear on the next bill. If the arrears have not been paid by the end of the month, another notice from management should be sent. This should inform the owner that the matter will be referred to counsel for collection if not paid by a certain date and that, under the lease or other pertinent document, they will be responsible for all legal fees incurred in the collection process. Buildings that impose enforceable late charges and have such a process usually have fewer arrears — and fewer problems collecting.

Remember, as fish in a stream need an adequate and constant flow of water to thrive, your building requires an adequate and constant flow of money. Buildings without that may survive, but life will be difficult. And an inadequate income stream could be fatal.

It is your responsibility as directors to establish and provide an adequate amount of income, monitor its flow, and take whatever steps are necessary to make sure it is constant.

Mark Shernicoff is a partner in Zucker & Shernicoff, CPAs, a division of the Metis Group, CPAs.

Adapted from Habitat February 2007. For the complete article and more, join our Archive >>