Alternative Funding Options Abound for Communities

Alternative Funding

In this challenging economy, many co-op and condo buildings are struggling to pay their bills while planning for future needs. Still, most building boards and HOAs are loathe to raise maintenance fees or levy special assessments on their residents until there are no other options. And while sometimes a fee increase is inevitable (and may even be overdue), often there are other ways for buildings to increase their revenues. Knowing when to do one, or the other, is a matter of prudent planning.

Some of these alternative sources of funding, such as allowing advertising space to be leased on a building, are fairly obvious. But others are less apparent, which is why it’s smart for a board to involve professional consultants in such matters.

Dialing Up Cash

When a community is strapped for cash, it can be tempting for a board to create new fees, raise maintenance fees, or enact special assessments. It might seem like the path of least resistance—money is needed ASAP, and raising a fee might seem to take care of the need. But many governing documents in Chicagoland limit such moves and the fee hike can be subject to challenge. Often such moves are contentious and sometimes require a vote of the board of directors or board of managers, which doesn’t always end happily. 

"If you think owners will be upset when you raise the annual assessment a few dollars, imagine how they will feel when you are required to pass a special assessment for thousands of dollars per unit and, by the way, that assessment is due in 30 days," explained Craig Finck, vice president of Alliance Association Bank, a financial services firm in Plainfield.

And, whether or not such a vote is successful, it is a short-term fix at best to what could be a chronic cash flow problem. Other solutions are needed.

Some of the most common avenues of revenue generation in co-op, condo and HOA buildings include renting out exterior spaces to advertisers, renting out the association community room or clubhouse or recreational amenities, or putting telecommunication booster antennas or satellite dishes on building roofs. 

That may be fine for buildings blessed with the physical space to allow such advertising. In such cases, a building’s board might want to consider if they can fit more antennas on the roof if they already have some, or to allow more advertising. 

This is one of the easier pitches, claims Jim Stoller, president of The Building Group, a firm that provides real estate and management services throughout Chicago. “We have done a lot with antennas on top of buildings, but many people are scared about radiation—despite market data that supports that there is no danger,” says Stoller. He explains that buildings which have moved forward with installing antennas typically earn between $1,000 to $3,000 per month in rent from telecommunication companies. “We have one building with multiple antennas that is making upwards of $8,000 per month,” he adds. Cell phone and cable companies are actively seeking new sites, but require long term commitments—a catch that many boards do not realize. For example, a board should be prepared to enter a 10 to 20 year contract with renewals clauses based on successful milestones clauses embedded in the contract.

Use What You Have

But other, less invasive approaches to bringing in new revenue could be possible, such as making the most of the usable space in the building. For those buildings that have them, community rooms also can be a possible revenue source. If the community is not allowing the room to be rented to people outside the building, they might want to consider doing so—and charging a premium for it. Some charge as much as $500 per night for their space to be used for meetings, club functions, receptions, and other such events.

Leasing the community room to outsiders, though, brings some liability and vandalism concerns that require proper insurance to address, experts say.

Another popular option if these spaces exist is renting out unused basement space for storage facilities or storage lockers, which are then rented out to residents. Vendors like City Storage manage the entire process and return a percentage of the revenues to the association.

“We don't just install the units. We manage the whole thing,” says Michael Tolva, president of City Storage, LLC in Chicago. “We meet with the tenants and we lease to them. We carry all the insurance, the maintenance and the staff for the units. The associations will never spend money with our products after installation,” he says.

 “We sign a master contract, which is like a lease agreement, similar to that of a laundry service, they lease a space in that building, install the equipment for free and 25% percentage goes back to the association. We sign a master lease and then enter into individual storage contracts with unit owners,” Tolva adds.

Invest in the Rest

Raising revenues also could involve strategic investments using the funds you already have. “Every association they should have an investment policy, something in writing that's approved by the board so they know what types of investments to put the funds in.” says Steve Silberman, a partner at Marcum, LLP, a national accounting firm with offices in Chicago and Deerfield, Illinois. “And if we're talking about that whole funding schedule, if they decide to go to certificates of deposits, in their investment policy would say that they're laddering them so that they're available when some of their reserve projects are estimated to be done.”

Laddering certificates of deposit is a way of spreading money out across multiple CDs that earn different interest rates for different lengths of time. For example, you'll get a higher interest rate for a 5 year CD than you will a 3 year CD, but you invest in both so that you'll have access to some of your money sooner if needed. “Associations should know they have some big projects, whether it's a window project or a masonry project, that's coming up in two or three years,” explains Silberman. “To get the best rates for CDs, they'll want to invest in some CDs that come due in 2 years, some in 3 years, and some in 5 years. That way they can get a better interest rates and they'll be able to have those CD's coming due at the time that they need them for those particular projects.”

