Financial Management Tips: Second in a Series of Print 'Em Out Checklists
May 6, 2009 — Managing your co-op or condo, never an easy task in the best of times, becomes even more challenging and possibly overwhelming as shareholders and unit-owners, struggling with financial problems of their own, fall behind on their maintenance or common-charge payments, or in extreme cases lose their apartments to foreclosure.
Attorney Janet Oulousian Aronson, a specialist in community-association law, and a member of the New England chapter of the Community Associations Institute, here gives her top tips to help you keep budgets balanced, maintain essential services and protect property values, even as the normal revenue stream may be disrupted. " When budgets are already tight, even a small decline in anticipated revues can have an out-of-proportion impact," she says. "Shareholders and unit-owners must be prepared, and must accept that their board must take action to weather the present economic storm."
Here are 10 things every board should do:
1) Anticipate cash flow problems. Knowing that you'll eventually collect all the money you're owed won't help pay your bills today. Budget for shortfalls. How? By looking at your historical delinquency rate and doubling it in your revenue calculations. Also double the amount of time you usually expect it takes to collect delinquent payments from financial institutions. Banks aren't rushing to foreclose, because once they own the units, they're required to pay their share of the monthly charges – and so some banks actually compel co-op/condo boards to initiate foreclosures and then sue the banks to collect the delinquent payments.
2) Be proactive. You don't have to wait until the next annual meeting to recast the budget. If it's clear the numbers aren't working, rethink the budget now.
3) Develop a strategy for filling the revenue gap. Your primary options include: increasing maintenance fees/common charges – never popular, but possibly necessary; as well as
4) levying a special assessment; and
5) obtaining a bank loan or refinancing.
6) On the expense side, look for reasonable ways to cut costs. Consider delaying capital expenditures. You can't forego essential services – snow removal, heating-oil deliveries – but consider reducing the lawn-mowing schedule, foregoing the planting of spring flowers, or opening the swimming pool later than usual this season, or perhaps not opening it at all. These choices won't be easy or popular, but they may be necessary – and in some cases, such as flower planting, may inspire volunteers to contribute plants and time.
7) Renegotiate contracts with vendors.
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8) Be creative. For example, converting unused basement space to storage cubicles, for rental revenue, or selling unused common space, such as a square of land that a ground-floor apartment owner can buy and convert to a patio.
9) Don't slash and burn. Don't defer essential maintenance. Repairing the roof is expensive, but less costly than dealing with water damage in multiple units and subsequent mold problems resulting from it. Firing the management company may be penny-wise, pound-foolish category. eliminating the management fee but removing the expertise and experienced hands you probably need to guide you through a difficult environment.
10) Include shareholders/unit-owners in the decision-making process. This is probably the most important point. You're going to have to make difficult decisions -- don't make them in a vacuum. Communicate with owners. Explain the financial pressures and let them weigh in on the options you're considering. Special assessment, fee increase, or bank loan? Close the pool or cut back on landscaping? If owners have agreed in advance to cut back on lawn service, they're less likely to scream at the board when the grass begins to turn brown. Savvy politicians say, "Don't waste a crisis." This financial crisis may provide an opportunity to solve the common problem of how to engage residents actively in the governance of their communities.
Remember: Bankruptcy is not an option. What prospective purchaser would knowingly purchase a unit in an building under a bankruptcy umbrella? Foreclosed units would remain unsold, and other, financially strapped owners, trying to sell their units to avoid foreclosure, would become delinquent in their payments. Voluntary receivership – asking a court to appoint a receiver to run the community – is equally undesirable, for similar reasons, and it's hardly a plus to relinquish control of your property to others.
It's far better for the board, elected by owners, to decide how to allocate the community's resources. A special assessment won't feel good, but an increase or assessment mandated by a court-appointed receiver will feel awful!
Janet Oulousian Aronson is a partner in the Massachusetts firm Marcus, Errico, Emmer & Brooks , and has lectured on community-association law to groups including the Boston chapter of the Institute of Real Estate Management , the New England chapter of the Community Associations Institute , and the CAI's National Law Seminar. This checklist is adapted from her article "Hard Times Require Association Boards to Make Tough Choices" at her law firm's website.