Costs and Income Must Be in Balance

Habitat spoke recently with Constantin Anagnostopoulos, president of Sigma Real Estate Services.

A lot of co-op and condo boards seem to think that keeping the monthly maintenance or common charges down is the way to go. But what happens when costs outrun income? 

We actually are involved with an example of this problem today. We took over the management of seven homeowners’ associations that were under a single master-association umbrella. The master association was paying for the land and common areas for all seven condos, and over a five- to six-year period the expenses had increased. But the condos were not increasing their payments to the master association, and over time this put it into the negative zone. 

Didn’t the condo boards understand this?

The boards never actually moved the needle on the income side. On top of that, the utility company hit the master association with a $144,000 bill, which was basically a retroactive collection. Things were out of control, and we needed to get involved.

What was your first step?

Part of the problem was communication. Each board was looking at its own issues instead of the big picture. The first thing we did was bring everybody in and tell them they needed to work on things collectively.

So fragmentation was working against them?

Absolutely. The master association, which fixed all common charges, started taking money from the reserves to pay for the shortfalls. Over time, the individual condos owed the master association more money, but that information wasn’t being relayed to them. 

So what was the solution?

On average, each sub-association owed the master association about $40,000 for all common-area aspects. We couldn’t have residents pay that all at once, since it would be $1,000 for each unit. So we created payment plans for each sub-association that varied between two to five years, and we allocated that money into the future budgets. We tried to hit people with as low an increase [in common charges] as possible, but it was still about 20 percent.

Ouch.

They weren’t happy. But they hadn’t had any increases for six years, so if you average it out, it ends up being only a 3 to 5 percent annual hike.

What’s the plan going forward?

We’re taking a multi-phased approach. We put in an additional payment plan for the utility bills for each sub-association, and we’ve reached out to several banks to try to get a loan to defray the shortfall. As long as the master association maintains a 3 to 5 percent increase and the utility expenses get paid, we’ll be able to collect all the money needed to fund the operating reserves. 

The moral?

There’s no getting around maintaining proper income increases on an annualized basis. If you don't do it, you’re in for trouble.