For new and old tenants moving into or vacating a unit, it’s commonplace that move-in and move-out fees are charged. Fees, which range from $500 to $1,000, cover any damages to the co-op or condominium unit. Some innovative ways buildings have raised money include renting out their spaces for movie/commercial /photographic shoots. The right kind of building might be needed for such a project, but a building’s management cannot know if their building is right, if they don’t ask around.

 “I’ve had some clients that have leased space in their building for a movie,” says one management pro. “But there are some headaches that go with that. You have to weigh the potential money with how much it will inconvenience residents.”

Charging fees for pets living in residences also is another way to raise revenues. Dog fees might include an initial $1,000 registration fee and an annual fee of $100 to keep the dog registered and legally living in the building. Some condos have also gone so far to keep a DNA registry and test dogs for violating waste policies in the community.

Working Together

So is it the manager’s responsibility to try to improve a building’s financial picture, or the board’s? The answer is, the task is the responsibility of both.

“The board has the fiduciary duty and a fiduciary responsibility over the financial information of the association,” remarks Silberman. “So often, once they hire a management company, they think the management company is responsible for it. But what we always tell them, is this is your company and you are an owner of this company. You wouldn't expect another company that you're hiring from the outside to be responsible for your financial information. This is something you would want to make sure you understood.” 

The board is responsible for the financial information, but they should surround themselves with a good team. “That team,” says Silberman, “includes a good management company if they're managed, a good accountant to help them out with their year-end financial information, a good reserve engineer because part of it is to get a reserve study that they should be using so they can know how much to put into the reserves, and of course, a good lawyer to make sure they truly understand what their declaration and bylaws say, because there are certain things in the declaration and bylaws that really explain what type of financial information they should have and that's one of the first key places they need to go to.”

Boards and management of residential buildings should work together to identify opportunities to raise more income for the community. First, they should look at all of the building’s expenses and revenues. Next, the group should consider how much funding is needed to handle all of the building’s expenses, including deposits into its capital improvements fund.

The board, management and the building’s accountant can collaborate on this task. They should ask, what are the building’s maintenance costs? Are the maintenance fees keeping pace with the costs, or could the building be running a loss with its maintenance program? Since maintenance is not a static fee, and residents can expect it to increase, hiking such fees is completely reasonable when it’s justifiable. If the building’s management team asks around regarding fee rates of buildings in their neighborhood, they could find that they are undercutting themselves by not charging enough in routine maintenance fees.

Other avenues, say the experts, is exploring how much revenue is being brought in by the laundry room, or if the building has a gym, what fees does that entail. Such a tweak might amount to a fee increase of $400 per unit yearly. Similarly, parking fees might be reviewed to raise some additional revenue.

And with the energy consciousness of today’s citizenry, money-saving ways to reduce energy costs can be found with a little bit of research and investigation. Healthy incentives are available from local, state and federal sources.

Pushback

Depending upon the demographics of a building, though, raising fees could be especially tough on residents. In the case of very small co-op buildings—those with around a dozen units—it can be a challenge to increase revenue without raising maintenance, experts say.

Boards in self-managed buildings can identify and implement revenue generating programs without guidance, if needed. The Illinois chapter of the Community Associations Institute (CAI-Illinois), the Association of Condominium, Townhouse & Homeowners Associations (ACTHA), The Chicagoland Cooperator monthly and its Cooperator Expos in Chicago and in Rosemont, and other resident-focused organizations can provide resources for boards.

But if big money is needed by the community—for perhaps, reconstructing a roof or another major project, the management team should consider lines of financing for the funding. And they also should consider, again, where they might cut funding.

Of course, shareholders and unti owners have some say in how their building makes money. While they may not have the right to veto a commercial tenant, or be able to vote against putting signage on the building, they do vote for board members as their elected representatives. Board members can be voted out of office, or in some rare cases, special elections can be called to have board members removed from office before their terms expire. 

Perhaps the best policy, though, is for residents to elect good board members who connect themselves with astute accountants, property managers and other smart consultants.

Jonathan Barnes is a freelance writer for The Chicagoland Cooperator and other publications. Staff writer Jenn Welch contributed to this article.

Related Articles

Anatomy of a Condo Loan

Anatomy of a Condo Loan

One Building's Case Study

The white seal and red imprint with text PAST DUE on white surface. 3D illustration

Collecting Delinquent Common Charges

What Can Your Board Do?

Arrow with dollar bills pointing up. Concept shot for currency exchange rate going up, inflation, economic boom

As Costs Rise, So Do Carrying Charges

Monthly Fees for Co-ops & Condos Up All Over the U.S.