HABITAT
Co-op Condo Operating Budget 2012
All you can safely predict about numbers on a future budget is this: They're going to go up. We've experienced dramatic events in the past decade that have affected the way buildings operate. The real estate bubble, the events of 9/11, the global banking crisis, health care costs, changes in the Internal Revenue Code — all have had an impact on the operating costs of condominiums and co-ops. And as well, co-ops and condos are unique — each has individual characteristics, history and an operating style that affects the way it functions and deals with increasing costs.
As a rule of thumb, I often recommend that maintenance / common charges should be increased by an average of five percent per year, which may be too high for some and too low for others. And although my rule of thumb may have worked in the past decade, boards must closely monitor their operating costs and design budgets that are realistic and cover their operating costs.
That said, one way to see into the future is to examine the past. And that means taking a look at your budget, a basic tool of management. On an annual basis, usually around September or October, condo and co-op board members and managing agents get together to project your operating costs for the following year. This is the basis for determining the level of common charges or monthly maintenance to be paid by the owners or shareholders
Creating an annual operating budget is straightforward. Most costs are relatively fixed — the board has limited control over 80 to 90 percent of the annual operating costs. Your board and your managing agent have a great deal of financial and operating data and information available, along with reasonable estimates, to develop cost projections for the large expense categories (e.g., real estate taxes, payroll, mortgage, etc.) in the annual operating budget.
In an effort to predict future operating budgets, I've compared co-op / condo financial statements from 2011 to those of 2001. I looked for changes, trends, and patterns of the expense categories that had a material impact on those budgets over the past decade.
Real Estate Taxes
While most readers understand the differences between a co-op and a condo, it should be pointed out that the major difference in the budget of a co-op is that it includes the expenditures for real estate taxes on the property, and in most cases, principal and interest on an underlying mortgage. For New York City co-ops, these costs generally account for 40 to 50 percent of your annual operating budgets. In a condo, those costs are paid directly by the unit-owners, and therefore are not included on the operating budget of the condo association.
The past decade has seen dramatic increases in New York City real estate taxes. Because these represent one of the largest expense categories for a co-op, the impact of this increase has been most pronounced. Most co-ops have seen their real estate taxes double, with some tripling, in the past decade. Of the co-ops I surveyed, such taxes represented 26 percent of their total operating costs in 2001, while in 2011, real estate taxes grew to 36 percent of total operating costs.
This increase is the result of a combination of (a) the increased value of the city's real estate and (b) the increase in the tax rate. Given the state of New York's fiscal needs, it appears that real estate taxes will continue to increase, hopefully at a slower pace.
In the short term, the New York City Cooperative and Condominium Property Tax Abatement Program, which has provided a partial tax abatement (17.5 to 25 percent) for most co-op / condo owners since 1996, is scheduled to expire June 30, 2012. Many real estate professionals are concerned that the abatement may not be extended or may be reduced. The expiration of the tax abatement may force an immediate increase of 5 to 10 percent on co-op maintenance charges because most co-ops have been offsetting the pass-through of the tax abatement to shareholders with an assessment to cover operating costs.
Payroll
Overall, co-op / condo payroll and related expenses have increased by approximately 50 percent in the past decade. Wages increased by about 35 percent, but the biggest increase has been in the cost of health and pension benefits, which have more than doubled.
Next page: The Impact of Heating, Insurance and Mortgage Costs >>
Board Talk
Engage, enrage, ask questions and give answers with your community of board members. Submit your questions and comments here!
Habitat Week by Week
Co-op and condo board business broken down into bite-sized bits - 2 stories each week. Read now on all digital devices.
Ask the Experts
learn moreLearn all the basics of NYC co-op and condo management, with straight talk from heavy hitters in the field of co-op or condo apartments
Professionals in some of the key fields of co-op and condo board governance and building management answer common questions in their areas of expertise
Subscribe
join nowGot elected? Are you on your co-op/condo board?
Then don’t miss a beat! Stories you can use to make your building better, keep it out of trouble, save money, enhance market value, and make your board life a whole lot easier!