Spotlight on: Protecting Your Building's Income Stream
June 18, 2015 — What would you do if your building didn't have enough money to pay its mortgage, payroll, fuel bill, or any other major expense?
You'd have little choice but to file for bankruptcy — and all your shareholders or unit-owners would lose their investments. But you can prevent this frightening outcome by understanding your building's income stream and how to protect it.
Know your dough. A co-op or condo's income stream — the flow of money from fees levied from apartment owners, rent for commercial tenants, and any other sources — must be both large and constant enough to ensure the building has funds available to pay its bills as they come due. The bulk of this income — often 95 percent or more — comes from maintenance charges (and commercial rent, if applicable).
A target in sight. The first component of a proper income stream is ensuring proper volume by setting appropriate maintenance fees. To do this, you must prepare a budget for the coming year. The amount of maintenance you will need to collect is equal to the difference between your estimated expenses and your estimated income from other sources. Failure to budget accurately will usually result in operating deficits, which will deplete your reserves and increase the likelihood of unpaid bills.
Bill, baby, bill. Once you have determined your maintenance needs for the year, you should protect your building's income stream by billing for these charges regularly, accurately, and promptly. Don't let a backlog accumulate, or you'll be scrambling to make ends meet when the bills come due. Proper billing procedure should also be applied to commercial rent increases, transfer fees, late charges, sublet fees, storage fees, and other tenant charges.
Get what's coming to you. Another key to ensuring a steady cash flow is staying on top of arrears. Unpaid maintenance charges can quickly add up to a gaping hole in your budget, and the longer the arrears are allowed to continue, the less likely it is that you'll ever collect on them — especially in condominiums, where boards' ability to collect is often hamstrung by finance laws.
Make them pay. To prevent arrears from getting out of hand, your board should establish a timetable for sending notices to delinquent owners and referring cases to your building's attorney for collection. Don't let the process drag on for more than a couple of months. It's also wise to impose a late fee on owners in arrears, to cover the costs of collecting the money but also to act as a deterrent. Buildings that do so usually have fewer arrears — and fewer problems collecting.