A Budget Deficit Is a Recipe for Disaster

Habitat spoke recently with Aaron Weber, finance and operations manager at Weber-Farhat Realty Management.

You’re managing a small, 20-unit co-op with major money troubles. What’s going on?

They're running a deficit, and it’s been growing year by year, so their problems are compounding. Every month they're paying late fees, and interest is accruing on their late payments. Most recently, they paid their property taxes a couple months late and were charged interest. Because they had a line of credit with their bank, it was notified. The co-op received a default letter warning them that if they didn’t pay up, the bank would call back all the funds they gave through the line of credit. That would leave the building without any money for operating expenses. 

Sounds like a very precarious position.

If they continue paying their taxes late, or not at all, they're running the risk of a tax lien on the property, which means the state will take over the property and the tenants could lose their homes and their investments. We've had several board meetings to address the issue, and we’ve proposed increasing the flip tax and allocating that money to the co-op. We floated the idea of easements, leasing out space on the roof to Verizon for a satellite dish, or using part of the facade for billboard advertising. But it turned out that one of the shareholders owns the roof, and the city rejected our bid to advertise.

Does the board understand how dire the financial picture is?

The board is actually responsible for the problem. It decided to keep maintenance fees lower than the market standard so that when someone tries to sell, it will sweeten the deal and be more attractive to prospective buyers. But for buyers and their attorneys, looking at a building’s finances is part of due diligence. A deficit wouldn’t go unnoticed, and it would be a tricky point of sale.

Did board members finally come to their senses? 

They didn't want to increase maintenance by too much because the tenants simply couldn't afford it. So to cover short-term expenses – including paying taxes on time – we increased the line of credit and subsequently increased maintenance fees by around 5 percent. They won't be able to build a cash cushion, but it addresses all the immediate problems for the year. 

What have you learned from the experience? 

No. 1 is to price maintenance fees correctly. I built a model in Excel where you can input expenses and income and also project taxes and tax increases so you can determine whether you’ll have a surplus or deficit. It also helps to offer tenants the ability to pay online or electronically, which reduces carrying costs and flow time so we're able to quickly send out the disbursements to vendors and the city.

One-time, nonrecurring charges should also be factored in, right? 

Yes. Say you have capital improvements coming up and want to see how you'd fare in an environment of rising interest rates or rising taxes, or what would happen if you increase your line of credit. You would go into the Excel model and increase the principal and interest you're being charged, so you'll be able to stay ahead of the curve and plan accordingly for the next year.

Still, being on good terms with your bank is also smart.  

Absolutely, because there are going to be times where you're in a cash crunch and need to borrow. A month ago, the fire department came in and threatened to evacuate all the tenants because the sprinklers were not up to code. It was going to cost about $100,000 to remediate the issue. Luckily, the co-op has good credit and a longstanding relationship with the National Cooperative Bank, so we were able to get the money ASAP.